All Forum Posts by: Mike Weiss

Sari,

Like many mom & pop operations, the accounting is not always accurate.
Many times it does not exist.

We'll have to recreate the income/expense statement to get to a Net Operating Income (NOI) figure. If this figure meshes with your expected return, BUY IT! If not, make an offer anyway and see how the seller reacts. More on this in a later discussion.

Keep in mind: commercial property like this MHP is valued based on the investors' expected return (CAP rate). For example: If you invest $100 and receive $9 back per year -- this is a 9% return. If you invest $200 and get the same $9 back -- that is a 4.5% return. Same $9 return, but more risk because you have more money at risk.

It's a bit of work, so be prepared. Here's an outline:

(At $300/space * 10 spaces = $3,000/month = $36,000/yr.) If the model works at the lower number ($250), it'll work better at the higher number ($300). BTW, $250 to $300 lot rent is low in many areas.

Expenses: depends on who pays which utilities. One rule of thumb is 45% of gross income. Again, it depends on the utility costs and who pays them. The lower you can keep your expenses, the higher your NOI will be. And thus, the value of the park.

Continuing on with the income/expense statement -- $30,000 gross income less 45% expenses = $16,500 NOI.

Take the NOI $16,500 / $250,000 asking price = 6.6%. Not too good. But we are not done. We'll have to consider the income / expenses from the RV rental section. You'll have to do some market research to see what the market rents and expenses are.

I happen to own an RV and am currently traveling from AZ to South Dakota for a reunion. I've stayed in many RV parks and have a sense of what parks charge for RV's. 

Let's say your minimum return on investment (ROI) is 10%. As we have outlined above, the ROI is 6.6%. We'll need another $8,500 NOI to reach our goal. How did I get the $8,500 figure? Take your expected return on $250,000 of 10%. That's $25,000. We have $16,500 NOI. That leaves $8,500.

Here's how $8,500 is broken down per space. $8,500 / 12 months = $708/month. Divide that by the number of rented spaces (10) = $71. How can you raise rents or lower expenses to get to your NOI goal?

What if you only need an 8% return?
Can you do the math using what we've discussed?

After getting all the market data - consider the following:

What about adding MH's to the park? If each MH adds $250/month, what is the value of the park with 5 extra spaces renting for $250/month at an 8% CAP rate?

You'll learn a ton and make money while you learn.

One more thing -- the asking price of $250k sounds like a round number the seller pulled from the air. Many times, mom & pop sellers ask for what they need rather than what the market will offer.

Hopefully you'll be able to do the next one on your own.

Keep us posted,

Mike Weiss

A bit of math: @ $350,000 purchase price with $35,000 down. Finance $315,000 @5% with 25 year amortization. Monthly payment: $1841. NOI: $30,000 / 12 months = $2500. Net cash flow before taxes, depreciation, cap ex: $658/month.

Worth it now? What will it take to improve this asset? Additional capital, management, etc? Now what is your total invested capital earning?

What else can you do with your down payment $$ and additional cap ex $$? 

Think HABU - highest and best use.

$350k for 15 units = ~$23,300 per door. Can you acquire it and bring in a capital partner that is excited about 8%? That would take your money off the table so you can use it to acquire more units.

Mike

Confusing bits of info here.

A big company has something by accident. Accident? Did they slip and fall into it? :)

Did they acquire it in foreclosure? 2010 was a prime year for lenders taking back property.  You lenders out there know what I'm talking about.

Needs $30k. Then needs $70k.

They need to get rid of this property -- for what reasons? Management issues, asset location, need for capital, investor/partner breakup, tax issues? Get specific. If you get the right answers to the right questions, you will solve the right problems.

If they sold it once and held the financing for an unsuspecting buyer who got all lathered up on the seller financing carrot, did the buyer forget about the all-important NOI?

Maybe that's their business model -- sell it for market, get a down payment, get out of managing the property and be there to foreclose when the novice buyer can't make the note payments.

They don't need the money, but you are concerned that it may take 60-90 days to sell for a market price? Hmm...

If the market cap is 8.5 - why are you paying market price? How to you profit? There are lots of questions that have to answered.

Why don't they just sell it and be done with it.  What do they need you for? Please don't take this personally.

There are PLENTY of investors that would JUMP at a 8.5% yield. If that's an accurate number. Probably not.

And if/when interest rates go up, how to you profit and/or refinance into lower bank rates?

You sound like you know what you are doing -- but don't be taken by a seller that offers seller financing. Let them suggest terms. That is another way to take their temperature.

Keep us posted,

Mike

Since the others have answered your question regarding pulling out cash on a newly acquired property, (BTW - its called "cranking" a property for cash) I will address the benefits of seller financing. If you read the security agreement/mortgage/trust deed, it clearly spells out the remedy for non-payment or other abuses of the property/security. How else would a bank / note holder protect themselves? What if you were the seller? Wouldn't you want to be protected?

One more thing regarding your plan to pull out cash at closing -- you now have 2 payments to make. Will the property support it or not?

OK - some seller financing benefits off the top of my head:

Fast closing. -- get the title work done, arrange your down payment and the deal is ready to close.

No qualifying - bad credit is OK.

Terms, terms, terms. 

No payments, quarterly payments, ZERO interest - you and the seller agree to terms.

Ability to renegotiate the terms if the need arises.

Able to move the security to another property.

Able to payoff some or all of the balance at a discount.

Keep us posted,

Mike Weiss