All Forum Posts by: Troy Zsofka

Darwin,

I'm not a PML (so my opinion may be worthless), but if I were a lender I wouldn't touch a mobile home on leased land. Why? Because there is no underlying appreciating asset. The underlying asset is only the trailer itself, which loses value over time.

What's your exit strategy? If it loses value over time, all you have is cash flow. If the loan is at 12%, that's $1,280 each month, leaving you 20 bucks (if you experience zero vacancy and repairs). If the cash flow is being consumed by the PML, what's the benefit to you? Furthermore, the PML is likely going to balloon, so you'll need to look into a refinance strategy and run numbers for that as well. Maybe 12% is incorrect. Maybe you have a downpayment that will greatly reduce debt service. If you have a downpayment, can you get a bank loan to change the numbers and reanalyze? If you're going to hold it, you'll need longer-term financing somehow anyway I assume.

If you pull out 17% of rents for management, vacancy, R&M (5% each) and CapEx (2%), you're down to $1,660 (of course I have no idea what the typical expense ratios are for mobile homes, perhaps even higher vacancy and repairs?) Then knock off the lot fee and you have an NOI of $11,520/year. That's a 9 CAP on an asset that loses value. I have no idea what the typical CAP Rates are in your area, but that doesn't excite me much...

Overall, I like assets that depreciate on paper for tax purposes, but appreciate in real life. That's just my opinion for what it's worth, and perhaps there's money to be made in leased-land mobile home investment; I honestly don't know.

Best of luck,

Troy

One solution would be to switch the due date to the 15th. They'll have to pay 1/2 a month extra rent to buy those 15 days. I have successfully done this before to accommodate a change in a tenant's budgetary situation.

If they aren't cool with that, you have a couple options:

1) Hit them with the late fee until they change their minds. Of course, your efforts to force them to comply may backfire if they decide to move out.

2) Let it slide. If Pops says they pay on the 10th every month, take care of the property, and have been there for awhile, I would let them slide. Consistent rent 10 days late from a good tenant who cares about the property is better than rolling the dice on a new tenant...

If you approach them politely and respectfully, you may be able to avoid the choice between 1 and 2 altogether. Explain that you can't waive the late fee for them but not for other tenants, you have to be consistent with your policies across the board, but you want to work with them to solve the issue because you value them as long-term tenants. They'll likely be willing to put some money each month towards buying that 15 days and getting things correctly on track. On the other hand, if you come down as the new boss in charge and start changing the understanding they had with your old man, you'll lose their respect and gain their resentment. Understand things from their perspective when you deal with them, and they'll happily work with you to rectify the situation. Hopefully...

I hope this perspective helps. To make it easier on them, you can move the due date to the 10th for 1/3 month's rent. I just like to keep it simple and have all my tenants pay either on the 1st or the 15th so rent arrives more or less in batches. 

Hi Drew,

I see that this one is off the table for whatever reason, but the following may still be a good exercise to look at for future purchase considerations.

Based on your numbers, if you spend the $10K to separate the heating (which is a good idea in my opinion because it incentivizes frugality; whereas a tenant who doesn't pay for heat has no reason not to leave it at 75 degrees all day),  you're in for $158K+/_ .

Purchase Price: $140K

Misc: $3K

Heating: $10K

Repairs: $5K

The NOI you propose, without paying for oil, comes to $9,144 per year (gross rents minus all operating expenses - NOT including the mortgage payment). This represents a CAP rate of 5.79% (NOI/AcquisitionCosts). I wouldn't necessarily jump up and down about that in the Upper Valley. Sure, Leb is arguably on the up. However, the numbers have to work without the prospect of appreciation, regardless of how hot the market is, especially if your initial exit strategy is to hold for rental.

Consider making some adjustments to your deal analysis:

1) In my opinion, you're beating up the expenses too much. Being conservative is one thing, but 37% for PM, Vac, R&M, and CapEX is a bit rough. First of all, if you're going to pay a professional PM 10% to manage it, they need to get better results than a 10% vacancy rate (especially considering that you can show an occupied unit to prospective replacement tenants with 24 hour notice to the current tenants, so there's really no reason to have a month vacancy between tenants). Also, in my opinion, if you can't keep the Repairs and Maintenance at 5%, and the CapEx at 2% or so, you didn't do enough renovations in the first place. (Disclaimer - I buy rehab properties with no tenants in them, so it's easy for me to bring everything up to par before renting. On the flipside, I can understand waiting to do some repairs that aren't really needed right away because you already have a stabilized property with established tenants and you don't want to remove them). For a quick analysis, consider using an Operating Expense Ratio. OER is the ratio of expenses to gross rents. Your numbers put it at 68.25% (meaning that 68.25% of your gross rents are going to expenses, not including mortgage). 40-45% is about normal. Let's go with 50% to be on the safe side (NH typically is a bit higher because our real estate taxes are so high, and the rents don't typically quite make up the difference, from my experience). At 50%, your expenses (Taxes, Insurance, PM, Vac, R&M, CapEX, Water/Sewer, etc) come to $14,400 instead of the $19,656 that you have estimated. The CAP rate then becomes 9.11%. Getting better.

2) Realize that if you convert the heat, you may have to decrease rents (unless they are below market right now). I don't know the square footage, beds, baths, etc, but you'll need to take into consideration what other comparable units in duplexes in Leb are renting for. 

3) Try a little value-add. If the units are side-by-side and have separate yards and driveways, and you're restructuring the leases and rent anyway to put the heating costs on the tenants, consider putting the lawn and snow on them as well. I mostly invest in single families, but we do own a couple duplexes, and the lawn/snow is on the tenants. 

4) When figuring cash flow, keep something else in mind. To get a commercial investment property loan, qualification will not be based on dollars of cash flow, but rather on DSCR (Debt Service Coverage Ratio). This is NOI (Net Operating Income as discussed above) divided by the mortgage payment (principal and interest. The taxes and insurance go into the operating expenses that you subtracted from gross rents to get NOI). It's been some years since my days in commercial banking, but I think a typical DSCR for a loan approval is around 1.25 or higher. Now, I know that a duplex will not be a commercial loan, and will not use DSCR (will use DTI instead with probably 75% of rents applied to wash the mortgage payment, or something along those lines). However, I still think it's a good idea to look at the DSCR as part of your own deal analysis, and to show the lender you have an investor mindset by providing them with a pro form income/expense analysis, including DSCR, when you submit the loan request.

Double-check my numbers if you want. I threw this together quickly so some of my calculations might be off. 

Happy investing,

Troy