Quote from @Joe Mills:
Thanks so much for the reply Roger. I appreciate the sound advice.
While this is probably a wild goose chase, I wouldn't mind playing this out with the seller a bit (for my education at a minimum) and pursuing what you say about making an offer for the land only and letting them keep the trailers. If pad rent for the 4 trailers is say $1,000/month, what would be an appropriate offer? It's on public water and septic tank. The owner says the septic tank has recently been pumped, but I don't have information yet on the condition of drain field. The driveways are gravel and appear to be in pretty good shape. Taxes would be around $500/year for the land only. What expenses am I missing? I would likely make a cash offer and finance with a personal HELOC, currently at 8.5%. Thanks!
Hey Joe!
Basically these would be your expenses on a TOH (tenant owned home) park. Property taxes, liability insurance, water, garbage, septic maint., general maint (road, common space, etc) and management costs. Lets just do a thumbnail breakdown.
* Taxes- you said $500 per year. Cool- you got that number.
* Liability insurance- play it safe... say $600 a year.
* Water- if you are not billing it back to the residents most utilities have a base rate then a usage charge over the base usage allowance. You can call the utility and find out but lets say $25 per month/ per home. $100 per month. If you bill it back (recommended) to the residents it would be zero. If the owner pays it... then you use this expense in your negotation of price- then bill it back once you buy the park.
* Garbage- same as the water. Say the expense is $100 per month (either 4 individual cans or a dumpster). Again you would get this billed back to the residents pretty quickly but for now lets consider it an owner's expense.
* Septic maint- Yeah... no current cost but if you are pumping say one tank per year at $300 you should set aside $25 per month on the expense.
* General maint- road gravel, weed abatement, etc. Just guess at $500 per year.
* Management- This one gets over looked alot by new MHP owners because you figure I will just do the billing myself, etc. But you do travel out to the park every month or so and check on things. There is a cost to that especially if you are staying over night, etc. Will say that is zero for now but it is something to consider and add into your expenses as you think things through.
Right now if my math is correct you are looking at $4300 per year in expenses (if you include the water and garbage). Without water and garbage your at $1900.
Take that $4300 out of your $12000 gross and your at $7700 NOI. If you are going to tie up your capital on something this small as a TOH park you should require a higher CAP rate of 10-15%. 10% cap puts you at $77k; 15% puts you at 51k. For just the park.
$7700 is not a lot of money to be tying up a HELOC for something this small. Not saying it is a bad deal... just small and once you tie up your HELOC you lose that leverage on another park with bigger returns. One thing I did with my first park is I offered the seller a higher price with a lower CAP if they carried the contract. If I had to get outside financing the price would be lower. It worked in my favor. For me... the best negotiating tactic I have is just to show the seller 'my math' and tell them I need a minimum 10% CAP. Hopefully the seller is paying the garbage and water because once you buy the park and bill that back to the residents your CAP rate explodes as does the value of your park. Adds 31 Bp to your CAP at $77k.
One more thing Joe... I am just a Mom and Pop operator. No investors and fancy algorithms... Not who I am. Let me know if you have any questions,
Rog
