1st Commercial Real Estate Deal

Real Estate Deal Analysis & Advice
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1st Commercial Real Estate Deal

Michael Meeks
Developer · Saraland, AL · Member since 2013 · 93 posts · 52 votes

I'm working on my LOI, for a Mobile Home Park. I've run some numbers and looks like their is a tremendous upside. I own a mobile home that I am currently owner financing in this park, and was approached by the owner some time ago about buying the park. I reached out to him last week and we are meeting early next week. It's owned by 2 brothers in their 60's and they are ready to retire. They recently sold their primary (salvage yard) business, so I believe they sincere in their reasons. So here are the details:

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Asking price: $410,000.00 (Owner already stated negotiable)

Owner is willing to do some owner financing - No terms have been discussed.

Park has 28 mobile home lots with sewer and water installed 2 to 3 years ago. Sub-metered. Looks like possible room for small expansion, but not verified.

22 lots are occupied paying $200/mo. lot rent. $52,800/yr.

Right now expenses are an assumption $1600/mo. $19,200/yr. Debt Service not included. I think that number is conservative.

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Upside: Renewals and new leases will be at $220/mo., and raised thereafter a minimum of $5 per year. Last increase was 2 years ago, from $180 to $200. I'm sure I can fill the lots with 6 more homes, and not only maximize the occupancy, but also owner finance the mobile homes for additional revenue. There is commercial expansion of stores and restaurants within 5 miles. One of the top school districts in the county.

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My thoughts are securing bank financing for the majority of the purchase. Purchase price somewhere in the range of $360k to $380k. If I can still get positive cash flow, ask seller to take back 2nd mortgage on all or most of my down payment. Reason is that down payment taps my capital, and I need the funds to bring the six additional homes, but I do have seasoned funds, to satisfy lender.

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Do any of you seasoned pros, have any advice or suggestions?

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  • Bruce May
    Lender · San Diego, CA · Member since 2011 · 664 posts · 231 votes
    11y

    @Michael Meeks let me first say that I am no expert on buying MHP's. I don't currently own one but I've been searching for one for several months and have analyzed about a dozen.

    Your assumption on expenses is not too far out of line. I've seen some actual expenses come in around 30% and others that have gone above 40%. The formula I've been using and which seems to be very common is, lot rent X number of lots (occupied) X 12 (months) X expense ratio (.65 in your case) / desired CAP rate (10 is very common).

    Using your numbers it would look like this: 200.00 X 22 X 12 X .65 / .10 = $343,000 purchase price at a 10 CAP. Obviously, your projected offer price and their asking price are higher so the CAP rate would be lower and that might be fine for this park and your desired return. $381,333 comes in as the purchase price if you want to buy it at a 9 CAP and it looks like the owners are offering it at an 8.5 CAP rate.

    In regard to your financing option I can't comment on bank financing other than to say you should contact the local banks in the city where the park is located and find out if they will finance the park and at what terms. This would then give you an idea of what you can offer the park owners. Best of luck with the purchase. Sounds like an exciting opportunity.

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  • Michael Meeks
    OP
    Developer · Saraland, AL · Member since 2013 · 93 posts · 52 votes
    11y

    Thanks Bruce. That's very close to my analysis. I would like to be in around the 9% cap, equipped with the knowledge that just the $20 increase on renewals push me to around a 10% cap. Getting the last 6 lots filled pushes me to a 14% to 15% cap, and it increases annually. The owner financed homes not included in this equation will produce $30k+, in additional annual revenue. If I do have the ability to add a few more lots, the deal just gets better, if not a few storage units across the back maybe. Expenses I assume: Property taxes are under $1200/year (verified), 2 dumpsters ($350/mo.), 2 street lights ($25/mo.), no common water, no gas, business licenses ($50/yr.), lawn care of common area and vacant lots ($300/mo.), unsure of insurance cost ($400 - $500 per month guestimate), Capital reserves (3%), Misc. repairs ($100/mo.), paperwork-office supplies-miscellaneous expenses ($100/mo.), craigslist and my father being in mobile home sales will cover advertising needs. My wife is a seasoned property manager, and I am Director of Maintenance and Construction of approx. 10,000 apartment units. Potential capital repairs I see are a water or sewer line repair, asphalt maintenance/repair and fence repairs at dumpsters and property line.

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    Originally posted by @Michael Meeks:

    Thanks Bruce. That's very close to my analysis. I would like to be in around the 9% cap,  

    Michael, why are you shooting for a 9% cap?

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  • Michael Meeks
    OP
    Developer · Saraland, AL · Member since 2013 · 93 posts · 52 votes
    11y

    My initial offer will be at 10% cap based on verified revenue, expense, less the needed capital repairs. If negotiations come into play, my hopes are to get the deal with at least a 9% cap. I want to be careful not to damage the relationship, and not get the owner financed 2nd. I need that capital back to quickly push the occupancy up. I then Can create even more equity should I choose to sell. I can aggressively payoff the 2nd and realize a higher rate of return, once I gather down payments and additional revenue from the 6 homes I need to fill the lot. The demand for the homes is in place, bank financing for mobile homes in parks is virtually non-existent. It's a great value add opportunity, but basing my buy on current numbers. Do you see fault in my logic?

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    Originally posted by @Michael Meeks:

    My initial offer will be at 10% cap based on verified revenue, expense, less the needed capital repairs. If negotiations come into play, my hopes are to get the deal with at least a 9% cap. I want to be careful not to damage the relationship, and not get the owner financed 2nd. I need that capital back to quickly push the occupancy up. I then Can create even more equity should I choose to sell. I can aggressively payoff the 2nd and realize a higher rate of return, once I gather down payments and additional revenue from the 6 homes I need to fill the lot. The demand for the homes is in place, bank financing for mobile homes in parks is virtually non-existent. It's a great value add opportunity, but basing my buy on current numbers. Do you see fault in my logic?

    Yes, I don't see any cap rate comps. If the NOI is $30,000 and your offer at a 10% cap is accepted you will be paying $300,000. If they negotiate you down to a 9% cap you will pay $333,334.

    But, if the comparable sales have been at a 12% cap then the market value would be $250,000 and you'd be OVER PAYING by $50,000 to $83,334!  

    Sounds like the owner has you where he wants you.

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  • Jefferson Lilly
    Rental Property Investor · San Francisco, CA · Member since 2010 · 117 posts · 92 votes
    11y

    I own 6 MHPs.  I just bought one like this in December.  We paid an 11% cap.  Small-ish parks like this just don't command the high prices that 75+ pad parks do.  I'd offer an 11% cap rate, maybe go down to a 10% cap in negotiations.

    But before you get into this business you need to study!  Frank & Dave's bootcamp is a must.  It'll answer questions you did not even know you had.  Mobile home parks are quite unlike any other real estate niche.

    My podcast on MHP investing can be downloaded here: http://www.biggerpockets.com/renewsblog/2015/02/26...

    Get educated before jumping in.

    My 2 cents worth,

    -jl-

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  • Michael Meeks
    OP
    Developer · Saraland, AL · Member since 2013 · 93 posts · 52 votes
    11y

    Thanks Jefferson. I have followed Frank and Dave for some time, but haven't done the boot camp. It was actually material from them, that pointed out consideration of what you can push the cap rate to. 

    Bob, I'm researching comps. Thank you again for the advice.

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  • Michael Meeks
    OP
    Developer · Saraland, AL · Member since 2013 · 93 posts · 52 votes
    11y

    Great Podcast Jefferson. You have the same insight to the opportunities in mobile home parks as myself, but I benefted from several tid-bits. It was great to hear a bank was willing to fund purchases of home inventory, to fill the parks. Great market testing ideas to verify demand. Odesk for bookkeeping may be a solution I need, entering receipts is so tedious. This is an industry I want to be heavily involved in.

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