First small mobile home park, something off?

Question

A small 5 unit mobile home park came on the market yesterday and the agent said they already have two offers in hand. Seller has 48 hours to accept so I need to get my offer in today. The agent said that the seller is liquidating his portfolio to move and retire.

I am evaluating this based on NOI and cap rate like a normal commercial property, but some of my research says to evaluate it based on price per unit as well. This would be advantageous because I would like to transfer ownership of the units to the tenants in a lease to own and just collect lot rent.

For some numbers: List price is $89,000, 3 units rented at $350 a month, two units newly vacant this month. I drove the area and went inside one of the vacant units yesterday evening. The area has a lot of nice older homes, the neighborhood and houses all look well taken care of, and the major area that everyone in town wants to live in with a mall and the airport is 20 minutes away.

It's hard to find such cheap housing of course in a decent area close to everything and rents haven't been raised in 6 years, so I am running the numbers at $400/month per unit, 10% capex since I don't know the condition of the water electrical etc, 8% repairs, 4% vacancy, 10% property management. The vacancy is low because I spoke to a mobile home park owner in a much worse off area about 10 miles away said the same thing as the owner of this one, that they can have it rented out in a day or two and have a list of people the day they list them.

400*5=2000/mo*12=24,000*.68 (32% expenses)= 16320-632.61 taxes- 700 (estimated insurance)= 14,987.39

14987.39/90,200 (89,000+estimated 1200 cash closing)= 16.65 Cap

Finally to the question, I love the cap rate and will be fine with 10-11 so I can increase my offer so I can win the deal or make unit/park additions, but even if I offered $100,000 for the 5 units, there is no way that each used single wide 2/2 is worth $20,000 each. So does one just be happy with the potential cap rate and cash flow, own all of the units long term? I would clearly be overpaying for the price of each mobile home but the cap rate does justify the price. Any thoughts? Would I be overpaying at 100,000+?

Jay Hinrichs · Answer

Old single wides will bleed you if you have to constantly maintain them

David Miller · Answer

@John Pettas. My personal belief is I will never get into a bidding war to get a property, especially when there is a rush for time and I don’t have the inside track.

Rachel H. · Answer

@John Pettas Mobile homes that old definitely need updating. Plan on paying for new heating and air conditioning units (HVAC), hot water heaters, roof repairs and replacement, and plumbing issues to say the least. The floors will need to be addressed and/or repaired or replaced at some point as well. If you don't want to deal with those issues, you may be better off bringing in newer homes into the park to replace the older ones. Though, you'll have to check to see if this is possible via zoning regulations. In some areas, the mobile homes in that particular area can stay but you may not be able to move in newer ones into the park. This depends on the area and zoning regulations. Hope that helps. Good luck!

John Pettas · Answer

I met an investor here who very graciously showed me his park that had similar units nearby, and he walked me through the ins and outs of investing in single wides MHPs in my area, and even toured the property with me. I concluded that this was not the kind of investment for an out of state military investor to try to get a good property management company to manage effectively. I passed the deal on to him, so this really is a testament to being involved and connected on Biggerpockets. Thank you everyone for you input and advice

Rich S. · Answer

I'm no expert, but are you intentionally not valuing the land?  The LAND is what allows you to collect lot rent.  I think the point that MHP are hard to come buy as more and more places are trying to get rid of them, means the ability to have one that generates good returns is harder and harder to find.  For some, park owned is a pain and they want nothing to do with it, but if you can raise the rents and with only a handful of them, I'd keep them that way until you need to replace them... then switch over OR give the tenants two options . You can buy the trailer for X amount, plus the lot rent per month OR you can just pay X amount for lot rent.

The private septics is what would worry me the most on this deal.

John Pettas · Answer

Update: Got the MHP under contract at 96,000, 7 days due diligence.

@Ed Emmons that is what I was afraid of. Looking at others and based on the fact rent hasn't been raised in 6 years, I was hoping to raise it to $400-425 and then there would be an incentive to purchase for that amount or more plus 200-$250 lot rent.

The problem I think goes back to the fact that the homes are in average condition from what I can see from the outside, and the homes are the following years: 1964, 1967, 1972, 1981, 1988.

With the closing costs maybe $1500, potentially 5 elevation surveys needed for insurance at a $2000 total, other miscellaneous immediate repairs, I'd easily be all in $100,000.

If I can't owner finance them to the tenants for that $100,000 total, do you still do the deal waiting to get your money back to eventually enjoy collecting lot rent only?

That to me is the only reason to own a mobile home park

Ed Emmons · Answer

If the current rent of $350 is for the home and lot, there is no incentive for tenant to buy the home. If their total rent is higher you could structure the lease/purchase to be just a little higher than their current rent with idea that it will one day drop when they fully own the units. If the homes are in good condition and you have good tenants, the cost to keep them up is not that much. It is probably not realistic to get $20,000 for them unless they are late 80s or newer, 14’ wide and very good condition and would only be on L/P rather than full cash sale.

Jeremy Ramsay · Answer

@John Pettas sounds good!

John Pettas · Answer

@Jeremy Ramsay got your message, I'll shoot you a text and we can do a call later today when I get more information

John Pettas · Answer

That was the plan, so with expected rent increases and a possible increase in expenses that I don't know about yet, an offer price above asking at maybe around 100k, I shouldn't have a problem achieving my desired 10-11 cap rate.

But if the trailers probably aren't worth $20,000 functional but not so desirable single wides, and I've paid $20,000 a piece for them, will I still be able to sell them to the tenants for $20,000 or more? I take it if I sell them for $20,000 to each tenant I am expecting to make money off the property solely by holding a note at 6-8% plus the lot rent until it's paid off?

I feel like a tenant will look at a rent to own contract and see that they're paying $20,000 plus interest and lot rent and say no way. Does anyone have experience have experience transferring 2/2 standard finished single wides over to tenants that they can share?

First small mobile home park, something off?

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