Mobile Home Park in Contract but I have a Question

[Seth Wells]

I have a mobile home park in contract for $395,000 but now after reading some of the forums I think I may have made a mistake with the evaluation. It has 23 spaces, 17 current homes rented (all owned by the park), 3 homes that need rehab, and 3 vacant spaces. I already own 12 residential units and kinda jumped into this deal without a ton of research on the differences between residential homes and mobile home parks.. Since then I have realized that most investors seem to only buy parks that do not own the homes and that they evaluate it based on the lot rents, not home rents... The cap rate listed was 16% and if you consider the home rents (which that rate does) the numbers make a lot of sense.. The big unknown is the repairs.. It was a distressed property and an investor purchased it two years ago, rehabbed a lot of the units and got it almost fully rented before now selling it for a profit. It currently has a gross income (including home rents) of $81,000 and the NOI is $65,000. If I only considered the lot rent portion, then the gross income goes down to $51,000 (but it is making the other $30,000) so I do not know how to think about this... If I continued owning the homes, I could get the gross rents to $110,000 by fixing and renting the 3 vacant homes, slowly increasing the rents for people who have been there a long time paying a low rent, and by filling the 3 vacant spaces. PLEASE lend some advise.. I can still get out of this deal if I need to but it seemed like such a great deal before I read that I SHOULD sell all the homes to the tenants.. In a perfect scenario, that would be 23 spaces x $250 = $69,000 gross income. That would equate to a NOI of $57,000 with no vacancy and no repairs. I am not sure what to do and need help!!

[Rodney Miller]

Full disclosure: I don't own any parks.  I've purchased courses and studied this topic in detail, and have been evaluating parks for the last few months.  Sounds like he's high on his asking price.

First of all 20% sounds low for expenses especially for so many park owned homes. I'd take a close look at that. You should figure out your cap rate on lot rents alone. What is the ROI based on only lot rents? Then you might want to evaluate each house individually and add back in some value for those but keep it really low.

What you read is right....the value is in the lot rentals, not the old homes.  If you buy the park you might want to let those renters become owners and put them on a 3-5 year payoff based on their rent amount.  This will take you out of the nightmare of managing mobile home rentals and will keep your expenses down.  

Hope this helps