Cap rate

What is cap rate I should target when offering on a rental park of 40 lots and 38 trailers? I will work to transform to lo rentals

Assume the trailers and utilities situation checks out



Dean,CAP rates are not something that you can set without knowing many more moving parts of the deal. To find the right CAP you really need to work backwards through the deal. So- location… not just the land, but where is the location in relation to other things? Is it more or less desirable than other parks, and why? What is the city, or local economy? What is the County and State Economy? Are there weather effects on the property? How big are the lots, how favorable are the laws? What does the money cost (interest rates) for that asset class, in that town? What is the demand? Sorry- but that is just the beginning of the list… There are 4 CAP parks I would purchase and pay cash for, and there are 20+ CAP parks I have walked away from. In general- your looking to add 3 - 5 to the interest rate to get your cap. So if interest is 6%, your looking at something in the 9 - 12 CAP range plus adjustments. You must also track your cash on cash return. Low money down deals can have a great CAP but be very, very tight cash on cash. They can even be negative. You also must watch interest rates from sellers that are below the industry standard. If you base your CAP on a seller giving you 4% financing, so your buying it at a 8 CAP say, the cash on cash might work, but the principal will not if you have a short term loan. If you have to refi and bank rates are at that 6% area, you will not appraise for the refi without probably having put about 40% of the property paid off in cash… so watch the owner financing… 

As a general rule, for a park with mostly POHs, and assuming city utilities and decent metro, I’d pay a 14% - 16% cap rate including the trailer income.  But valuation depends on upside in rents, ability to reduce operating expenses, and ability to take down payments to sell homes to deserving families.There are parks with a lot of POHs I wouldn’t touch at a 20% cap rate, and others I’d pay single-digit cap rates for.  So would need more information to know for sure.Good luck,-jl-

So here is the skinny … Just back for driving the park with seller

40 lots, 39 trailers rented, and 2 more empty lots to be included (one of these lots will be on a lake)There are 4 larger parks in the area, with one park being lots only. These 40 lots are spread out along 4/5 streets throughout this community.

County water and sewer, however the owner said the water must be billed to the land owner, and water/sewer/trash billed monthly at 45.63 per month due with rent. They fail to pay and be cuts off water. The state has an environment that favors the landlord.

He does not have titles to all the trailers, lots of bill of sales. Said insurance costs a little over 1000 per month.

I will say the area was a little better than I thought. The seller actually lived in the park for ten years, and his ex wife lived there till she passed. Her trailer still sits empty as he will not rent it due to his kids. His last act was to our buy 2 trailers for his kids they are sitting on 2 of the lots he is working on.

Thoughts from the experienced … Value?

Thanks dean

One last note … Homes are mostly 14 x 72 or 80, and some 16 x 72 and 80. Only one old 10 x 60 and 12 x 70.The 10 foot has same tenant for three years

Run a test ad for the homes.  POHs are worth what they can be sold for on a note.  If you get good call volume (3x/day) for a 1995 14x72 at $500/month with $2,000 down and a $14,000 sale price, then that is what it is worth to you (you’ll collect 12% - 14% interest along the way to compensate you for paying ‘full price’ to the current park owner).  However, if you get few calls and find that you can only get $1,000 down and $400/month at a $9,900 sales price, then that is what it is worth.Your test ads will tell all,-jl-

Jefferson,Isn’t that only applicable if you are SAFE/Dodd-Frank compliant though? Otherwise, how is the interested party actually paying $500/mo plus $2k down and from where are you getting your 12%-14% interest? I definitely see that being the case a few years ago when you could just carry the financing yourself without a bunch of red tape, licenses, etc but these days I would think the cash value would be more relevant (or perhaps some blend of cash value/value on a note).

If you do Rent Credit, you are SAFE/Dodd-Frank compliant.  It’s not a mortgage.  You can not pursue the renter if they simply leave the property.  The credits they build up are not for any particular asset (they can be cashed in on any home you have).I get the 12% - 14% interest from industry norms.  If you determine that a home is worth $10k, then it is fair for you to pay $10k to the park owner for the home.  You are now entitled to earn a return on the money you just cashed-out the owner.  You will sell the house for, say, $14k worth of rent credits.  If the renter pays you $300/month in house rent credits, then they will own the home in ($14,000/300=) 47 months.  If you come to Bootcamp you’ll get all the paperwork and understanding you need to make this work.  Indeed the paperwork does not specify an interest rate.  You have marked up the home to the point that you are reimbursed more than the $10k you paid the previous park owner for the home.Cheers,-jl-

So, if I’m understanding you right, you do a test ad for “trailer for sale, $500/month and $2,000 down,” which isn’t SAFE compliant but is very easy to understand, and then when push comes to shove and you’ve purchased the park and are actually getting people in the homes, you advertise the same thing but when they come in you say "here’s your lease 

Be careful!  Advertising for financing falls under federal regulations, and “disguised mortgage” rules can trip you up.  If there’s no security interest in the home, you are probably not going to be accused of granting a mortgage, but if it’s “rent-to-own” and you take back the home when the tenant leaves – this looks like a security interest in the home because if the tenant doesn’t pay, you kick them out and take the home back.  So this probably falls under SAFE.So how is that different from pure rental with an option to buy or “rent credit”?  It’s a grey area.  I understand the “rent credit” model, but I would be very cautious about how you explain the “credit” portion (and/or how you structure the “option”), both in your advertising and your contracts.  There is no good case law in your favor if and/or when someone comes to investigate, so you are going to have to convincingly explain how what you are doing is not a “disguised sale.”  Will someone come knocking?  Doubtful, unless you get a disgruntled tenant who knows who to call.  But in that case, I would want to have a solid paper trail showing that the “rent credit” was real and not a disguised mortgage.“Rent credit” may be a way around the SAFE act, and it may be a good way, but it has not been tested and I would not go so far as to say that it is 100% bulletproof.  Everyone has to get comfortable with their own risk.  If you have 100’s of homes to choose from and a tenant’s rent credit is good for any home, that looks better than if you have 3 homes and they’re all occupied (so the tenant is unlikely to be purchasing a home other than the one they are currently living in).Someone please correct me if I’m missing something, but I think “rent credit” just boils down to the following argument:“Dear Seller, you are financing homes because after X months of paying $Y, your customer owns a home that you sold.  If (when?) they don’t finish paying, you kick them out and take the home back.  This is a mortgage.”"Dear Inspector, if it is a mortgage, which home was I mortgaging while the tenant was building up rent credits?  It was impossible for me to know ahead of time which home they would buy so how could I have granted a mortgage in that home?"Is that convincing?Brandon@Sandell

The rent/credit construction is a little different than that. First of all, the agreement is a straight rental. This is exempt from SAFE. Then there is the “rent credit” agreement. This outlines the program (in no different manner than Southwest Airlines Rapid Rewards, for example). We do this as a service to the customer, and to foster retention. If SAFE ever rules that you cannot give customers any incentives and rewards, then that’s fine, but the underlying rental agreement is never in jeopardy, and you have definitely not broken SAFE. We don’t kick a tenant out under the rental agreement, nor do we have any incentive to do so. We actually gain financially from them never using their credits. However, we want to be in the land business and not the home business, so if the credits get used, then we’re happy with “losing money” over perpetual renting.What turns the typical “rent-to-own” into a “disguised mortgage” is that it is written exactly like a mortgage, but with a different name. In a typical rent-to-own, there is a “down payment” (that’s wrong) and a set of equal payments (that’s OK) and then they get the home for $1 (that’s wrong) at the end of a certain number of months (that’s wrong) and they “have to” buy the home (that’s wrong). Just because you stick the name “rent-to-own” on a mortgage, does not make it any less a mortgage. Ohio immediately pointed this out when the SAFE Act first came out. For more details, talk to your state MHA, as every state seems to have a different interpretation of the rules.The rent/credit concept was originated, I believe, by SUN (the second largest MH REIT in the U.S.) You can find information about it on their own website. You have to imagine that they put some serious legal scrutiny on that concept before they launched it. I know that in a recent Journal article I wrote, I found a mention of rent/credit in a large legal opinion memorandum as the only SAFE Act compliant system discovered to date.But the bottom line is that there is not any case law yet, and nobody knows 100% how anything works. So you have to gather the data, talk to your state MHA, ponder it a lot, and make your own decision.

Frank, assuming you do all your lending/RTO/credits in a small LLC that’s separate from your park LLC, and the LLC’s only activity is to handle the home itself… wouldn’t the LLC contain all of the potential liability if it got sued under the SAFE Act, thereby leaving the rest of the park (and you personally) free and clear?If that happened, then I’d think you could put the LLC into bankruptcy, not much lost in the grand scheme of things. Auction off the LLC’s assets (the home), and if nobody shows up to the auction you just have the park buy it. And now you know what "doesn’t work."I’m not a lawyer so if there’s a hole in my logic I don’t see it…

Our policy is to try to proactively hedge risk and then insure against it, so we don’t have to worry about such an issue. The SAFE Act is not that complicated to understand. The government is cracking down on those who create mortgages. It does not apply if you 1) sell for cash or 2) rent. So that’s what we do. Although there is no case law at this point, we have put a lot of diligence into our strategies, and I feel good about them. There are operators out there who are still making mortgages although they are not SAFE Act licensed or compliant, and totally in disregard for Dodd Frank. They will be the ones that get in trouble, if and when the government ever turns its attention all the way down the food chain to mobile homes (which I’m not sure will ever occur). Talk to your state MHA and do some on-line diligence, and you can get comfortable with SAFE and not be worried to the extent of what-if scenarios in a doomsday. While your methodology may hold true on the asset formation side, I would not want to ever be in a position to have to test it out. While you can’t hedge all risk, staying clear of SAFE and Dodd-Frank is a whole lot easier than people think.