Mobile Home Park Investors Q&A

[Brent Knipp]

When looking at Mobile Home Parks, what CAP is the suggested min to stay within for POH and also for TOH. What range would you like to be within for parks that have little to no value add and parks with a lot of value add.

[Jack Martin]

I would also concur with @Brenden Mitchum particularly when you are underwriting a value-add park. There are many way sellers (or brokers) can manipulate cap rate, so it is important to understand how to value a property yourself and not rely completely what they are demonstrating.

To keep it really general, the cap rate is simply an illustration of the expected "rate of return" that investors are currently expecting to receive if they paid cash for a property. In other words, investors are asking the question, "What return would I make on my capital if I were to buy this property for cash?"

You will find there is always a current market cap rate for each specific type of property due to the recent sale of similar properties. When the market is strong cap rates generally come down, and when the market corrects (like it did in 2007-2010) cap rates go up. Also, nicer properties and neighborhoods will always have a lower cap rate than lessor quality properties and neighborhoods. The more desirable a property is, the lower the cap rate will be. (this is why a run down property in a tough neighborhood will have a higher cap rate)

Cap rate can be easily manipulated by misrepresentation of NOI. If a seller characterizes lower expenses or higher income, that will create more NOI. If that increased NOI is unrealistic and you are not experienced enough to catch it, the cap rate will look much more attractive than it should.

In a mobile home park, some of the common ways a seller or broker will manipulate income and expenses are: including rental income from POHs, including utility reimbursements on the income side but leaving them out on the expense side, misrepresenting maintenance and repair expenses because they do them themself, not including property management expenses, and using rent comps from superior properties in better neighborhoods to demonstrate more upside in rent, just to name a few. 

Your ability to conservatively underwrite a park to the way you expect it to perform is paramount to your success.  If you have never owned a park and are not familiar with how they perform, it would be smart to get some education and spend time analyzing as many parks as you can.  The more you underwrite parks, the more familiar you will become, and the more you will be able to identify cap rate manipulation. 

All the best, 

Jack