Hi, I have looked at many properties in NC, PA, NY, SC, OH and all of the MHP listed for sale all include financials which calculates the gross income of what the park is currently producing (Calculation include the lot rent and home rent) . But in the forum i see you guys only calculate the lot rent not the home rent for the maximum offer on the property. How can you justify your offer when the NOI is clearly higher than your offer price? Sorry maybe this is a basic understanding everyone has of MHP forgive my lack of knowledge.ThanksGowri
You can only use the lot rent in determining the value of a park. You cannot cap the home income. You can give value to the homes only on a per unit price based on what they sell for (like a car). Here’s the general idea. If you cap the income from a 1972 home that rents for $500 per month and has $200 lot rent, then you’d come up with $500 - $200 - tax, insurance, etc. = $200 x 12 x 10 = $24,000 at a 10% cap rate. The home would only sell for $5,000 on its own. So you’ve overpaid by $19,000. Multiply that by 20 homes and you’ve just discovered the #1 reason that people overpay for parks.
So basically you are saying that after you calculate the No.oflotslot rent12*.610 then add a wholesale price (example 5000 per mobile home) for the number of mobile homes. (No.of mobilehome5000)Thank you very much for the advice. Really appreciate it.
Yes, that’s correct. The wholesale price of the home will be based on age, size, quality, etc. - they can range from $1,000 to $30,000 normally.
Boy, again, I kinda see the point, but I sure can see why a seller wouldn’t agree. If I have a 1972 taxicab which produces $75,000/year in income, but which, as a 42-year-old vehicle would sell for $500, are we saying that that’s ($500) all it’s worth? There’s no value assigned to its ability to produce income?dave
No, in the case of the taxicab, the license for the cab might be worth $150,000 (3 times net income is normal in buying a business) plus $500 for the cab. It would not be worth $750,000 (which is a 10% cap rate). Same difference. The problem is not that the mobile home is not income producing, but that the appropriate cap rate on a mobile home might be 50% not 10%. 10% is only appropriate on the lot rent income. Dave and I did not make this stuff up – that’s the way the lenders and appraisers see it.
Easiest way to justify it to a seller would be to point out that banks and appraisers will be using the lot rent only approach.I guess the idea here is that there is little to no money to be made in mobile home rental income. Between the fact that they are a depreciating asset, withstand wear and tear poorly, and attract bottom of the barrel tenants, you’re better off assuming the home rent is a break even proposition. Often even a money losing situation. If you do happen to make some money on the home rent that’s gravy. But if you price it in and cap it, especially in a park with a lot of POHs, then you might be in for a bad surprise.
When I talk to most sellers, I ask them if they have problems renting the home. That is, I steer the conversation in a way where they tell me all of the problems they have when they rent the home vs. the lot. We spend a lot of time talking about the cost of renovating and maintaining a home and how much easier (and economical) it is to rent just the lot. Then, when I start outlining the value of the homes, it makes more sense to them why we don’t capitalize the home rent portion. Now it becomes a question of what they think they could sell the home to a customer for (and how many times it will turnover before you have a homeowner). If your seller has a ton of homes, they know the homes aren’t worth the same as the lots. The trick is to get them to tell you why they feel the homes are a big hassle and keep those reasons at the forefront of the conversation when valuing them in negotiations.
Frank, I know this is an old thread, but I cannot find this answer anywhere. How does one determine what the lot rent should be in a POH where only rents are charged. I’m looking at a deal for 690k with 22 lots. the rent rolls show 129k among all the POH’s, so around $488/POH. This is under market, I believe, but still need to confirm. My plan would be to sell the homes off, or heck, give them away provided the new owner pay’s lot rent of $500/ month for 3 years. This lot rent is arbitrary though a little bit. How do you structure it properly so as to maximize the lot rent in future years?