OK, first a fact check. There’s no way the expenses on this park would be $10,000 per year. The expense ratio on a park like this would be 30% best case, so 26 x $175 x 12 x .3 = $16,380. And the NOI would be around $38,220 not $44,000. At a 10% cap rate, the value would be $382,200, but a 12% cap rate is a lot more accurate given the vacancy rate and location and park size, so that’s around $318,500 – which is what the 70 multiple formula already gave you.
WalMart does not build a store in the middle of nowhere. There must be a larger town 45 minutes away. What is the population of the town the Walmart is in? Is it in the metro and, if not, how far out is it?
A test ad is going to be the deciding factor in this deal, as the population appears sketchy and only the test ad will give you an accurate gauge as to the demand in this area. I would run that immediately, if you are seriously considering this property.
Make sure the seller financing is long-term (maybe 10 years) since you will have to get the occupancy to around 80% [36 lots occupied] before you can get bank debt. Do you have the capital to bring in 9 homes (at around $15,000 each) over time?
Final question: are there any other parks in this town and, if so, what’s their occupancy and lot rent and included utilities?
First off, thank you Frank for what you do for us beginners.
Answers to your questions:
The town the Walmart is in that is 45 minutes away has a population of 27,000. The nearest metro area is 130 miles away.
If things go as planned with this park I would have enough capital to fill 9 lots over time. Although it would negate opportunities to purchase other parks.
That 27,000 would be your metro in my opinion, as you’re just beyond the roughly 30 mile marker of metro that many people use, but functionally, it’s close enough. But the way to test this theory is with a test ad. Put the following ad in the “mobile homes for rent” section of the paper in that 27,000 population town:
[TOWN YOUR PARK IS LOCATED IN] 2 and 3 bedroom mobile homes for sale or rent, from $495 per month – includes lot rent. (xxx)xxx-xxxx.
See how many call you get over a 10 day run. Get it in the paper tomorrow for a start this weekend.
Then let me know how many calls you get over that 10 day run. If it’s 30+, then you are on the right track. If it’s 3 then dump it.
I would not touch this park at anything less than a 20% cap. There is just too much risk and hassle in such a small town with a declining population and only $36k HHI. I’m worried that even if your ad does pull 30+ calls/week, those people will be very sketchy and likely to do damage, not pay rent, and then abandon the homes.
So my only caveat, other than paying a really low price, is to actually meet some of the prospective tenants who respond to your ad and do a reality check on not just the quantity of respondents, but the quality of respondents. I’d be looking for prospective residents with good landlord references for the past 3 years (e.g. no evictions) and HHI of $25k+.