Cap Rate on a Nice Mobile Home Park

[Jason Merchey]

Hi all. I'm new to mobile home park investing.  A friend got a piece of land under contract that is in an area I would describe as: growing, nice for a double-wide and small home neighborhood (some trailers, but everyone mows their grass, there aren't any cars in yards, etc.). I am the money partner on this deal if we get through due diligence.

This piece of land has two old concrete block houses on it. We were thinking of scraping those and just putting 10 nice, recently rehabbed trailers in place. There would also be a little green belt along a creek, and were thinking of putting in a little play area for kids (jungle gym, mulch, etc). 

Any thoughts on cap rate? This area is growing and jobs are pretty solid. The weather, jobs, taxes, and proximity to Charleston are bringing folks here. It feels like a lower-middle-class/blue-collar neighborhood, but close to many things that are positive. My hope would be a cap rate of 9, and I could live with 10. I really don't think someone would demand an 11% cap to buy this since the trailers would be in good to very good condition, the piece of land has some trees and some minor amenities I mentioned, and it's not "dangerous" or anything. It would be a good buy and hold if that were my goal at this time. Probably a very low-expense property (maybe 10% in expenses). 

It's probably going to cash flow at $100,000 a year net. We are going to sell this asset that turns a 9-10% profit as soon as it's redeveloped and it's all leased up. 

Note: the land and the trailers comprise this asset; this isn't a true mobile home park where typically the land is what is being sold. 

[Chase Louderback]

You can check Loopnet, CRExi, and Mobilehomeparkstore.com to see what the going cap rate is for similar parks that are relatively close.  

One thing to keep in mind is that almost all operators and brokers are going to be valuing the park by capitalizing the Lot rent income and expenses only and then factoring in a shell value for the homes themselves.  You will receive a lower cap rate on the lot rent for:  more pads (to diversify risk), stronger market, public utilities (over private utilities), and ability to finance with agency debt, to name a few.