I am looking at a park that is being sold for 12% cap rate which is lower than I would like (prefer to be at a 13-15 cap for this area). It is an off market deal that I came across and have been talking to the owners about. Its a fully occupied park of 60 spaces and has a good portion of park owned homes but that 12 cap is the value with just the lot rent. The town is a small town in the mountains but it has 3 large mining companies that have been there forever and is what made the town, a town.
Here is my problem... The lot rents in this park are $115/mo which is very low to me, but the park is a well run and nice looking park. In my due diligence I discovered that the 4 other parks in the town are $115-$150/mo range as well. In my opinion I feel like all the MHP's are undercutting themselves and they should be at $250+/mo.
I have searched the demographics of the town, they have a low population (3000), Low unemployment, and high per capita incomes (From the mines).
1. The park owned homes rent for an average of $550/mo, I agree with this pricing as I have looked at MH's in the area as potential rentals.
2. Bestplaces.net (my demographics source) is showing a negative "recent job growth". I will include a screen shot that shows the quick demographics.
3. All the other parks are full so no one can move their trailer to another park.
Based on the information that I have presented and any information you would like on it, do you feel this small town could sustain a rent increase up to $250/mo?
This is an interesting scenario. After reading this the first couple things that came to mind is when was the last lot rent increase and for how much? Did that increase have an impact on vacancy? I am no expert but those were things that popped in my head when I read your post.
Be careful on raising lot rents to what "you think" they should be. A $100 jump, particularly with POHs, may increase your vacancy IMMEDIATELY. It is true people usually don't move their homes due to the cost, however, you must be near the market rate of $115-$150. It would be very easy for them to move out of your POH. A 12 CAP is not too bad on lot rents for this current economic market in general. Make sure you don't overpay for the POHs, they do come with a cost.
That is a good question Doug. Being this Multifamily requires a mover of $5000+ to move a trailer I would assume that vacancy rates take time to fluctuate a lot unlike apartment rentals. To answer your question, I don't know when the last rate increase was but the owner has indicated it will raise to $120 in the spring. With that knowledge in mind, he appears to be timid to raise it $5/mo. There is a 90 day notice to tenants of increase for MHP's in Idaho.
I have factored in a 10% vacancy upon rent increase with an immediate expense of $100k to fill those vacancies. IE purchase trailers and move them into the park, then sell them. Even with that vacancy and capital expense, it still pencils appropriate for my 2 year plan of value add. Not a typical situation but I'm expecting to be more hands on for the first 2 years until it stabilizes where I want it and can refi.
@David Klein Hi David, I assume by POH you mean Park owned homes? The park owned homes are rented right now at an average of $550/mo which I feel is market rents for the structures in place so those would stay the same and be sold off 1 by 1. The owner has them structured in a way that the tenants pay a flat $550/mo and no lot rent, he wraps the lot rent into the $550 for his accounting and valuation purposes. So if Lot rents were to increase to $250/mo, the park owned homes would stay at the same rental rate and my separate holding company that would manage those homes would take care of that land lording side of the business while selling them off to individuals for heavily discounted prices and owner carry options. $3000-$5000 a unit.
Could I get more? Yes. But I have to keep in mind that i have 12 months to sell them off so I, thru a different entity, am not the largest renter in the park and have it still be considered "park owned homes". I hope that makes sense.
@Virgil Nethercott Seems like you have a great opportunity, but that has some risks. What is the Ratio of POH to tenant owned?
What does the future of the mining industry look like in this area? Just because the mines have been there forever doesn't mean they will stay forever. Even if the mines stay operational, the demographics suggest that their work force is shrinking. What is causing that?
Why should the lot rent be 66% higher than it is now? While you point out a $100/month raise in lot rent won't increase your vacancy right now, what will it do to the relationship you have with the residents. Remember that you are buying a community in which some folks have lived for potentially years. What would your feeling be if a new mayor was elected and raised your property tax by 2/3s without giving you something in return?
Not saying don't raise rents, but have a plan. Raise them to market within 90 days, then by 20-25% a year after that.
If you plan to sell of the POH, is there a market for people to buy them? What the time on market for MHs in the area? Last thing you want is to plan on selling x homes/year and have that not be feasible.
If I were in your position I would be setting up a meeting with all the park owners in the area. Sounds like there may be an opportunity to definatly improve every owners bottom line if you all work together.
Collectively $250 lot rent could be very achievable.
@Thomas S. What you just suggested is the definition of price fixing and it is illegal in the US.
Now if someone did a rent survey combined with the budget of a the area's median worker, which they sent to the other owners, that illustrated the average tenant was using significantly less than the standard 25% of their gross monthly income on housing, then that is a different story.
Getting all five MHP owners into a room/email chain/group text and saying if they all work together they can improve their bottom line: that's a way to end up in front of a grand jury never-mind furthering the stereotype of greedy slumlords.
@Bill F. Thanks your input that is good information. I have decided to hold back on making any official purchase for now. Although still in the back of my mind.
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