Should my first deal be buying a small mobile home park

Question

Celeste Fackrell · Answer

Shannon,

I have been in real estate investing for almost 30 years and bought my first small mobile home park last February.  Although most of the experts say don't buy small, there is not enough money in them to be worth the hastle, I have had a great learning experience over the past 14 months and, although the money is not great, the park is paying for itself, has been a great way to learn, and will continue to yield small rewards for years to come.

I did not go to the Mobile Home University, but many say it is worthwhile.

As Rich said, you need to evaluate on CAP RATE.  I would not recommend buying a small park at less than a 12 or 14 Cap rate unless it is very solid and running smoothly already.

To evaluate you park:  (quick evaluation, before actual diligence)

# of lots currently rented (say 10 of the 12) x lot rent/month (say $200/lot/month) = 10 x 200 = $2,000/month gross rents.

Not take out the monthly expenses as Rich noted.  Monthly expenses are at a minimum, insurances (liability at the very least), taxes, business fees, health department fees, road and infrastructure maintenance (hold back for one-time expenses), management, utilities, advertising, etc.  In Rich's example he used a 40% expense ratio which is a good place to start before your actual due diligence.  If the park is on well and septic, then jump the initial expense ratio to 45% or even higher for the quick analyses.  Now lets say all these expenses add up to $800/month.  That means that your NET OPERATING INCOME = $1200/month ($2,000 - $800) or $14, 400/year.

If you want to purchase the park at a 10 CAP, then in essence you should be willing to pay $14,400/.10 = $144,400 for the park.  Lets assume the trailer that you would own is worth $5,000 (not hard to find out typically).  They you add the estimated worth  of the trailer on to the purchase price based on lot rent to get $144,400 + $5,000 = $149,400 for the purchase price of the the park.

This is absolute supposition.  If you want a better evaluation, and you can provide some details, I would be happy to go through it with you.   Details needed:  Average lot rent,  how many lots are currently rented, Expenses; the biggies are insurance, taxes (property), and utilities.  If you don't know these, again we can plug a % in for evaluation purposes.  Year/bed/bath/ size of the trailer being sold in the deal.

It is not the end of the world if you don't have all this information; a preliminary evaluation can still be done.

Hope this helps.

Sam

Robert Hudson · Answer

@Shannon Smith First tell us the rough financials on the park. Asking price, amount of lot rent,  type of utilities, age of homes, neighboring lot rent. Get back with those and maybe we can help you. It has been my experience in the industry that the guys that really know the biz laugh at using comp rates.

Laura H. · Answer

Awesome - thank you @Rich Ferradino!

Kevin Novak · Answer

Excellent info above- I'm a newbie and looking at a small park with a mix of storage units, pads and a small single family house.

Seller is showing total noi of 6,000 for the year. Park is on city water and tenants pay. there is additional land included which could be 2 more pads or additional storage units.

Broker owned and when asked about how the price was determined she said compareables.

Still seems high to me but how do you value the mix of pads/storage/single family?

Thanks

Rich Ferradino · Answer

@Laura H. I would ask the park and ask who they use to monitor/repair the lagoon and call them and get some knowledge on it. Also go to the county/city office and talk to the dept. of health or city sanitarian and see what files they have on it, and any issues they foresee with the lagoon. I would assume they would have to get an annual inspection on it.

Laura H. · Answer

Thanks, @Rich Ferradino - any resources you can suggest (i.e., words I can Google) to learn more about getting one inspected, making sure it's performing correctly, etc.?

Rich Ferradino · Answer

@Laura H. They aren't bad unless you know what you're doing and have a backup such as city utilities. The EPA and government hate them, and banks don't like to lend on them either. It's not a deal breaker, but you should know a lot about the lagoon in the park before buying.

Laura H. · Answer

Sorry to hijack this post, but why would you avoid lagoons? If everything else in the park checked out, would the lagoon be a deal-breaker? @Rich Ferradino @Jereme Mergendahl

Rachel H. · Answer

@Shannon Smith Aside from what everyone else said, be sure you've got the cash reserves. When doing your due diligence, evaluate the seller (most investors just look at the numbers). Are they being truthful? Can you trust this person? Or does it look like they're hiding something?

If they're really motivated to sell, they'll provide you with the documentation you need to analyze the deal. Ask for rent rolls, contractor invoices, tax returns, etc.

Once you get the information you need, then you just need to run the numbers.

Hope that helps. Good luck!

Jereme Mergendahl · Answer

Shannon,

Both Rich and Sam's posts are great responses. The first deal is going to be the most nerve racking. My first park was a 12 unit park and I had no experience with MHP's, only multi-family homes. Utilities are the most important variable with MHP's. If you have public water and sewer you are off to a great start. I personally am not afraid of well and septic but I would stay away from lagoons and treatment plants. After utilities, I would say let the numbers give you your answer whether or not it is a good investment! The numbers never lie and I am sure you know but I will say it anyways. Confirm the sellers numbers don't take them for face value! It all comes down to you doing your homework on the numbers. If the numbers work jump in!! MHP's are by far the best real estate investment I have ever made! Good Luck!

Should my first deal be buying a small mobile home park

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