Mobile Home Park Purchase

[Abbi Armstrong]

I have $450K cash in hand. I'm looking at purchasing a mobile home park for roughly that amount. The park brings in $2850 in space rentals, $450 for one house on the property and an additional $1350/ month in owner financed trailers. The space rents could definitely be raised by $50 per space for an additional $950/month. Every space is individually metered, public sewer and water. The reason I want to purchase the park is as a single mother, this very hands off option seems more attractive than purchasing duplexes or SFR's where maintenance will be a constant issue. I plan to hire someone to property manage for me at 8%.

Now for the million dollar question: Do I buy it with cash, putting all my nest eggs in one big basket and risk that it might depreciate but skip dealing with the local bank that thinks investing in a mobile home park is a bad idea anyway? This way everything I bring in is profit after I pay the property manager!

OR

Do I put $350K into it- keeping $100K on hand for another deal in the future and take out a $100K loan for a period of ten years at a payment of $1100/month? 

[Jack Martin]

@Abbi Armstrong the answer to your question really depends on what you are trying to accomplish.  If you are a super conservative person, you don't want to build a large portfolio, and simply want to create a stable stream of income on your 450k, then it might make sense for you to pay cash.  After all, there are not many investments safer than a MHP with no debt.  

However, if you are an aggressive investor and would like to build a larger portfolio, then leverage will allow you to get a higher cash on cash return on this asset AND give leave some of your cash free to pursue more.  It all depends on what your goals are. 

If you do put debt on the park, just make sure your lot rent at current rates will conservatively cover the debt.  It's also smart not to allocate the income from the sale of homes toward a debt payment.  Instead, allocate funds from home sales toward the acquisition of homes or repairs to POH's. Keep those two flavors of income separate.

As it relates to price on the subject park, I agree with @Chris Pellicone here. If the seller will carry, that is always a great way to keep the deal simple on the debt side.  Also, it sounds like you will have some capital improvements to make, so don't forget about budgeting for that as you consider how much to offer on the park.  

Add up the total amount you think you will have invested in the property (purchase price, closing costs, legal fees (if any) capital improvement budget, reserves). For the sake of this example, let's say you can buy the park for 300k and with everything else your total number is $400k.  Then answer these three questions:  

• If I get this park running the best I can, how much cash flow will it produce?  (conservatively, I would assume expenses are going to run 40%.  As Chris mentioned, you can likely get them to 35% once you have the park stabilized, but in the beginning it's likely they will be higher)
• If I invested $400k in this property, what would the return on my investment be?
• Does that return make it worth investing in this deal?

If the answer is no, then you need to negotiate price, add debt (to gain leverage) or both.  

All the best,

Jack