Buying Mobile Home Park Using Master Lease

[Alexander Glasser]

Looking at Purchasing a Mobile Home Park using master lease with Option to purchase at the end.

Currently 9 spots for mobile homes. 

2 are owned by the park (1 occupied no rent collected, 1 vacant needs work)

6 are tenant owned. 

Current avg. rent lot is $175.00 (Owner hasnt increased rent in years) 

Avg. current market rent is $300-400.

Asking price is $400,000.00 which I think is too high. 

Avg market rent for POH is $800-$1000

I am trying to figure out a fair market value using a master lease take over with a purchase agreement in 3 years. Or purchase offer right now. I am coming up so far away from his asking price. Can anyone help me, i can provide more details if needed. 

Thank you.

[Jack Martin]

@Alexander Glasser the quick back of the napkin math is lot rent times 12 months, times the number of lots, minus the expenses, which will give you the NOI. Then divide the NOI by the market cap rate and there is the target value. There are more variables to consider like the utility reimbursements, landscaping, etc, but that will at least get you in the ball park.

In this example if the market rent is $350, the future value would be $350x12=$4,200 > $4,200x9=$37,800 which is the gross rent. Subtract 40% for expenses (expenses can range from 35-50% depending on the park and the amenities, but for this example we will use 40%) and you are left with $22,680 which is the NOI. I don't know what the cap rate is for that market, but if you divide the NOI by the asking price of $400k, you arrive at 5.67% cap rate.

If that park is in a primary market, that is probably not too far off. However, that is the value of the park once you convert the rental home to tenant-owned, renovate and sell the vacant home, and raise the lot rent to $350 for all 9 spaces.  

Using $175 for the lot rent, the formula would be $175x12=$2,100 > $2,100x9=$18,900 which is the existing gross rent. Subtract 40% for expenses and you are left with $11,340 which is the existing NOI. If we use the same cap rate of 5.67% then the park is only worth $200k.