Valuing a Mobile Home Park purchase based solely on Rental Income

[Reid Hanley]

I need some input from all you BP MHP Pros! 

I met with a seller yesterday who has an 81 unit all POH Park for sale based on a 7x multiplier of his annual rental income.  Would anyone here buy an all POH MHP based solely on a rental income multiplier?   In my mind POH parks are worth the value of the land + the value of the homes + some consideration for the amount of income they produce.   But I know businesses are often sold on a 5-8x multiplier of gross sales, which basically is what rental income is to MHP.  If all valuation factors are in the normal range (ie. Expenses 30%, Rent rates at market value,...etc.) is a 7x income multiplier reasonable for a MHP? 

[Bill F.]

Originally posted by @Reid Hanley:

I need some input from all you BP MHP Pros! 

I met with a seller yesterday who has an 81 unit all POH Park for sale based on a 7x multiplier of his annual rental income.  Would anyone here buy an all POH MHP based solely on a rental income multiplier?   In my mind POH parks are worth the value of the land + the value of the homes + some consideration for the amount of income they produce.   But I know businesses are often sold on a 5-8x multiplier of gross sales, which basically is what rental income is to MHP.  If all valuation factors are in the normal range (ie. Expenses 30%, Rent rates at market value,...etc.) is a 7x income multiplier reasonable for a MHP? 

We already value commercial RE on a multiple of earnings, just a bit differently. Bear with me for a second, this got long. 

In stocks/businesses , the most common multiple valuation technique is Price/Earnings. There are lots of others too: Prices/Sales, Price/Book Value, Price/Free Cash Flow. 

Price/Earnings= [Price per share/Earnings Per Share(EPS)]  Since EPS is (Net Income/ Total Common Shares) and Price per share is (Market Value/Total Common Shares) the PE=

(Market Value/Total Common Shares)/(Net income/Total Common Shares). 

Both Price per share and EPS divide by the total shares, those cancel leaving:

PE=Market Value/Net Income. Note, this is Net Income, which is similar to NOI. It is NOT Revenue

 Now if I know the Net Income (NI) and the PE ratio I can get the value? 

Not always. This method only holds true for companies in the same industry. For lots of reasons, it can be normal for companies in different industries to have different NIs, but have the same revenue; OpEx, deprecation schedules, CapEx...Also, as with any calculation, its highly dependent on the actual source of the numbers. Are you using pro forma projections or audited historical performance? Garbage In, Garbage Out as they say. So in Industry A, a multiple of 14x is normal, but in Industry B 20x is within reason.

Almost like how apartments sell for a 5 cap, but MHPs sell for 7 Cap. Because a 5 Cap and 20x earnings are the same thing mathematically. (x/.05=20x) 

Rephrasing your question now that we know all of this: Would we buy an 81 space park with all POHs for a 14.3 Cap based off GOI and not NOI?

 F*** No!!

You'll over pay by a factor of the Expense Ratio, which in a park like this is north of 60%. In other words, paying  $2.50 for a $1 bill. 

To talk with the seller, run the numbers for you to operate the park. GSR-GOI-NOI. Put an acceptable Cap Rate on the NOI based off the market, condition of the homes, condition of the park, utility set up.. to get a value. Then do a Price/Sales ratio and see how far you two are off. I bet you'll get a Price/Sales of 3-5.