Low CAP Rate on a Turnaround Park

[Rick S.]

Does it make sense to buy a turnaround park at a low CAP rate, with the reasoning that it can be "easily" turned around and brought up to the market, or even above market CAP rate?

My thoughts are that a turnaround park should be purchased at a relatively high CAP rate. If I am going to do the work and spend the cash to turn the park around and stabilize it, shouldnt I benefit from raising the CAP to well above market?

Example: I am looking at an older 1940s park (40ish spaces) that has 30% vacancy, half of the lots are TOH old MHs and the other half are RV spaces (mostly empty). Old infrastructure, high density, old MHs, etc. The park is in an area that a similar but stabilized well-run park may trade at a 7-8 CAP. When would buying this park at a 6 CAP be justified?

[Neil Schoepp]

Never.

The seller doesn’t get paid for the work you will have to do. If I’m doing the work then I’m the one getting paid for it. Buy on ACTUALS if it’s the sellers position that it’s “easy” to fill in the blank, then he should do it. But I’m not going to pay for the privilege of improving the park. I’m going to buy the park at a discount BECAUSE of the work that needs to be done.