Questions about this deal


#1

I have been studying mobile home park investing a few years and have recently come across a deal that has about 62 lots which consist of.

28 Park owned homes monthly rents - $360.00 to $500.00 x 12 $ 150,381.84
27 Resident mobile homes months rents - $135.00 to $470.00 x 12 83,843.88
2 RV spaces @$295.00 per month x 12 7,080.00
9 RV spaces @ $245.00 per month x 12 26,460.00
1 Stick built home @ $625.00 per month x 12 7,500.00

							 ANNUAL            TOTAL	                 $  275,265.72

The expenses are $54,000 leaving a NOI of $221,628.72
The property has a sewer system with 4 septic tanks holding 10,000 gallons in each tank, tenants are paying for cost of water, property also has room to install 30 more spaces.
The seller says he will hold paper for 20 years at 5% amortized over 30 with a down payment of a little over half a million.

Given all of this the numbers don’t look bad, but is the septic issue a possible deal killer, even he is willing to hold paper?


#2

A few questions come to mind when reading this.

The expense ratio is really low for that many POH - is the owner doing all the repairs on them? Or are they in bad shape?

Why is the lot rent spread so large? Do you just not like septic, or is there a larger problem with the systems?

Keep us posted.


#3

You say 62 lots but the numbers don’t add up.

The expenses are way, way off. You must model them carefully. I’d estimate (first cut) $75k NOI on $275k gross. Just my experience based on number of POH & turnover. You don’t say how much you’re paying, but assuming a $1 million loan this leaves you about $10k return on your $500k down payment. 2% cash-on-cash.

Your loan may be bigger.

Slightly more optimistic approach: You have about $260 average lot rent on which you’re going to clear $130 times *62 lots? or 66? and the rest is “gravy?” That comes out to about $103k which would leave you about 40k return on your 500k d/p which is 8%.

Are you going to collect 100% of the potential gross day 1? Probably not.

What do you expect your NOI to be? Take that and subtract your debt service. Figure (you hope!) principal paydown on debt service equals capital reserve budget, so that’s a wash. Whatever that number is, divide by your down-payment (plus other out-of-pocket closing & startup costs!) to see your cash-on-cash return (cash out divided by cash in).

That gives you an expected return. People in this Forum talk about high teens and mid-20’s, but those are pro-forma and the reality of driving a park to a 40% expense ratio can be a bit jarring. It’s not always so easy as it sounds.

DEMAND is the key driver of how much control you have, how much leverage you have over the residents to make sure “my way or the highway” is the rule.

And once you have that cash-on-cash number in your mind, don’t forget there is VARIANCE! What is your best-case? If you model your expectations on the best case then you will surely be disappointed. Be sensible and realize your best-case scenario is not likely. What is your worst case? What are some of the other possible headaches/issues/aggro?

Calculating your expected return means little if you do not consider the risk you take in order to reach for that expectation. And your aggro and time are worth something too.