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Updated about 12 years ago on . Most recent reply
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Analyze possible first MHP.. Help Please!
Hey guys been reading here for awhile and I have definitely learned a lot. First time posting so I'll introduce myself. My name is Justin. I'm 28 and I live in south Louisiana. I have a fulltime job making 6 figures but I know all good things must come to an end so I'm trying to be prepared for when that time comes.
Here are the details for the mhp. Possible first deal!!
Income:
44 lots total
2 lots empty
4 lots in the back not completed. (needs power pole and water meter)
13 rental trailers. Avg rent $575
25 lots rented. $140 per lot
Total. 10,975/mn
Possible potential. 12,900/mn (add the 6 empty lots and up the lot rent to 175)
lot rent hasn't been raised in 5 yrs!
Expenses:
Property tax 2650/yr
Million dollar ins 2500/yr
Lights and sewer system 190/mn
Misc maintenance 1000/mn
Total. 1620/mn
Gross Income 131,700/ yr
Expenses 19,440/ yr
NOI 112,260/ yr..... 13% cap rate?
Asking price $885,000
Well kept and very clean
Tenants pay water
Paved road and driveways
Property manager lives onsite rent free
3 1982 trailers and the rest are 95' and up
Sewer system is 12 years old and can handle up to 50 trailers
Reason he is selling is to buy a bigger park
Thanks in advance for all the help. Justin
Most Popular Reply
Hi Justin,
In the case of the park you are evaluating you actually have two operating businesses, one being lot rentals, the other mobile home rentals. It is important to make this distinction because the two businesses are different animals and have to be evaluated differently. This is because Mobile Homes (unlike lots) are not only depreciating assets with limited resale value, they also require additional maintenance and management expenses that MHP lots do not incur. Think of how little maintenance a MHP lot requires vs the heating systems, doors, roofs, porches, plumbing, paint, appliances, etc. of a rental. And from a management point of view remember that a trailer tenant can kick in the walls/door, steal the refrigerator and skip out in the middle of the night, whereas it is difficult and expensive for a lot tenant to move his/her trailer from your park. And because lots are valued solely on the income they produce, but trailers are sold in a market, the two must be evaluated by different metrics.
Now plenty of park owners will just love to try to sell you on the idea that their park & home combo is a steal at a 13 cap, and they do this by "capping" the income from the Park Owned Homes on top of the income from the lots. A little analysis will show why this is a bad deal (from your perspective) and why it is important to separate the income streams so that you can determine the value of the lots separate from the the value of the homes.
In your case you have 38 lots and 13 trailers. The lots rent are $140 and while the homes rent at 575, bear in mind that 140 of that 575 that is lot rent. The incremental rent on the homes $435.
Now a MHP is gong to have an expense ratio of around 25-40%. For the sake of analysis let's assume 35%, meaning you'll net 65% of your lot income. Your net income from the park will be: 38 Lots X $140 X 12mo X 65% = $41,496. At this NOI and a 10% CAP Rate the park (without the homes) is worth $414,960.
The 13 houses can be evaluated several ways. You could have them appraised or get a "blue book" value on them. You can also value them with a CAP Rate, but because the homes represent more work, maintenance, cost and trouble, because they're not holding their value, and because they are generally not financeable, you do not want to buy them at the same CAP Rate as you would the Park. Lets assume the expense ratio on the houses is 40% so that the houses generate a net income of: 13 X $435 X 12mo X 60% = 40,716. And for the sake of the argument, let's further assume you indeed decide to purchase these at the same 10% CAP rate as you are paying for the Park. Note that you'll pay $407,160 for these 13 homes. That's over $31,000 each. They're hardly worth that much brand new! Furthermore, you'll be hard pressed to find a bank who will finance these nor will you find a future buyer who'll pay you that 10 CAP for them. At a 20 CAP you'll still be paying over 15K per home... and this would be about the max I would even begin to consider offering for them unless they are very recent homes and in excellent condition.
If I were buying this deal I would first ask the seller if he/she would like to keep the homes and just sell the land. If that wasn't possible then I'd structure it with two separate LLC's, one purchasing the park and the other the homes. That way the park is a stand alone business entity that may be financeable with the bank (remember banks don't like POH's). As for the homes, consider selling them to the tenants on a land contract, or contract for deed. This makes the tenant/buyer more "sticky", gives them pride of ownership which improves the Park and it eliminates all the management/maintenance brain-damage of the home rental side of the business.
Your goal is not just to have a business that pays you a good rate of return, it needs to be one that can take advantage of financing while also being structured for future resale/trade. While the immediate returns might look OK, overpaying for the POH's will stymie you in the long run.
I uploaded a simple spreadsheet that will allow you to play with CAP Rates and Expense Ratios. To me it looks like this deal is worth about $600K. I might pay a little more if the seller carried.
Good Luck,
Ben