Quick Analysis of a MHP in Red Oak, Iowa

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I am a newbie and I had been examining this particular MHP for a few days already. Then today I listened to Pitches and Hits with Joanne Stevens where Frank Rolfe and Joanne discussed it.

I think this MHP may be more problematic than it sounded on Pitches and Hits.

According to the Memorandum put out by Joanne, there are 56 physically occupied sites, BUT only 39 paying sites. The ave. lot rent is $260.

So, here’s what I come up with for CAP RATE, given that info:

39 X $260 X 12 = $121,680 X .7 = $85,176 NOI (rough estimate)

$85,176 divided by $1,150,000 = 7.4 CAP

But I also used the quick formula for finding the value of a MHP. Here’s what I got:

39 X $260 X 70 = $709,800

That is a far cry from the asking price of $1,150,000!!

First of all, is my math correct? If so, what would you offer on this park?

Another interesting tidbit: when this owner bought it in 2007, they had 95 lots filled and paying. Now they are down to 39!! Maybe that is just bad management, but maybe it’s something else. There is no metro and the county only has 10k people!! On the other hand, it’s only an hour from Omaha, one of Frank’s favorite cities for MHP’s!

Curious to hear what others think. THANKS!!

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Demand is everything.

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Got to identify why the occupancy is declining. Brandon is right.

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Thanks @JasonS. Macroeconomically, I think factory-built housing is a no-brainer long-term win-win. As I like to say, and I’m half joking when I say it, but if they could build it cheaper, they would. Housing is a tremendously expensive commodity and the single biggest investment/cost in most people’s lives. The ability to “host” this kind of housing is a valuable asset. Long term, I’m positive on the industry.

However, it’s a seller’s market right now and there’s a lot of hype from people who know nothing of hard times as when demand is impacted. It is not all peaches and cream and there’s a tremendous amount of capital investment that’s required to maintain roads, sewers, water, etc; all of which is not visible until it’s time to pay the piper. Margins are slimmer than people realize.

Maybe you can cut costs (everything except taxes and the mortgage?) but you can’t do anything about lack of demand for your product unless you are a marketing wizard.

Of course demand will respond at some price point, but you still have some costs above your mortgage and tax payments. With 39 units, every unit that has a problem (either with rules or paying) you will have to weigh eviction and saying goodbye to 2.5% of your gross income (affecting your profit margin significantly) versus dealing with the problem which may in turn affect the behaviors of other tenants (for better or for worse).

It’s even worse if you’re not able to fill the park yourself (with homes) because you would have to heavily incentivize someone to favor your park over others (e.g., cover moving costs, $5k towards moving costs, etc).

So if there’s demand, and with your management you can get it to [$valuation] in [$time] with [$risk] by increasing occupancy maybe the park is worth $1mm plus. Maybe it’s worth 70 times gross (cheap). Maybe its worth 110 times the monthly gross (expensive).

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No metro and county only has 10k? I would immediately pass on that. You can always find deals that look just like this and there’s a reason for that. These kinds of sellers are just waiting for someone with no experience to throw money at them.

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A quick wikipedia search on Red Oak, Iowa reveals a population that has been in decline since the 70s.

That alongside a total county population of 10,000 people, a roughly 5,000 city population and an median home price of $82,000 should be enough to deter you from investing in this park.

I would pass.

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I agree this is a pass, but there are plenty of markets in the middle of the country with stagnant populations that aren’t going anywhere and will continue to have the demand. I bought one of these in a slightly declining population small town (although am looking forward to new census) with no major metro and a couple of major employers. I knew/know the risks. And I knew at the price I was paying it would pay for itself in sub 6 years. That is an absurd statement in real estate generally. This is not a small park either. There are two sides of the coin. If you follow the F&D model as gospel in this environment you will likely buy nothing. There are many markets that are absolute NOs, but I also think there are plenty that are cuspy and are being overlooked today, especially considering the relative value vs. where “sexy” markets are trading.

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@jandg081377 Great topic. I know Red Oak IA, and that part of Southwest Iowa, I have family whom live not to far from there. Not much in the town, a few manufacturing plants. This is Small, small town Iowa. The current population is 5,475 according it Bestplaces.net. and the population from 2000 till now has declined 11.65%. With the population that same, and most people being farmers there is not much to pull from. Red Oak is the county seat of Montgomery county. The next “Big city” is Clarinda with has only 5,572 peeps and is the county seat of Page County. The problem is that most people are farmers and have a lot of land, so they just plop a MH on that land. Just my 2 cents. Please message me if you want to talk more.
Good Luck

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too many metrics dont add up on this park. I would PASS on this one.