All Forum Posts by: Daniel Ryu

@Meron Gashu

• Pricing is usually set by Cap Rates - which is an approximation of return on capital that you will receive from investing (I say approximation since Cap Rate takes into consideration on one year and is based on purchase price, but not all in capital). Do you know what cap rates are for Mobile Home Parks in that area? If not, talk to a few MHP focused brokers and find out if they can give you a better sense. 
• Seller is offering at about a 5% Cap on 47% Expense ratio. That's pretty aggressive pricing. The Seller will talk about the upside of the empty lots, but it takes a lot of money / time / effort to fill those up.
• As other posters mentioned - make sure to do your market due diligence and see if this is a market you'd like to own in. How's the median income? How are 3bd rents? What's the MSA population? How much are average home prices? What's the current vacancy rate? Who are the major employers? These questions can help you get a handle on the market overall.

Hope this is helpful! Good luck

From my buddies that flip mobile homes, lots of driving for dollars and looking for potential homes to buy. Know what your end buyer will pay (if you're flipping). 

@Mitchell Hart

When you say inspector, do you mean someone to inspect the wells and septic?

Typically, we'd contact the DEP and find out who oversees the septics - in Pittsburgh, for example, there's a sewage inspection officer. They may or may not require you to send in a FOIA (Freedom of information act) to find out if there's been any complaints or if there have been any violations. In your due diligence request list to the owner, you can also request this info. 

For the Wells - I believe we'd contact the EPA to find out who had jurisdiction over inspecting the water (although this is a smaller park and I know sometimes there are different rules for smaller parks). Typically, owners are required to turn in test samples on a regular basis. 

Find out who the owners has overseeing the septic / wells and talk with them about how the systems are running. Then find someone to come in and verify - I think for one park we used a well driller to come out and check out the system.

Then there's the rest of the due diligence - checking financials, bank statements, reviewing invoices, etc, and making sure they P&Ls they've provided line up with expectations.

Also with MHPs, keep in mind that it's the lot rent portion that is capped, and not the rental income portion above the lot rents.

Good luck with it all

We contracted with @Steve Edel to oversee due diligence for some acquisitions - he might have a more suggestions

@Andrew Benavides

Is this a mobile home duplex?

If not, you might have more luck posting in a different forum.

By the way - when the groups cap POH NOI, it's just to get an approximation of value. In the end, they're looking at IRR to find pricing.

@Joe Cassandra

Yep, that's generally how parks are valued - Lot Rent Stream as one separate valuation / POH as separate.

In my spreadsheets, I separate the income / expenses for the two different portions.

So if you're paying $2000 / mo to a maintenance man and he's spending 75% of his time fixing homes, then $1,500 is going to the POH side of things, and $500 to the Land Side.

With the RTO stream, you can use a net present value formula, where you take all the anticipated cashflows, discount by 25% due to people bailing, etc, and then discount that income back to a rate you feel comfortable with (ie. 15%).

That will give a theoretical value for those income streams.

With POHs, here's what I've seen people do:

• Value based on what you can sell them for << more common
• Value based on a gross rent multiplier, typically 1-3. Could be higher for nicer homes.
• I've also seen them cap NOI, but it's usually at a much higher cap rate (15-18%) - not as common

@Jimmy Toussaint

Generally-speaking:

• If a tenant owns the home, that income stream is considered more stable.
• In theory, tenant that owns their home will:
• Take better care of their home (pride of ownership)
• Be less likely to move (difficult to move a MH)
• Will have a lower 'burden' to pay (assuming the house is paid off)
• Therefore the income from the TOHs will warrant a lower cap rate.

What about the POHs?

• A) One way to deal with the income is to separate it into two portions - the "lot rent" portion and the POH portion. So let's say that the POH was generating $600 / mo. You know based on comps in the area that lot rents are $400. Then you can 'assign' a lot rent of $400 and the other $200 would be the POH income.
• You'd calculate the NOI of the Lot Rents (Lot Rent Income annualized, minus Land Only Expenses, to get a Land NOI). And you'd do the same exercise for the POH rents.
• You'd divide expenses such as: Fixing the plumbing in a home - that's a POH expense. But fixing the pipes leading to the home - that's a Land expense.
• The "Land NOI" (Lot Rent NOI) would get valued by a cap rate, say 10%. And the POH NOI would be assigned a higher cap rate, such as 20%.

• B) Some may however want to completely remove any of the income associated from the POH from the Lot Rent NOI calculation. The theory being - those are rental units and the tenants are not as stabilized. So I don't want any of that income to receive the 'lower cap rate' valuation.

• C) Also some will not value the POH based on capping the POH NOI. Instead they'll apply a NADA value or try to use a gross rent multiplier to that income stream.

Let's say that there are 10 TOHs and 1 POH.

Lot Rent: $400

POH Rent (above the lot rent): $200

Let's look at the different valuation theories:

Example A: Split the Lot Rents from the POH Rents

$400 x 11 x 12 = $52,800

Exp factor: 30%

NOI: $36,960

Cap Rate: 10%

Valuation: $369,600 - for the Land

Example B: Remove any income generated by POHs

$400 x 10 x 12 = $48,000

Exp factor: 30%

NOI: $33,600

Cap Rate: 10%

Valuation: $336,000 - for the Land

You can see a $30,000 swing in valuation.

Example C - Cap all the income

$600 x 11 x 12 = $79,200

Exp Factor: 30%

NOI: $55,440

Cap Rate: 10%

Valuation: $554,400

As you can see, how you cap the income streams can greatly affect value.

Banks will value based on A or B, but not C. How banks value will affect your ability to get loans, refinance, etc. Also appraisers will value based on banks. Most investors want to value how banks value as their business plans at some point may involved refinancing or selling to someone who wants to get a loan to buy. 

Keep in mind cap rates are there just to get a sense for value. If you want to get a clearer picture, then you'd want to create a financial model that included all cash inflows / outflows and solves for an IRR.

That IRR will be the best indicator of how much you should spend because that gives you a time adjusted calculation of your investment.

When you calculate the IRR, you'd have to consider - what's my exit price going to be? Just because I'm willing to cap all income, will the next buyer? Or will the next buyer assume that he / she is going to sell off homes and want to just cap the lot rents and apply a separate valuation for the POH?

Run the scenario both ways - see how your IRR is affected.

If the end buyer is going to only cap lot rents and you find that changes your IRR from 15% to 9%, then you'd have to determine whether you'd be willing to take on that risk.

Also keep in mind that all the 'metrics' are meant to help you predict future cashflows. Let's just say that you capped all the income, the POHs were not problem, very little repair work needed, etc, and your expense ratio for the entire income stream was 30%. When you went to sell in 5 years, the buyer was also okay capping all income. Then, there's no issue from a finance perspective. It's all just about trying to predict the future, assigning risk, and then adjusting price based on those factors. 

(By the way, I will be posting a series of videos on my youtube channel - link in my BP bio - that goes through how to evaluate a 65 space park with both TOH and POH income)

What are the differences/challenges of a MHP’s water source being the city, a well, etc?

The main issue that people have with wells is risk. Wells might 'dry up.' Wells may become contaminated. If so, then what's the alternative source for water. There are some parks on wells where the wells are no longer working and they have to haul in bottled water every week. You're not likely to make a profit if you have to do that.

If it's on city water, then if there's a problem, the city has to solve it.

With all that being said, there are some places where there's lots of groundwater, and wells are not considered as risky.

If you're looking at a park with well water, check out: Pumps and well house to make sure all is in good working order; What the well capacity is? If you bring in more homes, can it handle that?; EPA / DPA to see if there's been any contamination issues or health warnings; Cost to drill a new well; Ongoing costs for testing and maintenance of your well. Ideally you want a 3rd party vendor - this is what banks will want to see and future buyers - well documented, 3rd party confirmation that the well is running .. well? Sorry, 'dad' joke 😆

Dirt Roads

Banks won't finance parks with dirt roads - so likely on the sale, you'd be looking at seller financing or need a cash purchase. Paving roads is possible but costly. If you want to go that route, make sure you're getting the park for the right price.

If you're looking at parks with wells and dirt roads, then cap rates might not be high - just market for those types of parks.

See if you can find listed parks in your area and compare how those parks are to the ones you're looking at - I have a video on finding listed deals as one of my youtube videos.

I like looking at listed deals just to get a sense for the market. Also, it's good to see what the broker's are emphasizing or explaining - it might help you analyze the parks you're looking at by applying their filters

Hope this is helpful! But each situation is different and I hope the 'theory' helps you think through what works best for you.

@Barbie Steele

Got it... thanks for the further updates!

@Guy Gimenez

Great research!

Thanks for sharing

@David Benton Not in SC but looked at a few parks in the area, mostly N. Charleston

Cold calling yielded a few nibbles but nothing materialized as of yet.