1% Rule for Mobile Home Parks

[Keith Meyer]

I'm currently evaluating two mobile home parks for purchase. I love the 1% Rule (Monthly Rent / Property Purchase Price) for SFH and MFH, and am wondering if there are any thoughts on how this applies to a mobile home park investment, where the chattel arrangement applies. Mobile home parks owners typically rent the land to tenants, who own the home on top of the land (chattel). So our income is primarily from lot rent.

I've seen recent figures indicating that average lot rent in the US is around $325-$350 monthly per lot. I'd say a lot of parks I've seen sold recently are in the $30k - $40k per pad range on average, so the 1% Rule seems to hold up fairly well. I'm just wondering if there are other considerations that should be factored in, such as incorporating the depreciable asset of the apartment structure in MFH versus mobile home parks being primarily land, etc. Since both asset classes are commercial property valued on the Income Approach, I'm thinking the 1% Rule should be a good metric for the most part.   

[Bill F.]

@Keith Meyer everyone values parks different ways, but banks use NOI and cap rate to arrive at a valuation, so from my point of view it makes sense to use that to begin with, even if it's only in your head.

As for comparing across deals, all you need to know is number of occupied lots and lot rent. After that you determine the variables that lead to final price that more accurately represents the specific attributes of the park. Once you have a price you can turn that into price/pad or whatever other metric the seller likes. 

Here is the common problem I see with these rules. Take Park A and Park B: both have 100 paying pads with a lot rent of $200, a full time manager, and are offered at $2.1M. That's $21k/pad, which is right around this mythical 1%. Both great deals, right? Using a market cap of 8% (totally made up) means the NOI is $168k/yr or $140/mo/pad. 30% Exp Ratio isn't crazy.

What if I told you Park A was city water& sewer, but Park B was on two wells and 4/1 septic. The 30% exp ratio still works for Park A, but it costs $ to test the well quarterly, pump the tanks, and reserve maintenance, not to mention the higher cap rate Park B will have. 

The rule has lead you to look at a park that is over valued by at least 20%. 

If this was 1980 and I had to carry a calculator to do the math like a nerd, sure I'd be on board with the rules. Its 2018; I can have Siri do the work for me in under 20 seconds, saving me time and bandwith.