# Expense ratio for 23 lot park formula?

Hi I’m aware of the formula for calculating the potential noi.

Number of occupied lots x lot rent x 12 x . 7 ( tenant pays water and sewer) .6 (if you pay) = noi

I’ve heard a few times on the calls that Frank holds that he would use a different expenses ratio for smaller parks.

What would you guys use as the expense ratio for a park where the water is billed back but sewer is not (it’s on septic)?

What’s the lot rent? Makes a big difference if it’s \$200 vs \$500 or higher. I have a smaller park at ~\$450 and I run a 30% ratio. But I also live nearby and do semi-self management

Lot Rent is 300 but about 20 of the homes are park owned. Btw I do not own this park just but I am looking into buying it.

I definitely won’t be doing the majority of the management as it is several states away. The joys of living in California

I always do 40% ratio minimum but usually 50%, I never do 30%. I have found very few parks ever truly pencil out at 30%, usually only when water and sewer is direct billed by the city and the city owns the roads. Only then would I calculate 30% at expenses.

It’s actually closer to reality at a 45% ratio typically, especially for year 1. If your purchase pencils out at a 50% expense ratio you’ll be in a great spot moving forward. That’s what I tend to do and it helps you not lose your shirt…

Small parks have less lots for you to absorb expenses so it’s wiser to at least go 40% when modeling numbers.

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Just be careful you’re not counting that POH income, only the lot rent portion

Got it. So I’m clearly missing something in my understanding of the formula and terms used.

If the Gross Income is 100,000 and the expenses ratio is 40% then that would makw the noi 60,000 correct?

So the formula is actually: occupied lots x lot rent x 12 = gross. Gross x expensive ratio = expenses. Gross - expenses = noi?

Sorry for the confusion just looking for clarity

@Nexus343 re: NOI you are correct…

That being said, unless your seller has been living in a cave for the last 6 years, trying to calculate purchase/offer price based on this formula will most likely lead to disappointment because it is a sellers market that does not conform to the old models. In today’s environment most anyone would be luck to find a 10CAP opportunity. The old 10CAP is today’s 8CAP and most deals sellers are trying for 6-7CAP. Also, you “generally” want to be in the lot rental business - not the home rental business.

Based on the limited information I was able to abstract from this thread, if you get this under contract, I would first focus on determining the condition of the septic as that could be a heavy CAPx cost if it is on its last leg and can also be a good negotiation factor if heavy investment is required in the near future. I am not sure if you plan to make a blind offer or if it is listed for sale, but (as @westewart mentioned) in either case you don’t want to CAP the home rental income. Instead, try and determine the purchase price for each home and then add that to the CAP of the lot rentals. If the POH are older, then figure a price starting at what it would cost to move-in and set-up a home (minimum \$5k), and then go up from there based on age/condition. There is very little used inventory out there and new MH’s today - purchased, moved and set-up is minimum \$50k for a smaller 2BD/1BA - so that’s your range.

Once the property is stabilized, if you are self-managing, it is possible to get your expense ratio to 25%-30% on lot rent only with city services and all pass-thru expenses off the park . With Septic you may consider adding a 5%. However, depending on the percentage of POH’s to the total number of lots, POH’s can increase your expense ratio closer to the 45-50% target. Also, if you plan on hiring a third-party management company add another 5-10% for expenses and please note that most companies that manage apartments do not make good mobile home management companies, AND because MH lot rent is so low most management companies that will manage a MH park will have a minimum fee or about 8-10% of gross management fee (whichever is greater).

Not knowing anything about the property you are looking at, my initial thought would be to reduce expenses by charging for the water and any other fees the park is paying such as trash. Get rid of the POH’s. There are many creative ways to get the occupants to take financial responsibility and then ownership just to remove that liability from your expenses. The remainder of your deal will depend on the condition of deferred maintenance and the CAPx costs that will be required to complete those renovations as well as any infill required to stabilize the property.

Good Luck!

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