How does financing impact your calculations for MHP pricing?

Question

Hi everyone. I am interested in a trailer park but would need financing for it. I have see on here the basic formula for attaining the value/cap rate for a mobile home park. What I am specifically interested in is how you would factor in the financing risk.

To get more into detail:

I am looking at purchasing a MHP. I understand the value is income-approach. But long-term, how do you factor in the financing risk on a depreciating asset. So, let's say I buy a MHP for $1MM. I finance 800K, 200K down payment. All POH, no TOH. My worries are in the loss of the MH, or the MH just getting so old it's unrentable without major investment.

Also, the MHP in question is located in an area where new pads cannot be added. If a MH is lost to fire or whatever, it has to be replaced with like-kind or better within 30 days or it can't be replaced at all.

I would still have a mortgage to pay, no matter what, but might be looking at MAJOR expense (building or buying new MH) to replace any that are lost, thus reducing income and the margin between income and PITI.

The land is not worth what the income is worth. So I would be upside down on the mortgage if I were to lose X amount of income.
I would not want to lose my investment in the land. So how do I take into consideration that risk?

Any experience, advice, and war stories are welcome :)

Thanks

Bill F. · Answer

@Yvonne H.

I'll agree with @Edward B.

A MHP with all POH is two business. A MHP and a MH rental enterprise. You will be buying both, but you should treat them separately.

The MHP can be valued using whatever method you choose, income, DCF, comp sale, value of improved land. The MH rental business is worth whatever the apprised value of the MH is.

As for your concerns about the deprecation assets. That's why the IRS gives you an allowance for deprecation on your taxes. Its not just free money given to you out of the kindness of Uncle Sam's heart. You should be setting aside AT LEAST that much every year for CapEx.

Regarding the sunset provision (the home having to be replaced in 30 days or the lot is "dead") in the municipality where the park is located, I'd reach out to the NC Manufactured Housing Association  (I assume the park is in NC) to see if that holds water legally. It seems very strict.

Edward B. · Answer

@Yvonne H., lender's are hard to find for a MHP, but they are even harder to find for the POHs. I would be very very surprised if you were able to get a loan for 80% LTV on both the park and POHs.

Having said that, I would value the two separately regardless. You should only be capitalizing the income from the park itself and then only paying the shell value for the MHs. The shell value is typically low enough on a MH to overcome the depreciation assuming you do not overpay. If you capitalize the rent from the MHs you will certainly overpay for them, probably to a significant degree. I would then ensure that I had a plan in place and the reserves available to replace any MHs within 30 days should it become necessary.

A MHP with all POH is not what most investors are looking for. As such you may be able to get a great deal and cash flow rather well if you buy right. You will be buying yourself a full time job, though, and will likely have difficulty unloading it should you choose to do so.

Ian Tudor · Answer

@Yvonne H. - It should be based off the income approach.

What year are the trailers? You could sell off the homes to the residents and collect lot rent. I have homes in the early 70s that people are still living in. You would be surprised how nice a older mobile home can be if you take care of it. Usually it will always be cheaper to renovate existing than to bring in new or used homes unless it is burned down or destroyed by a tornado.

I would consult with the manufactured housing organization of the state. It is usually a group that supports the industry and will help recommend certain vendors, lenders, etc. Some counties try to make it impossible to replace homes but that isn't legal if you have the correct zoning. I have heard of people that have challenged those proposed rules by the county and won. If you want the park, I would dig deep in due diligence and see if there is any merit to what they are saying.

Mobile home parks are NIMBY at its finest.

Chase Louderback · Answer

Could you get seller financing on the park?  As noted by many others in the thread, banks see the POHs as a risk and therefore will generally not capitalize the income from those rentals.

If we considered a park like that we would plan to sell off the homes to the tenants as soon as possible.  Have you tested the market to see demand and if that may be a possibility?  You could mitigate quite a bit of risk and headache by doing so.

Hope that helps!

Jack Martin · Answer

@Yvonne H. the guidance offered by @Edward B. and @Bill F. is spot on, so I won't reiterate there.

As a side note, there are more lenders willing to add MH to their portfolio than in years past so you will find more option out there today, especially with smaller local and regional banks.  However, lenders will typically underwrite only the lot income and will rarely give any value to the income from the rental of homes.  Some lenders will not lend at all if there are more than a small % of POH in the park.  (they see POH as risk, just like you do)

With that said, you can gain a great education from a banker or MH lender's perspective that will help you understand how you can structure your offer.  Feel free to run the deal by them, get their opinion of value, and their appetite to lend on it.  You can use that perspective as leverage to get a lower price, or it may cause you to pass.  In both cases, you win.

All the best,

Jack

Yonah Weiss · Answer

This is very challenging to find financing on, but there are lenders out there that specialize.

@Ian Tudor what do you have to say on this?

How does financing impact your calculations for MHP pricing?

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