By the end of this article you should have a better understanding of how to quickly analyze whether a mobile home park seller is asking a competitive, fair, average, or inflated asking price for his or her park.
While individual mobile home investments are my typical topic of choice, this article concerns helping you quickly evaluate a seller’s asking price in relation to the income and cap rate of their mobile home community.
You likely already understand that individual mobile homes are lucrative. Investors that start buying, renting, and selling individual mobile homes inside parks can find themselves wanting to own an entire mobile home park. This can be compared to going from the minor leagues to the major leagues.
First let us understand a few basic terms with regards to investing in mobile home communities.
Net operating income: For the purpose of our quick calculation the net operating income or NOI will be based on the last full calendar year of income. To calculate the NOI you will add up all the mobile home park rents and other income for the year and subtract all the legitimate expenses during the same year. For the purposes of this quick calculation do not take into account any mortgage payments or interest paid on mortgage loans.
Asking price: A mobile home park seller can ask any price they wish for their park. Looking through a listing service of mobile home parks for sale you will see mobile home parks in all price ranges, sizes, and conditions. Some of these communities will have been on the market for a year or more and others will have sold after only a few days.
Capitalization rate or Cap rate: The capitalization rate is the yearly rate of return the average investor expects to earn on this type of mobile home park. There are typically three cap rates involved in each mobile home park for sale you see; there is the cap rate the investor-buyer wishes, the cap rate the seller expects, and the cap rate given from an experienced property appraiser. Cap rate changes based on the risk, location, and other factors of the park. When using the cap rate in math equations change this percentage to a decimal.
Using the asking price, cap rate, and NOI you can now quickly analyze if the asking price matches the income.
Asking price of the mobile home park X Cap rate = Net operating income
Example: $200,000 X 0.1 = $20,000
Said another way.
Net operating income / Cap rate = Asking price of the mobile home park
Example: $20,000 / 0.1 = $200,000
Using this quick formula can give you the confidence to explore or pass quickly on a potential mobile home park investment. The above quick calculations are only the tip of the iceberg when it comes to proper due diligence with regards to screening an entire mobile home community for investing.
In addition to the three simple criteria above there are also infrastructure issues to consider, utilities, management, rent rolls, empty pads in the park, extra build-able land included in the price, the number of mobile homes that convey with the price, financing included, any single family homes or other buildings that convey, current zoning headaches, future path-of-progress plans, and of course your desired exit strategy just to name a few.
In a coming post I will be discussing your possible exit strategies with regards to profiting with mobile home communities. If you are experienced in this field please do not hesitate to add any value in the comments below. If you have any questions please add them in the comment sections below for us all to learn and grow together.
Love what you do daily,
Photo: Lynn Friedman