So I have a park under contract. Nice enough(no frills) park built in the 90’s with large lots, concrete streets, modern plumbing, electric service, and off street parking. Has a package plant in very good condition with estimated 20+ years of life left. Sewer is at the street.
Lot rents avg $240 per mo which I will have to push to $275 to justify the price. There are other parks within 5 miles getting $280. There are 20 park owned homes included valued at $100K.
Price is $1,700,000 Owner will finance with 20% down ($340,000) at 5% for 300 months. After I rehab 5 homes this will put me at $184,800 NOI roughly and a mortgage of $95,405 and net income of $89,394.
This equals a 26% cash on cash return. Is this a good rate of return for a deal this size? I have a smaller 34 space “trailer park” that earns me 63% cash on cash but it was a turn around whereas this one is not.
I can get this much higher with the upside of filling lots.
The fact that owner is willing to carry the paper for 300 months at 5% makes this deal very attractive. Never having to go back out to the market for another loan is great. 26% cash on cash is nothing to be assamed of. What is the cash on cash before you raise the rates and do the remodel? My big questions would be: How much do you have budgeted to run the package plant? How much will the tap fee be for city sewer?
Cash on cash is only one metric. Like @PhillipMerrill mentioned the financing is a perk. Consider your IRR on this park vs a smaller one. And everything else being equal, I’d love to have a park that gave me a net income of $90k. Can you say, good bye job?!
Like everyone else, I think this deal has a lot of merit. But did you include an extra $20,000 per year earmarked to replace the packaging plant when it wears out? That could be a $500,000 capital expense item when it dies and you have to be prepared 25 years from now (or sooner if you are unlucky).
I’ve spoken with a local treatment plant service company and they say to budget $500 per month for their fee plus parts and chemicals. Altogether $1000 per month on the low side or $1500 to be conservative.
When I showed pictures of this plant to a treatment plant engineering/design/service company they were impressed with its condition. I will be having them do a physical inspection as well.
The tap for the sewer is estimated by current owner to be about $100K for lift-station and lines. I will need to dial that in more.
I’m not exactly sure how you calculate an IRR perhaps you can educate me. They only other influencing income streams would be on the 18 POH. That actually bolsters the return even more, but I generally run those in another company.
Yes, thanks to you, I’ve budgeted $20K per year for replacement and or installation of lift station and lines.
Since this park is local to me I won’t have travel costs or salaries to deal with so a 30% expense ratio works out well. Adding more homes will increase the revenue if needed.
Since this park is only 25 years old with newer infrastructure (streets are concrete, all electric is 200 amp, etc) my maintenance costs should be low.
The big question is do I take the owner up on this his financing deal? I’m leaning toward it for sure but I can get 4.5% at a local bank increasing net income by over $4688 per year.
If the owner is locking you in for 300 months at 5 % I would take that any day of the week as opposed to a slightly lower rate that I assume will balloon in 5 years or 10 years but that will be influenced by your anticipated hold time.
Additionally , you can see if he will match the rate and furthermore , make sure you can prepay and lastly , if the financing is assumable that could be of benefit to you as well.
He is going to want to adjust the rate up in 5 or 7 years I believe but so far no requirement to a term that it has to be paid off. He won’t match the banks rate.
My bank won’t balloon in 5 but the rate will adjust
I would just make sure you have a clear understanding of the terms and both of you are on the same page. Seller carry for such a long term is unusual but not unheard of . That coupled with the rate adjustments via a seller carry deal is the first time I have heard of such a scenario. Not to say its not possible , I just find it weird. Then if you have a lender who will do rate resets and offer better terms, id weight the two equally apples to apples and see which makes more sense.
Good luck