After a lot of searching I finally found a property that meets my criteria - city water/sewer, submetered and billed back to tenants by the city, 85% occupancy with no unocupied or park-owned homes. Expense ratio based on seller proforma seems a bit high at 40% though.
Located about 80 miles outside a 5M+ US city and has a population base of about 100K within a 20 mile radius. Lot rent is currently $250 and it has 150 lots. The asking price is 9% cap and the seller won’t budge on the price. I know this is not a 5x return-type of park, it’s stable, well kept and is close to being turn key yet still has some moderate upside.
Does that cap rate sound right or would I be overpaying for this park?
The 9 cap is fairly reasonable with a few caveats:
The 40% expenses might actually be low with the rents at $250. You need to calculate what your expenses would be including what the RE tax might be on re-assessment. Was the 40% expense ratio omitting work done by the prior owner? Are you going to manage the park the same way?
The population is reasonable but is there job growth in the immediate area or is it declining? Has there been a loss of residents recently and why?
How old are the homes and are the spaces large enough to replace with modern homes if the residents move out?
Nothing is ever “turnkey.”
Are there infrastructure issues that need immediate attention
The expense ratio seems in line with what I’ve been seening in the marketplace. Our general assumptions on parks is 40% for utilities billed back and 50% for for parks that pay utilities. The only parks that seem to operate better than this have 100+ lots (like yours) or rents exceeding $300 on lots. 9CAP seems a little high on the price, but leverage is awesome right now. You might have a workable deal. The question I would ask is what does the CAP rate look like after you realize the upside in rents?
How long has it been for sale and have they had any offers.
I would still only offer what I want to pay. What a seller is asking for a property has never been relevant to me and I have never given in to paying more than I want to pay.
When I hear a buyer saying the seller won’t budge that only means the seller is a better negotiator than the buyer.
It has been on the market about 9 months. Based on some preliminary research I think I can raise the rent about $25 and get occupancy to 95% in the first year. That would take it to about a 12% Cap. In this case the seller is a well-established owner of several properties and appears to not be a rush to sell at a discount. I’m just trying to judge whether I could sell this for a 9% cap or lower if I buy it for a 9%…
The problem you are looking at is buying for a 9 cap and selling at a 9 cap. When you buy the market is unlikely to be the same market you bought in. Variables will change, circumstances will be different, and financing will have a different cost to it. If you think, for you, the park will be a good buy at that price, then it maybe. It sounds like it has some upside. I would also keep in mind that the park has been sitting for 9 months. Maybe present a firm offer and see where that goes. Remember, you are not stroking a check for the park day 1. You have searched for a park for a while and it has been challenging to find something like this. Maybe have some flex room , come in at a 9.5 cap and see what happens in diligence period.
I would say that the fact that it’s sat on the market for 9 months at a 9CAP, that probably means you aren’t in a 9CAP market. The upside in rent isn’t juicy enough either to compel me to consider slightly overpaying. For me, the upside in rent would need to push it over 13 for that to start making sense. The best way to handle something like that is to make your offer at where you would need to be to feel comfortable with the investment. I would also thoroughly explain your offer and why you feel the market is a 10CAP market. An experienced owner will at least respect that and it usually opens up a nice dialog.
If you are unsure wether it’s a low CAP market or not, you can always check out who owns the other parks near it. If those other owners are Sun, Yes!, & ELS; you might be in a lower CAP market. If they are mostly Moms & Pops, you probably aren’t. I can tell you right now, with a market rent of $275, you likely aren’t in a market where others are willing to overpay.
I’m thinking that the problem here may be more with the market than the park. What the median SF prices and average apartment rents? What are the top 10 employers and what % of the workforce to they each employ. 80 miles away from a metro means you are not in the metro, so the park get’s no bonus points for that metro at all – you might as well be 200 miles away. So you have to focus on the market and what makes it tick.
My bet is that the reason the park has been on the market for 9 months is that people visit the market and hate it. A 9% cap rate can be made into a 10% cap rate with a small raise in the rents. But you can’t fix a weak or risky market no matter what you do.
Median SF homes price is $115K, 2BR Apart. is $750 - those feel like they can support $300 lot rent. However, the unemployment is a bit of a concern - 8.3%, 2 full points over the national average. Given that this park is already at 85% occupancy my though was to put it under contract and do some extensive demand testing with ads, Craigslist, etc to see if I get the 20+ calls per week and see if that unemployment figure can be overcome.
Just wondering here, I’m a total newbie, how will you fill the empty spaces and raise occupancy to 95% if the current owner didn’t fill them? Especially when you say the owner is well established.
Pretty good diversity of employment. Personally, I’d tie it up and do some diligence on it.
In answer to rinain’s question, the only way to fill lots today is to buy homes and bring them in. The best program to do this, if the market will support it, is 21st Mortgage/Clayton’s CASH program. Most of the moms & pops we buy from elected not to actively bring in homes to fill lots, and that’s why their occupancy is static.
This forum is an incredible resource - I appreciate everyone who has shared their comments and insights on this deal over the past few days - thank you!
I plan on getting this park under contract and going through the property and especially the area with a fine toothed comb.
Have submitted an offer - Seller has agreed to main points of the offer, now we’re just working with some of the more minor points to get the contract amendments finalized and signed.