How do you all figure out what the going CAP rate in a particular location is? If I am looking in Indianapolis vs Chicago, should I be looking for an 11-cap no matter what?
I know outfits like Costar list CAP rates per area but for those of us without Costar accounts, how do you figure out how to capitalize NOI when making an offer?
In response to your first paragraphās questions:
I am of the opinion that what you should be focused on is how much value you can bring to a park through increased NOI, and what your return will be after you do so if you wish to keep it.
How do you increase NOI? Lower expenses is one way - but that is kind of weak in all but extreme cases. And it is just as likely that the seller has lower expenses than you will if he has not been taking good care of the property.
So what is better then lower expenses? Raising rents and filling vacant lots. That is where the big money is and what you should be looking for. Read SDGuyās first post in the āLive Like A Multi Millionareā thread. Most likely when he bought his CA park it had a low cap rate. He used the figure 6% in his post but did not say that is what it was at purchase, but at any rate, CA cap rates are kind of low. But he did a $200 rent increase. Run the numbers on that and your calculator will display āWow!ā
If your plan is to improve a propertyās NOI, sell it and then move on, actually a lower cap rate market is better. That seems kind of counter intuitive until you realize that every dollar of added NOI you bring to the property, is worth more in a low cap rate market then in a high cap rate market.
Example: a $10,000 boost of NOI is worth $166,666 in a 6% cap rate market, but only $100,000 in a 10% market.
Hi Mike, thatās a great question. Randyās comment is absolutely a consideration with cap rates. I would pay a lower cap rate for a deal with upside than a stabilized deal. For example, Iām negotiating a price right now where the going-in cap rate in Wisconsin may end up being in the 6% - 7% range, however right-sizing rents and improving delinquency should bring the unlevered yield to 12/13%, if not higher.
I think itās unrealistic to expect to buy deals at 11 caps in this marketplace, too many investors are chasing deals, unless youāre using proforma NOI. My personal benchmark for Wisconsin is high-quality, stabilized, non-institutional quality/sized deals are going to trade for 7.5%/8% cap rates, and I make adjustments for the market, deferred maintenance, quality of the park on top of what I mentioned earlier, upside. This could partly be because Iām finding expense ratios to be higher than the quoted 30%-40% youāll hear all over this forum, especially after factoring in reassessment of real estate taxes (e.g. the park I mentioned earlier is assessed at ~$40,000 and the park will sell, and likely be reassessed for at least 8x that). Over the next 12 months, my cap rate benchmark will likely increase though as interest rates push higher. Jerome Powell announced he expects to increase the fed funds rate 4x this year.
Hope this helps, let me know if I can answer anything else!
Low expenses means deferred maintenance.
Today I was investigating a park I valued at $X. It is expected by the listing broker to trade at 240% of X. The trade value is based on $20k per POH plus 6% cap rate on pro forma 35% expense ratio on lot rent only. These are not numbers that I can make work even if they are true (and they are no doubt wildly optimistic).
I estimate the eventual buyer will be lucky to make any money at all over the first 5 years, after which it may be a home run who knows. But for the risk involved, I am not going to mess around with it.
I also find this true.
The cap rate is a guess at the expected return based on the size of the investment. But it is not all about return, it is also about risk. If the park is stabilized, it will trade at a lower cap as there is less risk and aggro involved. Or, to put it another way, parks with bigger warts trade at higher and higher cap rates because investors, smart investors, demand higher returns for dealing with bigger warts, all else being equalā¦
Thanks all for the insightful replies.
Randy, you make a great point that if the plan is a turnaround as opposed to a buy-and-hold then a low cap rate might help more than hurt. Thatās not something I had considered previously. Although itās attractive to keep āholdā as an option when going in, that perspective certainly helps more markets make sense to me.
Itās also interesting to hear that the expected 30-40% expense ratio isnāt holding for everyone here. Brandon, 2.4x above where you thought you could make money? Sounds like California real estate to meā¦ 
Wisconsin, indeed I think itās wise to be concerned about the collision of cap rate compression and rising fed rates. Thanks for sharing the kinds of rates youāre working with out there.
Tony, thanks for all the great content you put out. I believe I watched your cap rate video a while back and IIRC, my takeaway was there are no easy answers.
I appreciate all the insights and would love to hear more about what people are seeing and negotiating out there.
Best,
Mike
Cap rates arenāt all that important, in my opinion. Total return on investment over 5 and 10 years is more important, whether expressed as IRR or simple ROI. But to me, cash on cash return is most important, as I donāt plan on selling any parks. Iām looking for a 15-20% CoC in year 2 going forward.
Curious as to allocation of your expenses as a % of revenue.
For any parks of meaningful size (75+?) with rents above $300, your margins should be significantly higher, barring operating in a property tax prohibitive state.
If there are no obvious(or hidden) huge CAP-X charges looming, and, lot rents are average, or below average, you will win the CAP rate game at the end. As long as you manage the park in a top flight manner, even a 6 cap will turn higher (assuming city water, city sewer, strong MSA) and become a 12 cap. I would rather buy a super clean 6 cap than questionable/hopeful 9-10 cap as I know in 5 years that I will be sitting on a sweet asset.
It depends on your buying criteria. We only buy 12+ caps (based on actual income (true verified NOI at closing) often with upside).
We have a lot of off-market deals on the go . Weāre actually closing on another +15% cap in the midwest next week; 57 lots with tremendous upside. So the deals are definitely out there. This is not our first and will definitely not be our last. 
Our cash on cash return for this specific park (before increasing rents/adding homes/increasing occupancy/fine tuning management) is 42%. We like our coc to be above 30%.
If interested, email us. We often have too many deals; we canāt close them all ourselves and stabilize them efficiently. Open to assign contracts for fast closures.
What market and type of deals do you work? Iām assuming this must be midwest for the most part. Iām in central Illinois and Iād be happy to see some of the deals youāve managed as case studies.
Iāve got two parks Iām highly considering and am in the due diligence phase at this point. Iāve found that in both cases with the ma and pas the bookkeeping is done in house and not very well. One of these parks I presuming recently filled with tenants because the income reported is not anywhere close to where it can be reflected in its current status. So, what steps are you taking to get accurate numbers?
Hi Steven,
We love these types of deals. We make offers on parks without looking at them in person; we base our P&S agreement based on the income the seller reports.
That being said, our purchase and sale agreement protects us very well. We could opt out of it anytime without consequence. Once weāre under contract, we scrutinize the reported income. In most cases, like you have noticed, the income disclosed by the seller can often be way off.
What we ask for is 3 years of tax returns, 3 years of P&Lās, and all copies of leases. If they canāt produce 3 years of verifiable income, 2 is usually acceptable.
Of course, our due diligence checklist is a lot longer than this but this is a good start. Once these have been verified, we usually have 2 choices.
1- Go ahead with the purchase because the income matches what the seller had originally disclosed (rare)
2- Renegotiate. Thatās where it getās really fun! We renegociate the pruchase price based on the actual NOI. At the end of the dayā¦ thatās what we are buying - income.
Also, as you have noticed, non professional park managers have a hard time, amongst other things, making clear P&L reports. Therefore, during dd, make sure to call at least 3 professional management companies to see if theyād be willing to take on your parkās management after closing. We always bring in professional management that assists the on-site manager. Professionals make your life a lot easier. Especially as you grow. 
Ask me how I know. Haha
Hope this helps. Best of luck with your future endeavors.
Regards,
Janie
This is all so helpful. I hadnāt considered having a company manage it in such a way. I guess I will make some calls around town and see if any have even done that. I figured the management was all in house set up by the investor.
Iām in DD with two parks and the lack of separation of land business vs POH is incredibly hard to discern. Dave and Frankās formulas look good on the surface but when I dig it the numbers are drastically different - no where near to these rule of thumb that give a first clue. And the reported income definitely doesnāt match what they say they can make.
If you have time Iād love to have a chat about what you do find expenses to be ballparking when separating the land and homes. I would definitely appreciate some experienced insight.
Thank you for response above!
Ballpark, more or less, you will lose money in the homes. Unless you get into it in a big way and price it as middle class housing.
Reported income will almost never be what is actually recordedā¦ thatās when we renegotiate price.
I havenāt taken Daveās and Frankās boot-camp yet so I am unfamiliar with their formula. I would appreciate if you could elaborate on that so I can understand exactly what you are referring to.
What we do is we scrutinize 2-3 years of P&Lās/bank statements. We calculate the NOI and the CAP rate based on those numbers.
Once we receive the leases, we separate the lot lease income from the MH income and calculate the income.This gives us a better idea of what kind of return we will be getting moving forward.
We are in the land business and do not want to keep MHās on our books. When we purchase a new park, we try to lease option the homes to the tenants as quickly as possible.
Therefore, with that in mind, we need to know what we are actually buying (calculating lot leases only) + all expenses. We recalculate the ROI to give us a better idea of the parkās future income and make a decision from there.
With no homes on our books, expenses usually go way down + all our parks have the tenants pay for their own personal utilities.
In the end, everything balances itself out quite nicely.
Hope this helps.
Thanks wemindji - That is much my approach as well. With the ādetailedā bookkeeping Iām seeing from these owners its difficult to differentiate what was home rental expense, land business expense, and what expenses were one time write offs such as service upgrades and home set ups.
The rough formulas that give you an idea of whether to move forward are:
Number of Currently Rented Lots X Lot Rent X 12 Months X Multipier = ball park purchase price. Multiplier is 60 for smaller more rural parks and 70 for more attractive parks.
Number of Currently Rented Lots X Lot Rent X 12 Months X Exp. Ratio X Desired Cap Rate = ball park purchase price. Exp. Ratio is .5 for less attractive and .6 for more attractive.
Now if the park owned homes carry any value at all you can add that to the prices youāve determined from above but you wonāt count the rental income from it necessarily. As you say, youāre looking to acquire financing for the land business not rentals.
Indeed, bookkeeping analysis could be tricky.
Start with the leases.
From there, you could ask the seller to tell you how much of the monthly payment is allocated to lot lease and to the trailer lease.
Are the leases month to month? Yearly but have expired?
In that case, once the park purchased, you could come in and make all your tenants sign new leases where you could mention the portion that is land vs home.
As for the expenses, once we have gone through the P&Lās and notice that there has been non-recurrent purchases, weāll simply ask the seller to disclose what was done to the park. Ideally, weād like the seller to provide invoices for the expenses. It gives us a general idea of what are recurring and non-recurring expenses.
Regards,
Janie