I recently had a conversation with a small park owner on a possible purchase, and would like to hear your inputs about this possible deal. Here are some basic facts:
Metro area economics: 1M+, median income $49+k, and median home $150+k. The park is about 10 minutes walking to a major road w/ high traffic and many retails, less than 10 minutes driving to Walmart/Kroger. Media household income is about $53k for the zip code where the park belongs.
The park: 33 pads, 100% TOHs and all occupied (all paying rent except one), lot rent is $330. Homes are all single wide, mostly 2-3 bedrooms from 70s and 80s (flat/round/pitched roof). The road condition looks decent, and the sewage line is made of clay and some sections were replaced by PVC in the past. The current owner pays water/sewer ($1800/mo), security light ($150/mo), and trash ($480/mo). The real estate tax plus insurance is about $4000/yr.
So, if I run # correctly, the park would worth 330x33x12x0.7x10=$914,760. The seller seems willing to sell for $750k. A couple of questions:
Any flaw in the numbers I run? E.g., things I failed to include into consideration? Two things on top of my head: (a) sewage line may need repair/replacement down the road considering the prior repair work; (b) I am an out-of-state investor, so there will be additional costs associated with on-site manager and travels.
Seller is not willing to do seller financing. Typically, is this type of small park financeable by the bank, assuming seller has good records on P&L, etc.?
Is this small park a good deal or not? Any comments on this type of small park deal will be appreciated.
You’ll have to finance with a local bank or credit union. This may be tricky to find a lender that actually knows and understands the business. The deal is too small for most mortgage brokers to look at.
Thanks for sharing your thoughts on this. Really appreciated it!
Re the bank financing issue, I can see the difficulty in securing the financing but will talk to local banks on that. If it’s a cash deal, then I as an out-of-town investor will have to ask seller to further reduce the price (to which seller probably will say no, but we’ll see).
My main concern is the potential under-budget for expenses. As tmperrautl pointed above, I may budget 40%+ for the expense. What’d be the typical expenditure items for small park w/ 100% TOHs?
Seller provided me with his “total expenses” that include only water/sewer, security light, trash, tax and insurance, which is about 35% of gross income. If I submeter and bill back water/sewer, my expense ratio would be reduced to about 17% --see below:
expense ratio: I know 17% is definitely not realistic, even for park with 100% TOHs. What would be the typical expenditure items for park w/ TOHs? Road condition and tree both look pretty decent. It seems the only possible hidden major cost item would be sewer pipe repair/replacement? I will probably hire some plumber to assess the pipe condition. Any other significant cost items that I may have missed?
my plan is to submeter and bill back water/sewer costs. How much should I budget for submetering?
current water/sewer cost is about $1800/month. So, each home on average consumes w/s for about $60/month. I thought it’s a little high (maybe a sign of potential water leaking), your thoughts? Thx
The 70% profit margin you are using seems to be high, especially if you are absentee and have a hired manager. I re-ran the numbers for you and calculate the asking price of $750,000 to be an 8.71% cap rate assuming 50% expense ratio instead of 70%. This does not include the cost for reserves. You will have to determine the estimated annual cost to fix sewer issues, road issues, tree removal, etc. and factor that into the calculation.
This could absolutely be financed by banks and in fact, that is probably your only financing source unless you go non-traditional. Check local or regional banks or credit unions. Large national banks won’t have any interest or will mortgage brokers.
Good deal or not is subjective. Try to re-run the numbers with your cost for reserves and include any potential upside from utility bill-back or other revenue increases. If the numbers hit your target, it’s a go.
I wouldn’t over think the financing. You might have to call a dozen local banks but you’ll find a few that will finance it. Figure 20 or 25 year term, 5-10 year balloon, 20 or 25% down, and a 4.5-5.5% interest rate these days.
Seems like a pretty solid deal to me, but what are the market rents? I’d just make sure they can support billing back the water/sewer as well as annual increases of ~5%.
Since the current local owner runs about 35% expense ratio (based on what I was told so far), it’s reasonable to assume I would have at lease 45% expense ratio as an out of town owner —but I may be able to lower that ratio after sub-metering (a $21k annual saving) depending on how other expenditure items may go.
Re the prevailing rent, the lot rent for a 300+ pad park (owned by a large institutional investor) 3 mins away from this park is about $360, so there is room for $30 rent increase in theory (though the large park looks a little bit nicer).