All Forum Posts by: Frank Rolfe

The standard rule is that the operating expense of a mobile home park is 30% if the tenants pay their own water and sewer and 40% if the park does. But if the park is less than 20 lots, you are safer at increasing that expense ratio to 40% and 50% respectively. So all you do is take the total number of occupied lots times the lot rent time either 50%, 60% or 70% to get the net income. You divide this number by the asking price and that gives you the cap rate. Most mobile home park buyers want to pay a cap rate that is around 3 points higher than the interest rate on the loan. That can get you a 20% cash-on-cash return.

RV parks are treated differently. The bank will want to see the last three year's P&Ls and tax returns from the seller, and then will average them and count that as the net income. RV parks are typically priced at two points higher cap rate than mobile home parks because they have more risk since customers can freely move out (mobile homes cost around $5,000 to move by comparison).

There are about 1001 additional items you need to know, but that will get you started.

28 x $225 x 12 x .6 (no way the expenses are only 30% when you're this vacant) = $45,360. When this guy tells you that $945,000 for $45,360 is an 8% cap (the actual answer is a 4.8% cap) then he is not telling you the value based on actual real property income, but only what you would get if you add in personal property income WHICH YOU CAN'T.

So the bottom line is that no, this deal does not work at that price as far as I can tell,

And that was not even mentioning the market and 101 other variables that make a deal work or not.

You can go to an unpaid property tax auction that has mobile homes in it. They often sell for very low amounts because the homes are typically old and in poor condition and nobody knows if they can be transported. Since the taxing authority doesn't care or know any better, they will sell homes without HUD seals so be careful.

Beyond that, you will definitely find newer and better used options at repo lists (21st Mortgage, Vanderbilt, etc.) on Craigslist or Facebook, and from home wholesalers.

According to Bestplaces, Rochellle has a metro population of 50,306, a median home price of $146,500, a 3-bedroom apartment rent of $1,043 per month and a vacant housing rate of 7.2%. All of those stats are favorable (although most lenders and buyers would prefer a population twice that size).

Gravel roads are a problem as most lenders hate them, and they will make getting a loan harder.

But none of these items -- by themselves -- are a deal killer.

You need to focus on how you scientifically are going to make money with this deal, using such tools as raising rents, cutting costs and filling vacant lots and homes.

At one time we were the largest owners of mobile home parks in the State of Illinois, and still own quite a few there. You probably can't bash the politics of Illinois enough, but the affordable housing fundamentals in Illinois are similar to all the other midwestern states. I would much rather own a really great deal in Illinois than an average one in Indiana. There are many components that go into any mobile home park deal, such as the infrastructure, density, location and price. While I agree that I would favor a "red state" park over a "blue state" one in general, that's not the main driver to whether to invest in Illinois or not. Of your description, the attribute I like the least is the "gravel driveways" as most lenders like to see paved roads, and I don't know if you mean gravel parking pads (roughly 20' x 20') or gravel roads to each home. Here are some of the things I think you need to get a handle on to better make a decision on this deal:

What is the metro population (you can get this figure from Bestplaces)? Most lenders want to see around 100,000 people or more. If there is no metro, what is the country population? Again, the bigger the better, so hopefully at least 50,000 or so.

What is the median home price from Bestplaces? Lenders like to see $100,000 and up. And what's the 3-bedroom apartment rent? Lenders want $1,000 and up. And what's the housing vacancy rate? Lenders like 12.1% or lower.

What are the competing rents in all other parks? Can you raise your rents accordingly, or is there little room to do so?

Do you have a credit source to bring in homes to fill vacant lots? Are you aware that mobile homes right now are costing $30,000 (used) to $70,000 (new) set up?

Is the city going to fight you on bringing homes in to fill vacant lots?

Only once you get it under contract, you should do a test ad and see what the actual market demand is for mobile home parks in this area.

You can apply science to any mobile home park deal, and that will help you make a good decision.

But as far as the Midwest in general -- and Illinois in particular -- we have been very active in those markets for 25+ years.

It takes about 30 hours to understand the park business, without even spending time looking at listings as examples.

Whatever you do, don't buy anything until you have put in the homework so you don't get yourself in trouble. I get calls every day from people who find my phone number on-line and tell me about parks they bought without having a solid foundation and now are in way over their heads. Stories include people who bought private utilities and thought they were municipal, vacant lots so small you can't put a home on them, failing private water and sewer, failing master-metered electric and gas systems, permits that had expired -- you name it.

Before you'd buy a car, you'd read everything about it and become a quasi-expert. Do the same on mobile home parks, even if it means just scouring every article on every website you can find on Google. The business may look simple on the outside, but it's really complicated on the inside.

Just trying to keep you out of trouble.

Your best shot -- if the city will allow it -- is to get people retiring in RVs to fill those lots. RVs require zero lot preparation. The downside is that some lenders will discount some portion of their rent as they are far riskier to move out than mobile homes are.

Cap rates are based on many factors including not only current net income but also expectations of future income. For example, if a mobile home park lot rent is $200 per month and the market is $400 per month, then the buyer would have a reasonable expectation that they can double the rent over time, which means that the 7% cap rate today would be the 14% of tomorrow. The same is true with vacant lots, only its not nearly as great an opportunity due to the cost to bring in homes to sell on vacant lots. On the negative side, you have needed cap-x projects that, when added to the price of the deal, brings the cap rate down after purchase.

Cap rates in Texas range -- based on market and future income potential -- from around 5% on the low side (in a market like Dallas and Austin) to around 12% for a tiny park in a lesser market. That's a huge range of value. The bottom line is that every single deal is a total custom work of art, and you can judge it based on a macro cap rate range.

You are 100% correct that you CANNOT use the mobile home rent in any way, and only the real property income in your analysis. You can't blame a seller for trying but there are few lenders or buyers dumb enough to count home rent except in those cases where the park is being thought of as a "detached apartment complex" which, although a strange business model, can be found in markets like Mississippi (where lot rents are so low) and Washington (where home rents are so insanely high).

You're scaring me on much more than just the well and septic. 

Mobile home park values should be based strictly on real property income. The formula on this deal would be #occupied lots x market lot rent (since you are renting the homes you can't use the home rent but have to comp the going lot rent, which is about $300 per month on average in the U.S.) x .5 (50% expense ratio on a deal this small, best case) x 12 = net income and then divide that number by .1 to get the value of a deal like this.

If I assume $300 per month lot rent and that you have 10 occupied mobile home lots, then the value is around $180,000 and not anywhere near the $400,000 you are talking about. I don't know if those 4 RV lots are occupied with long-term RVs or not, but you can't use the RV lots so they are much less valuable.

Then comes the well and septic issue. Personally we would never buy a park this small with private utilities, because the cost of fixing a well for 10 lots about the same as 100 and your numbers can't survive the stress.

Again, I've never seen this deal or location, and for all I know it's located next to the Empire State Building, but I'm just trying to keep you out of trouble.

To fill a vacant mobile home lot in a mobile home park, the park owner has to find a used or new home, buy it, pay to prepare the lot for arrival, ship the home, set the home, connect the utilities, install the decks, stairs, skirting, etc. All of this, added together, is going to run about $20,000 to $80,000 right now, based on if the home is new and used and what part of America you're moving the home into. That's a whole lot of capital.

21st Mortgage has a park owner financing program called CASH in which they front you this money with zero out of pocket, but you still have to backstop the loan on the home and if the home goes vacant you have to make the mortgage payment, abate your lot rent, and pay to renovate the home and get it resold.

The bottom line is that filling lots is a lot more capital intensive and risky than building the park itself.