All Forum Posts by: Jack Martin

@Jason Hudson in this market it is becoming more common for a seller to want to know you are serious and capable before they will share financials and rent roll. Sellers don't want their park info blasted out to the world, so they want to know you are for real and are not just going to attempt to flip the deal. The tough part to navigate is you cannot truly underwrite a deal without seeing those due diligence items. 

A compromise is to submit a letter of intent with the terms you are willing to offer, conditional upon seeing the financials and rent roll. You can also sign a non-disclosure agreement to give them more comfort. If they accept the LOI, then you can underwrite it and submit a formal offer.

All the best, 

Jack

@Alexander Glasser the quick back of the napkin math is lot rent times 12 months, times the number of lots, minus the expenses, which will give you the NOI. Then divide the NOI by the market cap rate and there is the target value. There are more variables to consider like the utility reimbursements, landscaping, etc, but that will at least get you in the ball park.

In this example if the market rent is $350, the future value would be $350x12=$4,200 > $4,200x9=$37,800 which is the gross rent. Subtract 40% for expenses (expenses can range from 35-50% depending on the park and the amenities, but for this example we will use 40%) and you are left with $22,680 which is the NOI. I don't know what the cap rate is for that market, but if you divide the NOI by the asking price of $400k, you arrive at 5.67% cap rate.

If that park is in a primary market, that is probably not too far off. However, that is the value of the park once you convert the rental home to tenant-owned, renovate and sell the vacant home, and raise the lot rent to $350 for all 9 spaces.  

Using $175 for the lot rent, the formula would be $175x12=$2,100 > $2,100x9=$18,900 which is the existing gross rent. Subtract 40% for expenses and you are left with $11,340 which is the existing NOI. If we use the same cap rate of 5.67% then the park is only worth $200k.

@Brett Miller I would echo the sentiment above and add that if you acquire a park with some park owned units that are already rented, there is nothing wrong with leaving them that way until you finish the heavy lifting on the rest of the park. For example, we recently acquired a park where 40% of the space were vacant, 20% had vacant park owned homes, and half of the other 40% were park owned rentals. In that scenario, it made sense to continue collecting rental income (it was 3x the lot rent) while we renovated the vacant homes and filled the vacant spaces. Once we sell the renovated homes and fill up the vacant spaces, then we will convert those rental units to tenant-owned units. 

The reason why that makes sense in this case is because we already have our renovation crews on-site, so it's no big deal to do a random repair from time to time and then go back to renovations. Plus it props up the income while we are filling the vacant spaces and selling the vacant homes. 

All the best, 

Jack

@Kerry Noble Jr depending on the location and size, I may be interested as well.  

@Julio Gonzalez our favorite is cost segregation/bonus depreciation. This gives a host of our investors the opportunity to offset gains from the sale of real estate wherein they were either not able to execute a 1031 successfully, or chose not to.  Also, since the tax benefits carry over, it offers investors passive losses they can use against qualified passive income in subsequent years. 

With that said, the window will begin to close starting next year, so investors seeking this kind of tax strategy should consider taking advantage of it while it is at or near 100%. Feel free to elaborate since you initiated this thread. Always appreciate your perspective. 

All the best, 

Jack

Hey all, be careful not to react to events in the market in real time. The recent climb in interest rates have been aggressive and have occurred only over a short period of time. It is likely that rates will to continue to climb until inflation cools off. That will certainly impact real estate values AND the strength of the economy. You might argue that those need to take a breath anyway, so this could be a good thing in the short term. 

With that said, who can predict whether or not the Fed will lower interest rates next year to stimulate the economy? That tool did not exist 6 months ago when the fund rate was at 0%, but fast forward to a 3-4% fund rate and that could equal a lot of stimulus...what goes up could just as easily come down. 

Nobody knows when the market cycle will end, but history can teach us the greatest lessons. Do yourself a favor and look back at what has happened in the past. IMHO, the best book written on real estate cycles is by Phillip Anderson, called "The secret life of real estate and banking". Likely the best $35 you will ever spend if you intend to invest in real estate. I won't spoil the book, but essentially history tends to repeat itself over, and over, and over. And it will likely repeat itself again this time. 

Meanwhile, consider the smart strategy is to own quality real estate that produces recession resistant cash flow. Along with that, be conservative with leverage and avoid loans that require a refinance event in the near term. Then when the market corrects, the worst case scenario is you have cash flow you can count on. 

All the best, 

Jack

@Sheri Fluellen to answer your question above, 100% bonus depreciation will be phased out by increments starting next year. The amount allowed this year is 100%, next year it will be reduced to 80%, then 60% in 2024, 40% in 2025, and 20% in 2026. Keep in mind, some property types will produce more bonus depreciation than others so you may be able to achieve your intended goal, even after 100% is reduced. 

Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park or RV park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements.

The "lazy 1031" can be executed with a direct investment yourself, or through a passive investment in a syndication with a sponsor who is taking the bonus election. If you invest passively you should receive your pro rata allocation of bonus depreciation on your K1 along with the other investors. Either way, you should be able to garner passive losses equal to or greater than the amount of capital invested, over the next couple years. 

Those passive losses can be used to offset the gains you have incurred (or gains you expect to incur) as long as the gain AND the investment where bonus depreciation is being taken occur in the same calendar year. Any allocation of passive losses you cannot use in that calendar year will carry over, so they can be used in subsequent years. 

All the best,

Jack

PS - I am not a tax advisor or a CPA. This perspective is solely from my own experience in managing mobile home park funds and working with the tax experts around us.

I would echo what @Craig Sloan advised.  Don't waste your time with a bank that has not closed loans on MHPs. Spend the time to find the one that loves parks and is hungry to allocate loans to the asset class. You can go wider than the subject property's market as well. Start there, but expand to the entire state and region if you have to. 

All the best, 

Jack

There is an accelerated depreciation strategy sometimes referred to as "the lazy 1031" that combines cost segregation and bonus depreciation. Instead of completing a "like kind" exchange with time restrictions, you perform a cost segregation study and are able to take a significant passive loss, which is used to offset the gains you just incurred. And one of the best parts of the strategy is you have the entire calendar year to execute. 

When a property is purchased, a formal cost segregation study is performed wherein the value of the property is segregated into land (which is not depreciated), buildings (which are depreciated on a 39 or 27.5 year schedule), land improvements (15 year schedule), and other smaller items like personal property. When the bonus election is chosen, then 100% of the allocation to the land improvements can be taken as a passive loss in the year the property was purchased. 

This strategy can be executed with a direct investment yourself, or through a passive investment in a syndication with a sponsor who is choosing the bonus election. If you invest passively you should receive your pro rata allocation of bonus depreciation on your K1 along with the other investors. Either way, you should be able to garner passive losses equal to or greater than the amount of capital invested.

Those passive losses can be used to offset the gains you have incurred (or gains you expect to incur) as long as the gain AND the investment where bonus depreciation is being taken occur in the same calendar year. Any allocation of passive losses you cannot use in that calendar year will carry over, so they can be used in subsequent years. 

Keep in mind, some property types will garner more bonus depreciation than others. Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park or RV park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements. Properly executed, an investment in these types of property can garner passive losses equal to or greater than the amount of capital invested.

A few words of caution; be careful not to let the "tax tail" wag the dog. Each real estate type has different intrinsic performance characteristics, so make sure you understand the property type's risks and potential as an investment separate of the tax benefit. In other words, be careful not to invest in a poorly performing property simply for the depreciation. In that same vein, if you are investing passively in a syndication for bonus depreciation benefits make sure you vet the sponsor and understand the investment vehicle before you invest. Bonus depreciation is great, but when you combine that with great investment properties that produce cash flow and appreciation, that will be the best formula.

I am not a tax advisor or CPA. This perspective is solely from my own experience managing mobile home park funds and working with the tax experts around us. Here on BP, I would acknowledge @Yonah Weiss as he is an expert and contributes to bonus depreciation threads.

All the best,

Jack

@Kelly McClellan I would echo the perspective from @Jim Pfeifer regarding cost segregation and bonus depreciation. Keep in mind, some property types will garner more bonus depreciation than others. Bonus depreciation is derived from the portion of the property's value with a shorter useful life than the buildings themselves. Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from building(s) but rather from the improvements to the land. In a mobile home park or RV park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building, like a clubhouse or laundry facility. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements.

When a property is purchased, a cost segregation study should be performed, wherein the value of the property will be segregated into land (which is not depreciated), buildings (which are depreciated on a 39 or 27.5 year schedule), land improvements (15 year schedule), and other smaller items like personal property. If the bonus election is taken, then 100% of the allocation to the land improvements can be taken as a passive loss in the year the property was purchased. Properly executed, an investment in these types of property can garner passive losses equal to or greater than the amount of capital invested.

This can be executed with a direct investment yourself, or through a passive investment in a syndication with a sponsor who is taking the bonus election. If you invest passively you should receive your pro rata allocation of bonus depreciation on your K1 along with the other investors. Either way, you should be able to garner passive losses equal to or greater than the amount of capital invested.

Those passive losses can be used to offset the gains you have incurred (or gains you expect to incur) as long as the gain AND the investment where bonus depreciation is being taken occur in the same calendar year. Any allocation of passive losses you cannot use in that calendar year will carry over, so they can be used in subsequent years. I am not a tax advisor or a CPA. This perspective is solely from my own experience in managing mobile home park funds and working with the tax experts around us.

All the best, 

Jack