All Forum Posts by: John Franklin

Cap rates are the most misunderstood aspect in RE investing.  It’s also where shrewd sellers kill novice buyers.

There are differences between going in cap rates, stabilized cap rates and reversionary cap rates. Know which one you are analyzing. Banks are going to focus on the NOI and DCR more than the cap rates.

Brokers tend to use the going in rate but not stabilized. Cap rates for comparison should be the same type.  Unstabilized multi tenant properties should utilize discounted cash flows to analyze the true cost of stabilization.

Every aspect of risk influences cap rates.  Two properties with identical cash flow can have different cap rates if one has a much higher underlying land value. 

I totally agree with Seth.  Quit focusing so much on cap rates and focus on stabilized occupancy, market rent and cash flow potential.  

Then I’d focus on interest rates and what happens to your cap rate if you refi at 1-2%  higher interest rates in the next few years.

Just my $0.02!

SH Rental rates have been under pressure over the past 1-2 years due to the massive overbuilding of new student housing at A&M.

I’ve worked with major developers on new student housing projects projects there since 2008.  Last year A&M was considered the second most overbuilt school in The country for student housing, with more beds available than enrollment supported.

Because of this rental rates are softer and vacancies are up.  

I think that makes for an excellent buying opportunity now since this condition will stabilize eventually and rents, occupancy and prices will increase.  

I’ve got a son going there in 20 so I’m looking there as well!  

One word of caution, the latest student housing developments are amenity rich with hi tech everything. The look like a cross between 4 star hotel and health spa.

Today’s college student expects a lot more out of their rental home and landlord than those of my generation.  Expect to spend more on location, finishes, fixtures and appliances if you want better rents.

Would appreciate @Chris Quinn perspective on market conditions and pricing as well.  I’ve seen several four plexes for sale with 25-50% vacancy mid semester.  Of course they were class C at best.

There is nothing political about money going where it is treated best.  It has always been that way.

I love to see honest and wise RE advice on BP!  There’s not much to add to what @Alexander Felice said.

I’d suggest you focus on reducing risk with this deal.  Maybe partner with a family member or friends who can comfortably cover most of the rehab cost PLUS another $20k if this deal goes south on you anywhere in the process.  

Give them a juicy share of the deal and make sure they don’t lose a dime.  They will accelerate your future success as an investor.

Always get every single plan and agreement with family/friends in writing, ahead of time and advise them (with signatures) they could possibly loose everything they invest in this with you.  They can be the most demanding partners you ever have.  If you don’t, you’ll be eating Thanksgiving dinner alone.

There are plenty of rehabbed flood home comps and I think what you may find at this point is that the prices for homes with proof they didn’t flood in Harvey show a recognizable premium compared to homes that were seriously flooded and rehabbed. This is due to stigma.

That said, stigma does fade with time.  So the impact on value to a previously flooded property should decrease proportionately up to the time of the next major flooding event.  At that time it’ll reappear and reduce value.

Houston had four major floods since 2001.  Three were in the past four years, the last one was the most severe.  Mitigate and account for future risk as you think best.  I’d require flood insurance and a 1% deductible on full coverage insurance with any financing.

Specific to that zip, I’d look at the underlying lot value compared to the  value of a rehabbed home.  If lot value is the majority of the total value now, the highest and best use is to build new, above any flood elevation, not to extend life of the current improvements.  The latter is simply an interim use until you find a lot buyer.

Thank you! This is actually helpful info. We're seeing more chickens in many subdivisions around my area of Texas. Usually, it's a deed restriction violation and can subject the landlord to monetary fines from the HOA.

Personally, I like chickens and eggs, they taste great, but it may be time to add the dreaded poultry clause to all new leases.  No pets is simply no longer all inclusive.  Don’t forget all reptiles, marsupials, fish, ocean mammals and rodents.

IMO, it was the handshake agreement that doomed this deal.  He said/she said doesn’t go over well  at the JP’s office during an eviction hearing.  Use the TX Statute of Frauds to your advantage.  If it’s not in writing, it was never agreed to and  that’s the law.  

When looking at growing park occupancy in an outlying area I look at three things.  First the 5 yr forecast household growth in the 1-3 & 5 mile radius; the occupancies of the closest 5 MHPs and the availability of rental housing nearby.

If the first two are low, it's doubtful you'll be leasing many lots. If the last one is low you may have an easier time leasing MHs or doing RTO, but your're talking about a large capital expenditure and long time to recoup. It's much easier to lease a MH vs MH lot.

Cap rates for good parks have nosedived over the past few years due to unprecedented demand from institutional PE funds and REITs.  A lot of smaller fish have jumped in and overpayed for smaller  “value add” parks and most MHP owners are getting new offers in the mail monthly.  The ball is definitely in their court right now.  Half the sales I’ve seen in the past 3 years never hit the open market.

IMO, It is what it is.  Value the park based on lot income at market rents only, if that doesn’t work, it won’t stand without significant investment 

in new/used homes and those won’t lease without high rental demand.

Hi Molly, 

While I’m not a lender or an attorney, I have seen similar situations as you describe here and have 20+ years experience analyzing leasehold interests.

Unfortunately, your options for financing are limited because you don’t own the land under your improvements. Unless the tract has been previously subdivided, you probably can’t sell your portion of the property and anyone who wanted to buy it couldnt except for cash, and assuming your ground lease, for which they’d expect a huge price discount.

There may be private lenders out there who loan on leasehold interests, but I doubt you’ll like the terms or they’re going to base the loan amount on anything near the fee simple interest or cost of the improvements, without a lien on all the land.

At this point, you probably can’t refinance your properties without your parents subordinating their interest in your leased land and your parents signing on the loan, which would likely be secured by the entire property.  If that works, great.

If in your present situation, I would hold off on any other construction on this land until I could visit with my parents and an attorney to try and change the lease agreement into something that would maximize the value to YOU of any improvements you place on the land, now or in the future.  

If it was just so you had a place to build your own house,  the lease might be ok, but there are a number of better options than this lease for an investment property.

An easier option mat be to convey your parents RE interest into an LLC for the entire property and divide the ownership based on the value each party has at this time. They can leave their part of the LLC interest to you in their will. Check with a CPA of course, but I don't believe an LLC conversion would trigger a tax issue. It's also possible they could subdivide the tract and sell or gift you the underlying land.

You’ve done a great job of developing income producing real estate and it sounds like you’re on your way to more success.  Being a pro investor means never skimping on expert CPA and Attorney advice as to how to maintain the long term value and appreciation of your RE investments.  If their advice doesn’t sound right, pay for a 2nd opinion.

BTW I grew up hearing folks say a 99 year lease is the same as pure ownership, but this is simply not true as it is much more difficult to finance and sell in the open market.  

Marketability is everything when you’re talking about real estate values.

Good luck!

It could be a good investment if there is adequate demand for the additional lots.  Do a market survey of the 5 most similar parks nearby.  compare average occupancy and rental rates.  Try to make it work on paper with the 73% occupancy and existing cashflow.  Don’t forget to add management expense if the owner is doing that themselves.  

I’ve seen parks at 65% occupancy surrounded by parks at 90%.  Sometimes it just takes a new owner to be the bad guy and clear out the riff-raff.  Most MH lot tenants are good folks who take pride in home ownership but a few bad ones tend to attract more bad ones and it goes downhill quickly.  

Good luck!

MH parks can be great investments but they come with a longer list of due diligence.  As with all RE not overpaying and financing terms are critical.  A semi-short answer to your questions would be:

1. What is market rent at competing parks and a three year history of occupancy and rent increases at this park. (along with the usual 2-3 years of rent deposits and P&L review). Also understand the employment and demo figures for your 1 & 3 mile population.  What is forecast household growth over next 5 yrs and what can you capture?  How far is it to Walmart/major grocery stores?  No growth in occupancy or rent reflect stagnant market.  Means little upside to investment.

2. Depends on local ordinances/county/state laws.  Eviction is part of the regular operations and some operators find a buyout of the lease and tenant’s MH easier, so keep some capital available.  Tenant screening makes or breaks a park.  Talk to local police/sherriff and find out if your park is a regular call location.  They know where the problems reside.  Improving tenant mix can increase rents but only if there is new household demand.

3. Don't get caught up in cap rate comparison before you understand the pros and cons of the investment. Focus on how you'd increase NOI, occupancy and add value to the asset. Be careful using a RE cap rate on income from mobile rentals (non RE) Keep pro forms income to lot rents only for RE cap rate and financing analysis. That's what most banks will do. See if seller will convey MHs through separate bill of sale and carry the note for a few years. MHs over 10-15 years old have minimal value after deducting relocation costs. RTO contracts have a high fail rate and should be heavily discounted off total balance.

4. Most appreciation will be related to the degree you can increase NOI (value add). Institutional Investor demand has lowered cap rates over past five years but parks over 100 sites have benefitted much more than smaller parks.

5. It is a concern. Again household growth and local employment are critical. Flat pop growth makes it hard to increase occupancy, rents or value.  Cheap land means no barriers to entry for competing parks.

6. I think utilities are the most overlooked issue. Is sewer private septic/lagoon or public? Cost for upgrading private water and sewer systems can be mind boggling. Have any septic and sewer pipes inspected. There are some older styles of pipe that break down over time and today's codes may make replacement unfeasible. The upside is that billing tenants for utilities or adding public meters can add to NOI and reduce expenses.

Based on the acreage it looks like you may have surplus land.  Can you expand the # of sites?  Sell off some acreage?  I’d confirm that as well.

You also should talk to the closest MH dealers. They can help verify demand and may have leads on tenants who can relocate to the park. Many park owners purchase new MHs and lease them as a package, sometimes RTO. Check state laws, you may need a dealer license for that.

Know the market, know the issues and potential upside and don’t ever overpay and you should do fine.