Help with First Park Valuation & Cash on Cash Return


#1

Hello, I’ve been researching MHPs over the last 6 months or so. I’m looking to buy my first one. I came across a small park very close to me that profits $14,000 / year.

The owner is willing to seller finance at an initial investment of $20,000 by me. Price of $125k for park.

This would be a 70% cash on cash return.

(1) Am I calculating that amount correctly?
(2) What is the average cash on cash return you guys experience? $1 return to every $5 is 20%, right? Which would take 5 years to recoup your original investment, right? Trying to warp my head around that.

Additional details of park:
-10 pads at $125 each, no POH - this is an opportunity to increase pad rent too.
-Expense ratio is <5%. All utilities billed to tenants. All he does is pay for city permits & grass. What expenses am I missing here? Taxes of course. What about insurance? Is insurance necessary? No manager necessary. No park-based utilities either.
-11.2% cap rate (14,000 / 125,000) = 11.2

Frank’s Valuations:
-number of occupied lots x lot rent x 70 = $87,500

Question (3) $1250 (lot rent) X 12 (months) X .05 (expense ratio at 5%) X 11 Cap rate = having hard time coming to a number? If I took the profits for a year (after expenses) - $14,000 x 11 cap rate = $154,000

Looking for some help in my valuation & cash on cash return.

Thanks for helping a beginner,
Cole


#2

There is no such thing as a park with < 5% expense ratio. Taxes, water lines, sewer lines, mowing, roads?, lighting, insurance (yes, it is necessary), garbage?, fences?, tree trimming?, reserves for capital improvements, value of your time?

You need to calculate the value of the property based on how you would run it. 20% expense ratio (ER) is extremely low and more common with larger parks that have mature processes, good people in place. Smaller parks 30-40% ER is very good.

Every park has their skeletons and you need to find them. If it sounds too good to be true…


#3

@jhutson If it sounds too good to be true, it probably is. Ha.

Thanks for the feedback. I needed to hear that.

Based on the above (let’s presume 30% ER), what valuation would you come at? Also, What would the cash on cash return be? I want to make sure I’m calculating my info out correctly.

Any feedback on what your cash on cash returns are would be great.


#4

$1250 * 12 * E.R. (50% if you are lucky) / cap = valuation.
Valuation = $125k per your opening post. $7.5k/125k sounds about right. 6% cap rate. More likely the expense ratio for you will be higher until you raise rents.

Cash-on-cash is that hypothetical $7.5k NOI less your mortgage payment which you have said is $105k amortized over X years at Y rate, divided by your cash outlay of $20k plus any money you put in. For example, if your mortgage pmt is $500 per month then $7.5k - $6k = $1.5k divided by $20k is 7.5% cash on cash.


#5

@Brandon This is what I’m looking for. Thanks so much.