Strategy and Positioning for Highest Valuation

[Lance Marshall]

Hey folks, wanted to run my current situation by you and get some advice on which route to take.

I currently have a mobile home park with 14 mobile homes, 6 of which are tenant owned and the remaining 8 are park owned (mainly lease option, a few straight rentals). Over the next few years, I'm going to be putting 10 more homes in the park with the goal to sell when it's "maximized" (positioning it as a nice double wide community, not a sardine can storage shelf). We're re-modeling every home we put in place with corresponding rent. My initial thought process was to increase total NOI (lot rent and home rent) in order to maximize value at sale via whatever cap rate the market will allow, i.e., just moving forward with straight rentals.

However, I listened to show 246 with Kevin Bupp today, who warned against this multifamily/apartment thought process. This has me taking pause and seeking advice for how to position these homes going forward, focusing on the contract and the split between lot rent / home rent.

When renting these homes out in the future, it seems raising lot rent, say $400 lot rent / $200 home rent when the market only dictates $250 - $300 lot rent, would be transparent to a savvy buyer. The potential buyer could just disregard the split of that lease option contract or rental agreement and say "nah, I'm only going to pay at a 10 cap with NOI computed solely through lot rent based on market rents." How a potential buyer would value the 18 park-owned mobile homes he would be coming into would be a huge point of negotiation, I would think.

Here's what I'm getting at -- at a 10 cap, the value of $300 lot rent is $36,000. The value of the total cash flow of the home, we'll call it $600 when adding in rent of the home, is $72,000.

• If a buyer isn't willing to pay a market cap rate based on the total cash flow of the home, and only on the cash flow of the lot rent, what's the valuation model for the premium of the rent from the home itself? 
• What are your recommendations for structuring division of lot rent and home rent for mobile homes I bring into the park, assuming $300 market lot rent and $600 market total rent for the home?  
• In my mind, the pros of a lease option contract are 1) increase NOI by reducing expenses, as tenants take care of most maintenance, and 2) tenants take pride in the home as it will be theirs one day; the cons I'm less sure of. Would a potential buyer prefer
  • 1) a straight rental in which they receive the entirety of the cash flow and potential to outright sell the home later, or 
  • 2) prefer a lease option contract that would theoretically reduce turnover, but one day only produce lot rent once tenant executes the option?

Thanks!