@David Mathews
I deal with mobile home park acquisitions and we constantly analyze deals every day.
Typically we value parks based on income. I don't normally do analysis on deals this small and I might be missing something but here's what we usually do to determine value.
1. We usually look at parks as two separate units - the land and the homes. We want to place a value on the land (the lot rents being produced). Banks also prefer to look at parks based on what the land is producing. Generally banks don't want to value the homes because mobile homes are depreciating assets and they don't want to give valuation credit for something that will depreciate over time.
If you look at this deal from a lot rent income analysis basis:
$350 lot rent / mo x 2 x 12 = $8,400
Minus:
$2,000 in taxes
Leaves you:
$6,400
And that's before other expenses.
The $200 above lot rent you earn from the mobile homes could likely get eaten up in cap ex and R&M over time.
But let's say all of that was profit:
$200 x 2 x 12 = $4,800
If you combine the two figures:
$11,200 (Net Operating Income - a very optimistic number)
He's asking for $150,000
$150,000 / $11,200 = 7.4% Cap rate
That's a 7.4 cap rate on a very optimistic NOI (net operating income).
Normally with MHPs, you'd be looking to buy something that small at a 10cap or above off the NOI from lot rents only and then paying something extra for the homes, depending on their age and condition.
Banks usually value at NOI off the lot rents divided by the cap rate times the Loan To Value ratio.
NOI / Cap Rate = Value
Value x Loan to Value (ie. 75%) = Maximum amount of the loan
General expense factors for mobile home parks are usually somewhere between 30-40% of income.
So the bank might look at the NOI as being closer to: $5,040 giving the property a cap rate of 3%
If you had a 75% LTV meaning you borrowed $112,500 from the bank at 4.5% over 20 years, your annual debt service payment would be: $10,327 / year, meaning your current cashflow wouldn't cover the bank payments.
Usually banks want to see a minimum Debt Service Coverage Ratio of 1.2x (You earn at least 20% more than the debt service payment).
Let's say the bank were willing to financing this deal.. you'd have to get your annual debt service payment to $4,200.
That means borrowing about $46,000.
So you'd have to raise $104,000 or bring that to the table.
Cashflow after debt service would be: $840
That's a cash on cash return of: less than 1%
At that Cash on cash return, most likely your private lender would have to be an equity partner since there's not enough money to make debt payments to the lender.
2. The Upside
So while the deal 'as is' might be overpriced, it might be a park worth overpaying for if you think there's a lot of upside.
One of the biggest expenses for mobile home parks is filling empty lots. That involves buying homes, moving them, and then setting them in the park.
With each home you move in, you're increasing the amount of money you have in the deal.
But let's take a scenario where you have the lot completely filled at 7 lots.
$350 x 7 x 12 = $29,400
Expense factor of 40% (since it's a smaller park and harder to spread expenses)
$17,640 NOI
If you divide that by 10% to get a value at a 10cap, you get:
$176,400
After selling costs, etc, you might be looking at $162,000 net + whatever principal paydown you were able to make?
That's a gain of about $12,000 (more likely there will be $0 or negative gain because of the expense required to move the homes into the park).
Most of that would likely have to go to your private lender, now equity partner. And that return might not be enough to satisfy him.
If you refi'd out - at a 75% LTV - you could repay your private lender about ($132,000 - $46,000) $86,000 (less than that because there'd be transaction fees as well).
He has $18,000 remaining in the deal and your new debt service payment (assuming the same rate) would be about $12,000 annually. That leaves about $5,000 left for you and your private lender to split annually.
3. I might be way off!
But if you plug in your own numbers into the basic analysis, it should help you think about what the upside is and whether it's worth the risk.
My own opinion - the current owner wants you to pay too much for potential income that will take a lot of work to realize.
I deal with a lot of owners looking to retire and most of them overvalue their properties. Our strategy would be: "Sorry.. I can't make those numbers work..." and then keep in touch with him by sending postcards / calls every 3-6 months.
In the meantime, try running CL ads to measure demand in the area.
4. If you think the real play is to convert into an RV park, figure out what the additional infrastructure cost will be and then run a similar financial analysis.
Bottom line: How much will it cashflow? How much can I sell it for later? What will my returns be?
Good luck!
