Would you buy this "mom and pop" 7 unit park?

Question

There is an older MHP in my area that I have been keeping tabs on for a couple years. It's not the prettiest thing but throws off decent cash flow for the investment.

The property is just under 3 acres with 6 leased lots with tenant-owned homes and a 2/1 block building. The lots are leased below market at $155/unit and the apartment for 450/month. Two of the trailers share a septic and the other units have their own. There is county water that is billed back to the tenants. The trailers are a mix of 70's single wide's and 80's double wide's that have little value. The block building is in relatively decent shape, being remodeled about 10 years ago with new wiring, windows, HVAC, etc.

The trailer park next store door is getting 200/month lot rent and you could rent the 2/1 for $585 section 8. Other parks in the area are getting $250/month with no amenities so there is definitely some value-add by increasing the rents.

Rental demand is very high in my market and I could see rents increasing in the future. I am a little concerned because the trailer parks are now not conforming. According to the seller if a trailer becomes vacant the county will give you 2 years to get it occupied/put a new trailer on the lot. This used to have 8 rented lots, but the seller decided to do anything with 2 of the lots so they are unusable.

*Current numbers*

Gross income: $1,380/month or $16,560/year

Taxes: $67/month or $800/year

Management: I will be doing this myself with my team, but I am thinking around $250/month or $3,000/year

Maintenance/Capital Expenditures: $250/month or $3,000/year

Vacancy: I'm thinking very low since the trailers are not park-owned, but I figure 5% is fairly conservative. $69/month or $828/year

Net Income: $744/month or $8,932/year.

The asking price is $75,000 and the seller indicated it was negotiable. Owner financing may be an option, but the seller would prefer a cash deal. Based on my numbers I could pay the asking and get about 12% COC with no leverage. If I increased the lot rents to $200/month it would be 16%! These are pretty sporty returns with no leverage.

My main concern is the amount of time it may take to manage and the age of the mobile homes. I'm hoping some seasoned MHP investors will give me some pointers on evaluating this potential deal.

Thanks so much!

Bill F. · Answer

@Chris Majors If I was local and planned on living near by for awhile I would as long as I had a few questions answered1: Septic: How many years left in the systems and can you replace them when they go or have the standards changed and the soil won't perc/ you've run out of room? You have 5 systems and if one goes it will eat up one year's of cash flow pre debt/tax. 2. Vacancy: If a home falls apart and a lot goes empty for 23 months do you have the capital to buy and move a home so you don't loose a space. Getting answers to those questions will determine the amount of capital reserves you'll need to bring in addition to the down payment, but I'd guess at a minimum you'll need $15k, which drop your returns to the single digits until you can increase rents.I'm not 100% sure of the legality of the county's laws regarding sun setting lots, but you could reach out to the state's manufactured housing association and potentially get the two lots back if you agree to infill them with new units. Overall, the price seems high based on the pro forma: I'd be looking in the $60-65k range, but if you can raise rents, the park could be worth around $100k, barring major expenses.

Rachel H. · Answer

@Chris Majors Sounds like a very small deal which may be the reason why the owner is selling. Yes, you're concern about time is valid. You have to see if the work needed to get the park up to date is worth the time needed to put in it. Good luck!

Chris Majors · Answer

Thanks for the replies!@Rachel H. Agreed. I think the big thing here that turns me off is the management. The transactions are small and there are not enough units to justify any sort of on-site management. @Bill F. I am local and likely to be here quite a while. 1. I'm not sure of the age of the septic systems, but assuming most of them are 30-40 years old. The owner mentioned some replacements and maintenance he has done over the years. I appreciate your point on that. 2. The 24 month window should be ample time to fix/replace a trailer. I guess the real question is, how much do you want to invest in the thing? Same goes to the lots not currently being utilized and reaching out to the state.I have decided to reach out to the owner and speak with him on some of the concerns. I'm leaning on passing on this because of the headache factor. I have some friends I'll share it with that like the lower-end rentals. If he will do $50k on it.. I guess it will be worth some headache for a little while, lol.

Miriam Seidel · Answer

Also, with such low lot-rents, what is the condition of the insides of the homes? If the owners can't afford upkeep, they may have major roof, floor, plumbing, electric issues which at today's cost of materials to fix and update will cost so much more than the unit is actually worth. And in turn, will take forever for you to re-coup back with such low lot rents.