Mobile home park options - Which one would you choose?

Question

Hey Guys, I am brand new at analyzing MHP's and would love yalls insight on these that are available in my area. I'm aware other variable will need to be considered, but on face value, which one looks like the best investment.

1. Asking price $1,100,00, # of lots = 46, park owned = 0, well/septic w/oxidation pond, $9200/monthly rent, 7% expenses

2. Asking price $1,350,000, # of lots = 27, park owned = 27, city water/sewer, $17,500/monthly rent, 31% expenses

3. Asking price $1,870,000, # of lots = 51, park owned = 48, well/septic (city is available for hookup), $30,600/monthly rent, 29% expenses

4. Asking price $3,500,000, # of lots = 108, park owned = 15, city water/sewer, $59,675/monthly rent, 22% expenses

5. Asking price $1,180,000, # of lots = 21, park owned = 12, city water w/septic, $10,925/monthly rent, 9.40% expenses

6. Asking price $1,000,000, # of lots = 23, (RV Park) Also included 94 storage units, well with oxidation pond, $19,960/monthly rent, 13% expenses.

Frank Rolfe · Answer

To even begin to analyze these, you need much more information on each one. Here's what you need:# total lots#lot occupied# park owned homesLot rentMarket lot rentAge of park-owned homesMetro size of marketSF price in metro3-BR apartment rent in metrotype of water:type of sewer:who currently pays it (park or tenant)Your expense ratio numbers are way off. The industry range is 30% to 40%, based on who pays water and sewer, and up to 50% based on occupancy.There's no park on earth that comes in at 9.4% -- not even if the city owns all the utility lines, roads and the park has zero common area (we own a park like that and the expense ratio is only about 25%).

Jack Martin · Answer

@Michael Blank that was supposed to be @Michael Baradell. But good to loop you in just the same:) .

Frank Rolfe · Answer

There's nothing wrong with investing in Louisiana if you stick to the big markets: Baton Rouge, New Orleans and Shreveport, for example. This industry is all about affordable housing, and to have demand for cheap housing, you have to have expensive housing. Any market that has 100,000 metro and high home prices would work regardless of what state you're in.

Jay Hinrichs · Answer

when you have one go bad on U you will understand why people shy away from them just like private water systems.. its regional of course. but for me personallylittle or no park owned homes.must have city sewer and water..If it has park owned homes first order of business is to give away the homes.. to tenants .. as quick as I can.. maintenance on used MH will kill you.

Frank Rolfe · Answer

I assumed it was master-metered electric since you said the park bills back electricity. But you can know 100% for sure if you just call the power company and ask them if they send one giant bill for the entire park to the park owner or if they send individual bills to each tenant.You don't want to even think about buying a new park that has 0% occupancy. Here are the problems:1) if one just got built then that means more can be built and that ruins the whole business model of owning mobile home parks since the value is based on the complete lack of new construction. The only region where you can build new parks is the southeast and that's why no REITs buy there.2) it's way too risky -- you have no idea how fast you can find buyers for homes or if any exist at all.3) the whole time you're trying to fill it, the interest clock is ticking.4) no banks finance vacant parks5) it costs about $20,000 per lot to build a mobile home park, so this is only worth $360,000 in its current state.

Jack Martin · Answer

@Michael Blank as @Frank Rolfe shared, a lot more information is necessary to give you an educated answer. However, some of the items that jump out from what you shared:1. Asking price $1,100,00, # of lots = 46, park owned = 0, well/septic w/oxidation pond, $9200/monthly rent, 7% expenses - I would likely pass due to oxidation pond.2. Asking price $1,350,000, # of lots = 27, park owned = 27, city water/sewer, $17,500/monthly rent, 31% expenses - Without knowing more, I would likely pass on this one because it is 100% park owned homes.3. Asking price $1,870,000, # of lots = 51, park owned = 48, well/septic (city is available for hookup), $30,600/monthly rent, 29% expenses - Without knowing more, I would likely pass on this one because it is 94% park owned homes.4. Asking price $3,500,000, # of lots = 108, park owned = 15, city water/sewer, $59,675/monthly rent, 22% expenses - This one looks interesting, so I would push to get more information. 22% expenses is a lot lower than reality. The seller is likely not including PM, capital reserves, or something is missing there. But this one is clearly the best candidate in the group, based on the info you provided. 5. Asking price $1,180,000, # of lots = 21, park owned = 12, city water w/septic, $10,925/monthly rent, 9.40% expenses - I would pass on this one, simply because it's a pretty small park, although it is almost comical. Price equals $56k per lot. That's pretty high unless you are in a primary market. There are almost 60% POH. Expenses are so far off, either the owner or the broker doesn't understand the business. That's probably why the price is so high. 6. Asking price $1,000,000, # of lots = 23, (RV Park) Also included 94 storage units, well with oxidation pond, $19,960/monthly rent, 13% expenses. I would likely pass due to oxidation pond.

Frank Rolfe · Answer

The reason that sellers want to include POH rent is 1) they don't know any better and 2) they want you to pay $30,000 for a $3,000 mobile home. Either way, you lose. So how do you analyze the deal in which there are many (or even all) POHs?The first thing you do is to acknowledge that lot rent and POH rent have nothing in common, and break the park into two business components: 1) real property (lot rent) and 2) personal property (POH rent). So let's say that there is a POH that rents for $600 per month and the market (not mom & pop's current) lot rent is $400 per month. Then you take the $600 in POH rent, and subtract $400 in lot rent and that means the personal property business has $200 gross revenue. Take away $50 in insurance and taxes and $100 in repair, and you'll quickly see that the home business is not making any money in this case (around $50 per month). Meanwhile, the real property side of the equation is $400 and you take off 30% (if tenants pay their own water and sewer) and you get $280 per month profit [about 6 times more than the personal property division is making].Here's the trick. When you analyze the two divisions, you often find that the POH division is actually losing money. I've seen moms & pop owners that have a staff of two guys at $50,000 per year servicing 20 POHs that only net $12,000 per year in net income. The answer is to fire the two guys and give or sell the homes to the residents.Most parks have a higher net income from adjusting the lot rent to full market and then shutting down the home rental empire.

Michael Baradell · Answer

@Frank Rolfe man you should start some type of educational course on MHPs!! Haha Awesome insight man, I truly appreciate it!And for what it’s worth, I am in Louisiana so you hit the nail on the head. Being that there are no REiTs here yet, wouldn’t that also lend itself to opportunity as well though? We have certain parishes where there are no new parks allowed. Should this be where I focus?

Michael Baradell · Answer

@Frank Rolfe Is there a tell tail sign that suggests it’s master-metered electric? I do agree though, even with my limited knowledge, this one is simply over priced.What are your thoughts on a brand new park with all city utilities, but only 18 pads and not any room for growth? There are no MHs on the property as of yet. Lot rent is $350. Sales price is $700k. This one seems double of what it should be in my opinion. Is it wise to buy homes to fill this up myself?

Frank Rolfe · Answer

It sounds like this park has master-metered electric. That's a deal killer unless a certified electrician can do an analysis and finds that the lines can handle the amount of amps that are being pulled with a nice cushion on top. When you buy one of these systems you are, in fact, becoming your own power company and that's a scary position to be in.In addition, there's no way the expense ratio is 24.9% -- more 34.9% or more. The normal industry range is 30% (if residents pay their own water and sewer) to 40% (if park does). On a smaller park, the fixed expenses eat up more of the total revenue (insurance, for example, has minimum charges) and the master-metered electric is going to cost more to operate, hence the suggestion it's more like 35% rather than 30%.One final item -- with rents above market and the park full, where's the money in this?