Mostly Vacant Mobile Home Park - Buy or pass?

[Sari Fulbright]

I have the opportunity to buy a mobile home park where I live. It has a lot of potential, but I just don't know if it is a worthwhile investment as is. It has 10 mobile home spaces and 6 rv spaces. It only currently has 3 tenants - but not for lack of people wanting spaces, because of an absentee owner. Average lot rent for the area is $250-$300 / month. The owner is asking $250,000 for the park. The owner says the infrastructure is in good shape but I have not dove into my due diligence yet. Any thoughts or advice? Thanks!

[Mike Weiss]

Sari,

Like many mom & pop operations, the accounting is not always accurate.
Many times it does not exist.

We'll have to recreate the income/expense statement to get to a Net Operating Income (NOI) figure. If this figure meshes with your expected return, BUY IT! If not, make an offer anyway and see how the seller reacts. More on this in a later discussion.

Keep in mind: commercial property like this MHP is valued based on the investors' expected return (CAP rate). For example: If you invest $100 and receive $9 back per year -- this is a 9% return. If you invest $200 and get the same $9 back -- that is a 4.5% return. Same $9 return, but more risk because you have more money at risk.

It's a bit of work, so be prepared. Here's an outline:

Gross income: $250/space * 10 spaces = $2,500/month = $30,000/yr.

(At $300/space * 10 spaces = $3,000/month = $36,000/yr.) If the model works at the lower number ($250), it'll work better at the higher number ($300). BTW, $250 to $300 lot rent is low in many areas.

Expenses: depends on who pays which utilities. One rule of thumb is 45% of gross income. Again, it depends on the utility costs and who pays them. The lower you can keep your expenses, the higher your NOI will be. And thus, the value of the park.

Continuing on with the income/expense statement -- $30,000 gross income less 45% expenses = $16,500 NOI.

Take the NOI $16,500 / $250,000 asking price = 6.6%. Not too good. But we are not done. We'll have to consider the income / expenses from the RV rental section. You'll have to do some market research to see what the market rents and expenses are.

I happen to own an RV and am currently traveling from AZ to South Dakota for a reunion. I've stayed in many RV parks and have a sense of what parks charge for RV's. 

Let's say your minimum return on investment (ROI) is 10%. As we have outlined above, the ROI is 6.6%. We'll need another $8,500 NOI to reach our goal. How did I get the $8,500 figure? Take your expected return on $250,000 of 10%. That's $25,000. We have $16,500 NOI. That leaves $8,500.

Here's how $8,500 is broken down per space. $8,500 / 12 months = $708/month. Divide that by the number of rented spaces (10) = $71. How can you raise rents or lower expenses to get to your NOI goal?

What if you only need an 8% return?
Can you do the math using what we've discussed?

After getting all the market data - consider the following:

What about adding MH's to the park? If each MH adds $250/month, what is the value of the park with 5 extra spaces renting for $250/month at an 8% CAP rate?

If this is too much right now, consider a partner/JV with someone with experience. 

You'll learn a ton and make money while you learn.

One more thing -- the asking price of $250k sounds like a round number the seller pulled from the air. Many times, mom & pop sellers ask for what they need rather than what the market will offer.

Hopefully you'll be able to do the next one on your own.

Keep us posted,

Mike Weiss