I’m in the market for my first park and trying to figure out where to focus my efforts. For those of you who bought your first park out of state, what brought you to that market and would you do it again considering what you have experienced trying to manage remotely? For those of you who bought local, could you have done it had you been a few states away?
Also, for the first time buyers and seasoned owners, when underwriting a park, what’s the minimum cash on cash return you would look at? I don’t care about cap rates up front, only exit rates. Would you do a deal that is penciling out with only a 5-6% year 1 (after debt service and some sort of reserves) if it bumps up to around 15% by end of year 2 or 3 after some rent bumps? Or do you only look at stuff that has stable returns right off the bat without rent bumps, and any increases are just a cherry on top?
Appreciate the insight!!
Can anyone contribute to this? Almost 200 views and not one person with experience? Appreciate the help!
This is going to depend a lot on what your capacity is, capability is, cash is etc. Its a broad question. What deal size are you looking at ? 10 lots is going to be different than 100 lots. A 500 k deal is going to be different than a 5M deal.
I think if there is a little insight into what you are looking for specifically in terms of deal size, it would give you a better response.
Also, on the second part of your questions, i will depend on what you are looking for. Are you looking for a value add deal? Are you fine with a stable investment on the front end that appears stable going forward?
Are you in a good market with a lot of parks locally that local is an option?
With that , hopefully you can yield a little better response .
@Deleted_User_ME Appreciate the reply. Deal size on my first one would be under $2MM, most likely under $1MM. Really just depends on what I come across. Let’s use a 40 lot park for $1MM as an example.
Second part - That scenario is based on a deal with stabilized occupancy and with under market rents. So with in-place income it’s looking like 5-6% in Year 1 but after bringing the rents up to market it jumps to around 15% in Year 2 or 3, depending on how large the rent increases are. I think most would call that a value-add deal.
That deal is now gone though, so I wouldn’t be able to answer your last question, I think it’s more of a general question at this point. I understand there are many other factors at play but let’s say someone sent you an email saying, “Hey, I’ve got a deal with below market rents, looking like around 5% cash on cash return year 1 but that gets to around 15% after increases.” Would that be something you would be interested in pursuing further based on only knowing that info or do you need more buffer on your year 1 COC returns to get excited about a deal?
The things that brought me to all of the markets I considered were the fundamental things that Frank talks about and that you learn in the boot camp/materials. I live in CA and bought in IN and have no problems managing the park (90 occupied spaces - I have a full time park manager (also does most maintenance), a part time handy man and a part time admin).
You stated that you don’t care about a low COC. I wouldn’t be excited about a 5% cash on cash deal unless there was huge upside. My minimum immediate COC would start at 15%, but that’s me - others have different criteria and resources. I only look at stuff with stable returns right off the bat along with oppty to raise rents. If you don’t care about cap rates up front, then you might have a wider market to purchase from.
If someone sent me that email, I’d ask why they are selling at such a low cap rate and why they think it has so much value - if they stated it was because of low rents, I may strike a deal based on having them increase the lot rent, wait for fall out (if any) and then buy or cancel - this would allow me to minimize my risk.
@tmperrault Thanks for the reply. Just to clarify, I was saying I don’t necessarily care about stated cap rates up front when I know I’m buying with room to add value. So the cash on cash after debt service is really all that matters in my analysis.
Also, I’m curious about your last paragraph. Have you seen this in practice? In theory that would be ideal but I don’t see why a seller would agree to go through that work and then still sell at valuation reflecting more of the previous rents than the increased rents.
Hi ZMitchell, in regard to my last paragraph, I’ve never been in that position to have to ask however I’ve heard that others have. I don’t think it’s asking too much of the seller, especially if you feel there’s risk. You’re calling his bluff, so to speak. If the seller’s valuation is incorrect you aren’t stuck with a ‘bad’ deal and if he is correct, he still get’s what he wants and you get what you want. Try to make the deal fair to you and the seller… and explain in detail the aspects of the deal that you don’t think are fair/are too risky and negotiate them to a point where they are fair. If the seller refuses to negotiate you’ll have to decide if you can live with the risk. If he says no to doing the work and your due diligence says you can increase the rent, then take the risk. It sounds like you are going to buy and hold so time is on your side.
I didn’t ask my seller to do it - I was comfortable with the asking price and knew there was opportunity to increase the lot rent. And, I didn’t want him to know what I was increasing the rent to - he would have seen ‘money on the table’ and may have tried to increase the price.