How to analyze MHP deals with a low cap

Question

Hey everyone, I am trying to wrap my head around analyzing MHP for sale with a low cap rate, say 4-5. Do you approach it differently than one for sale that is at a 10 cap? Does the cap rate matter that much?

For example, say the park has 43 POH and 20 are vacant and need repairs ($500/month). There are also 20 RV lots and 10 are rented ($320/month). It has 5 apartments with one rented ($640). Park is listed for sale at 1.2M for a 4.5 cap. It is city water/sewer/trash included in rent and water is not sub-metered ($30k per year)

When I look at everything involved, it seems like it is only worth $500K to $700k.

Am I looking at it wrong? Or do I just have to pay for the potential that is there? Any advice would be greatly appreciated.

JC K. · Answer

I tend to agree the asking price is too high.  One negotiation strategy is to explain to the seller that lenders will typically want a cap rate ranging from 9% to 11%, depending on location.  This leaves the seller a few options: 1) Seller finance (or lease to own, or some other creative approach), 2) Lower asking price, 3) Sit on the market for a few years waiting for a fool.

You may just want to move on to greener pastures.

Brent Coombs · Answer

@Justin Jones, the usual mantra is: never pay the Seller for unrealized potential!

If you reckon you could get it to a 10 cap, even though you're being asked to pay a 4.5 cap, then theoretically, you should be WRONG! ie. When you come to sell after improving it, You should still sell it at a 4.5 cap (or less).

That is, if 4.5 is the GOING rate around there! But, is it?

My argument against recommending novices buy in low cap areas is: How will it cash flow, once leveraged?

ie. Why would you pay all cash for ANY property investment?

eg. Your 100% savings should be able to get you FOUR properties, using 25% deposit for each.

Which means, you NEED properties with a MUCH higher cap rate than 4.5% as-is!

Looks to me that you're on the right track, realizing that properties may well be just plain over-priced! My 2c...