All Forum Posts by: Joe Hartman

I'm in a duplex right now. The other side covers the total PITI +$45/mo on a 15 yr note, so I'm living for the cost of upkeep, management and vacancy. I would love to move into another duplex, tri, quad and do it over and over again every 2-3 yrs, but the future wife doesn't like that idea. So if you both are for it, it's a great move IMO.

Something to consider... My duplex is completely separate, each with their own yard. So all the utilities are completely separated. It looked like the owner pays for that in that property. Call the utility companies and get the cost of each unit for at least 1 year (that is if it's separately metered, if not take the total and divide it as best you can). These cost are not found in the 50% rule, which you seem to be using as a tool to base your investment on, and can completely eat your lunch.

As best you can, treat it as a multi-family unit, where NOI/CAP gives you an idea as to what you should pay. Uwe gave you some ideas as to what cap rates to expect/want, and make sure to try to get as accurate expenses you can for the NOI. That should give you an offer to make from an income generating standpoint.

Now take those additional expenses that aren't included in the 50% rule and apply it to that (take it away from the sum of the rents after you multiply it by 0.5). Now you'll need to fin the price that still gives you $100/door left over (assuming that's what you want for profits). See how that compares to what you'll offer off the CAP rate method and make sure you're happy with it. If not, you need to ask less.

Also, please do not take out management fees from your calculations. Even if you don't care to pay yourself while you live there, you will when you don't (or at least when you decide to pay a management company to take it over). Just assume that you'll get bit by the real estate bug and want to move out of this place in 30 months for your next triplex. It's a 10% per month mistake that you'll wish you didn't make later on.

Good luck,
Joe

1) I've been valuing parks on the income they bring. So if you are buying the income of this property, you need to look at the rents that come from the lots. Here's how I would view the lots...
- 2 vacant lots... discount these way down. You are buying the income of the park. Do not pay for your future hard work. So say about 0-25% of the lot rent, so $0-$70 (2X140X.25=$70) of value to add to your income. Remember that these lots cost you $ in maintenance, management and advertising just to sit vacant.
- 4 lots in the back not completed... $0 added to the total income, since it's going to cost you to finish up the construction. If not, it will cost you to maintain the upkeep of that area not rented.
- 13 rentals... in the expenses, I didn't see anything for fixing up the rentals. That just doesn't happen. The guys that have been doing this for a while will say that renting MHs are about break even over the income from the lot rent. So that would be 13X140=$1,820.
- 25 rented lots... 25X140=$3,500

So that gives $70 (being generous) + $0 + $1,820 + $3,500 = $5390/mo... or $64,680 per year. (Note: this number is an assumption that takes the maintenance rehab/vacancy of rental homes into account, but not other expenses)

2) Like Ewe said, the expenses are probably 30-35% for parks with tenants paying their own water. There wasn't any expenses for things like management, travel, advertising, legal fees, accounting fees, etc. Those numbers most likely aren't the real story.

So here's another assumption... $64,680 X 0.7 = $45,276 income after expenses. From there, use your CAP rate to get a ballpark #.

3) The income that you're running your numbers on is giving a cap rate to rental income. The banks aren't going to do it since they know that's not a real profit center, so you probably shouldn't either. You may decide to give some value to the park owned homes themselves, but add that after you compute your NOI/CAP rate.

4) What's the water system, sewers system and electric? Who reads them?

5) Are you looking where you live? Make sure that it's a good economy with plenty of people in the metro, with mobile homes being a great solution for affordable housing. South Louisiana isn't all roses, and it comes along with it's own risk of hurricanes and flooding.

6) If you do buy this park, and want to sell off all your park owned homes, you'll want to have 2 contracts. 1 for the sale of the home (cash purchase, rent to own, rent credits) and 1 for the lot rents. With lot rents of $140 and rent rates of $575, that means $435 is going to the rent rate. If you look at how parks are valued on the lot rent, then you might want to increase your lot rent, and lower the home rents. You might end up selling the homes for less, but increase the value of your park over that difference... since you value the park on say a CAP rate 10. That is unless these are brand new, expensive mobile homes.

7) If the lot rents are low compared to the local comps, that's an easy way to increase your income. If you've figured what you think the park is worth on the real numbers and a CAP rate that you are happy with, you might consider paying for some of that profit that you know you can easily get on day #1. So if the local rent rates are $200/lot, and you know you can get to $170 without losing people, then you might pay a little extra. So that's a $30/lot difference from the current rent of $140, so you might add $10-$15 per rented lot to your evaluation.

I'm not sure how far along you are in this deal, because the info you've posted has changed a little from post to post? Do you have access to the pro forma data, or the seller's actual income/expense?

If you're still waiting to put an offer in, you might not have all the info yet, and using the quick and dirty calculations might help you in getting in that initial offer. So (90 rented lots)*($300)*(12 months)*(0.6 to account for expenses) =$194,400. So if you're using a CAP rate of 10, that's $1,944,000... adjust those numbers if I put in the wrong # of lots. If you like to do it the other way... 90X300X60=$1,620,000. So those at least give you a starting point, to make an offer.

Before you come up with an offer number, some things to consider from the info that you've given...

Lot rent is $300. Assuming that is the cost just to rent the lot, you need to put that # in perspective. In some cities, that's very expensive, in others it's a steal for the tenant. So, is that low or high for that marketplace? You said that this place is close to 100% occupied, which typically means that as the new owner, you should be able to come in and push those low rent rates up. That's a great position to be in. But if that's high or right at your lot rent comps, then you might not have that option. If this is the case, you're out the easiest way to make money on this deal (or not lose money if you screw it up or something unexpected happens).

You'll also want to get estimates on what it will cost to get the park sub metered and bill back the utilities. Just another way to improve your NOI by decreasing your cost... but be ready for the upfront cost to convert it.

You're very lucky to have someone that knows the business. If you get it under contract, show him/her the seller's numbers and make sure they are consistent with what it cost for you to operate the park. Get some estimates from plumbers, electricians, pavers, lawn services, snow services, landscaping, etc. to give you estimates on up front repair cost and what it will take to maintain the park. Talk to lenders to see how they'll evaluate the park. Maybe they'll only lend on the park as a CAP 12, not a CAP 10 like you planned on. Things will probably need to be questioned/adjusted as you go along. You'll need to build a case as to why you have to adjust your offer, just like anyone else would that is going to buy their park.

Let us know how things are going.
Joe

1) Search Mobile Homes & Mobile Home Park Investing here. Especially post from Jim Johnson and Dale Osborn
2) Mobile home park store's forum
3) Post your #'s here and ask for help... Lot rent, # POH/rentals, # vacant homes, # of vacant lots without homes, type of utilities, who reads meters, who pays water, sewage, electric and trash, estimate of cap rate to use, anything else that needs to be valuesd (buildings, billboards, etc), and list any problems that you are aware of.

@Adam - Ya, Sabrina got it right. Her math just eliminates 1 step in the quick and dirty assessment by multiplying X's 60. She's already plugged in my cap rate of 10% to go along with my assumption of operating expenses being around 40% of lot rent income.

But doing it Sabrina's way might not work everywhere. If you use that shorthand math and assume a cap rate of 10% in Orlando, Fl, you're not going to find many deals at all that fit your criteria. If you want to buy a small park in the middle of nowhere Michigan, you might be overpaying.

So first you have to figure out what cap rate you expect in order for you to even consider investing. If you're at 10, then maybe spend less time in Fl/Ca (trading at lower cap rates than 10% right now) or "retirement" type parks. But if you're not willing to speculate on land plays or other forms of higher risk, that might eliminate areas going for a cap of say 12-15% (maybe a troubled park, troubled area, small park, etc.). So you're investing goals should help narrow down your search.

@ OP - I know how you feel. I'd like to start off with a little park, so if it blows up in my face, it takes less time to rebound. But for almost all parks that I look at with this small amount of lots, the numbers just don't support it. The operating expenses vs. income is usually very tight, and estimated capital expenses seems to make these small parks more risk than I'm willing to take.

It might work on an all city owned water/sewer park, which has no park owned homes, that you manage yourself, if you lived in a place with higher cap rates. I live in Orlando, so that doesn't seem to be happening for me. I'm left with a couple options. 1) Get a small park, even though the risk is higher than I'd like 2) Go back to investing in SFH and/or duplexes try to make some more $ and then revisit buying a park 3) Find partner where we can buy a park with enough lots that it now makes sense to be in the park business. That's the conclusion I've come to for myself at least.

- Joe

If you were to buy that park at a 10 cap (which you might think is low at a park this small), you would need to have $833.33/month coming in after all expenses are paid.

It's probably not even close to that. Your net monthly profit is probably closer to $240/mo (2 lot rents X $200/lot X 40% NOE), which would make an offer below 28K reasonable on the income being produced.

However, if you did get it at that reduced price… just to either fix the trashed homes or have them hauled off and disposed of would take a couple of years to get your money back (at $240/mo profits). In order to make more $ per month, you may have to come out of pocket again to fill in the remaining lots. There’s not enough lots total to support the turnaround the park needs. There’s less money at stake vs doing this with a big park, but those dollars seem to be a greater risk, IMO.

I’d pass.

No problem Sam. Glad I could finally give some info instead of just ask questions.

Jim... with these agents, how are you working out compensation in situations where the sale is not up front (conventional lending, cash offers)? How are things set up on 100% owner financing, lease options and newly established partnerships with the sellers to take over as operational manager? Do you spell out these things prior to them locating deals?

As always, thanks for your help.

- Joe

In addition to what Jim stated:

I've used easyoutsource dot com. You can find very cheap labor... pay less for simple processes, more for someone that needs to create/toubleshoot.

Post your job and offer it as an ongoing position. In the middle of the job description, ask them to answer a specific question/or perform a specific task in the reply or you will not consider them (maybe ask them to access HUD and pull a 3 listing). This weeds out the people that apply to anything/everything, helps you find someone that can take orders, has good enough english skills to understand the task, and is willing to do some actual work.

After reviewing the applications, set up some interviews on skype. Find out what you need to know, let them know that you are a serious business owner and a nice person to deal with at the same time, and see if they fit the bill.

Hire at least 2 people on a trial basis. Let them know what task they are suppose to do, ask them to time how long it took them to do each task. If they had problems, ask them how they figured it out. Then, keep the best, fire both, keep both depending on your needs and their performance.

Most of these applicants will be from the philippines. They consider it an honor to work for an American company, and will treat you with respect. They also get embarrassed if they can't figure things out, and might stop responding out of shame. Treat them nice and let them know that you expect them to make errors in the beginning and get better as time passes. If something does go wrong early, take some of the blame yourself. Use things like screencast, jing, dropbox and/or gmail drive to train them and share files. If they ask questions, document it and save it in a FAQ in case you lose a worker and need to hire another.

Or, you can go to odesk and get someone to build you some software that can automate all that for you. Or find a out of the box product that might be able to do that for you. Or go to fiverr dot com, type in "scrape" and see if anyone will scrape what you need from those sites for $5.

Jim (and others),
I just spoke with a real estate agent that does only MHPs. She mentioned that there is a "buyers" fee of $500 up front, and that this is standard commercial investments. Is that what others are hearing? Would you even consider having this one agent if you're looking for property in 20 different states? She seemed knowledgeable about MHPs in general (she has bought 8 of them), but really only knows 2 states in depth.

I know that fee doesn't fit in with what you're doing here. How are you handling the agents that send you these leads? Are you giving them a finder’s fee? Taking them on as a buyer’s agent for any deals that they find?

Thanks

In apartment investing, you see common numbers thrown around... assuming NOE~50%, you need to cash flow > $100/unit after debt services are paid. So a goal for someone might be to amass 84 units to retire on $100K/yr.

Most MHP owners will say that renting only the lots has a lower operating expense and less hours spent on managing the property than if you were managing the lived in unit (mobile home or apartment) as well. Assuming your income is from lot rents (not renting the mobile home itself), what monthly $/lot are you looking to make?

Thanks,
Joe