So a couple weeks ago I was presented with an oppurtunity to by a friends entire rental portfolio. This consisted of a 3bd/2ba duplex that rents for 700.00 per unit and a small 8 unit mobile home park that has average rents of 620.00 per month (100% Occupied). The entire deal rents for $6,360.00 per month and will cash flow $2,984.00 after the mortgage payments. Because of the high interest rates, he owner financed this deal for an all in price of $615k w/ 115k down and 6.5% interest, with a ballon payment due at 10 years. As someone that has been seeking to invest and get in the rental game, I pulled the trigger on the deal. With that being said, I have had some major anxiety spending that kind of money mobile homes. I keep telling myself that I paid for the income and not the real estate value. I do not come from money and it took me a long time to aquire what cash I have and I want to make the best decisions I can for my family and their future. I guess my question is for those with experience, was this a good deal for me and would you have pulled the trigger on it? Thanks for tyour feedback.
Is this a great deal? Depends.
Is this a good deal for someone just starting? Probably.
Typically you want a Cap Rate that is 3 points higher than the Loan Rate.
Ask the Seller if they will entertain 2-3 years of Interest Only payments. To help you get over the “hump” of being the new owner.
Without knowing more about the deal it’s very hard to make a solid recommendation.
Is the park on city services? or does it have a well and/or septic?
Where is it located? If it’s in La Jolla CA then buy it for sure. If it’s in Nowheresville Nebraska then maybe not.
Also, I assumed a 40% expense Ratio. I just used my best guess. I have some parks at a 50% expense ratio and some at a 30% expense ratio. Dig into the numbers and see what type of expenses the park has.
Here’s my analysis.
|Duplex A||700||Loan Amount||$500,000.00|
|MH1||620||Cash on Cash Return||6.84%|
|MH5||620||Spread||1.30%||<—Target is 3% or higher.|
|Minus 40% expenses||$(2,544.00)|
|Net Cash Flow||$655.66|
To be honest, you might want to trust your gut on this one. Unless you’re planning to bring the rents up substantially. If this is on private utilities, run even faster.
Assuming lot rent of $350. 8x$350x12x.6 gives a generous NOI on the park of $20k a year, so maybe the land is worth $200k.
Duplex you should be able to find local comps but at $1,400/month income it’s probably worth $150k or so.
Then add in wholesale value of the homes, maybe $10k each given the rents (guessing it’s not a screaming hot market) so another $80k.
$200k + $150k + $80k = $430,000 value and I think that’s being a little generous.
Added to caveat: if you live nearby and feel like doing repairs yourself it could probably work. Or like SDGuy says if it’s in the Bay Area or downtown Austin and rents are way out of whack, buy it in a heartbeat.
The properties are located about 45 minutes outside of Knoxville, TN. My wife and I are going to self manage everything and use the existing maintenance and lawncare guy. I feel like our expenses will be 15% by doing this and we live less than 10 minutes from all of the properties. Also, every unit is on city water, sewer and free trash pick-up. I feel like the convenience of the investment makes it really attractive for us and gets our feet wet.
A 15% expense ratio seems too low.
Do not guess or go on your feelings. Find out the facts.
How much is the annual insurance? Liability, Fire, Worker’s Comp.
How much are the property taxes? Will the park be reassessed upon sale? Take a look at the actual property tax bills. Ask a local Realtor how/when properties are reassessed.
I would ask the seller for a trailing 12 Profit and Loss statement and/or a copy of the tax returns. 2-3 year is preferred.
Is there a bunch of Trees? Tree trimming gets expensive quickly.
Road Maintenance. Fence Repairs. Underground utility repairs. Water line breaks. etc.
There are a ton of nickel-and-dime repairs that happen.
You said the MH rent is $620. Will you own the Mobile Homes? or is the $620 just space rent?
If you will end up owning the Mobile Homes then you can expect a 40% expense ratio. Also, I do not consider MH Rental income in my purchase decision. If this park has a bunch of POHs that really changes the analysis for the worse.
Just because you will be managing the property yourself does not mean you should do it for free. How much is that worth? A good rule of thumb is the add a 5% management fee (minimum) for off-site management.
If you were to later sell the park to me I would deduct a 5% management fee for my valuation, you should do the same.
I hope the purchase does not include 8 POHs. If so then long term expences will be in the 50% range regardless of you self managing. The brick and mortor will be 50% expences garanteed.
Never under estimate how much it costs to run a business because expences are not based on monthly costs they are spread out over multiple years and generally include large expences that happen only intermintently. New roof, tree removals, appartment renovations can be major expences. My advice would be to save every penny and build up a significant bank roll to cover unexpected expences unless you have a line of credit to operate from.
Hey SD Guy. Thanks for your helpful comments. That spread sheet you showed blew my mind. I’m also a first timer, been looking for first RE Deal for 14 months, nothing so far. I recently came across this on MLS near my home and am having trouble analyzing the deal. There are so many moving parts its difficult. Could I get your or other’s thoughts?
Property is complex-- rural, older class C/D, unpaved. 14 lots, 4 empty, 1 with a very old trailer that needs redo or removal, 7 POHs with recent rehabs and new heat pumps, 2 TOHs. There is also a fairy large old school house turned duplex and an old 800 sq foot 2bed/1bath house that needs ~10K to get it renting but will be livable/rentable and bring at least $500.
Rates: TOHs are 430 each. POHs are roughly 800 a piece. Duplex brings 1200 total.
Total Current Gross is 7680, and again the small house is not rentable at this time.
Two wells (one new pump and pressure tank), two septics.
They have offered very little in the way of expenses. Very few trees to worry about. River nearby but flood insurance very cheap.
Price tag 500K
To make things more confusing, they are offering adjoining property with a 3/1 house for additional $160K, would bring $1200 rent.
I know it will cost a lot to bring in more trailers. And too many POHs. And the 2 or 3 actual structures (homes) make this hard to analyze for me. My ideas about this have been all over the place. I have used several calculators but the duplex and house(s) make it tricky. Make an offer for both properties for $630k and then dig into the due diligence? Run away fast? Take a vacation?
Any help from experienced folks would be greatly appreciated! Thanks!
BUY!! Any chance you get to buy / own income producing properties BUY them!
Look at you make hourly on managing this versus the annual cash flow. This looks like an investment where you’ll make less than minimum wage for the hours you put into running it.
@rldugger there is a simple rule when it comes to purchasing an investment called “price or terms.” If the seller wants a certain price that may not be immediately justified or finance-able, and for whatever reason you want to buy it, then you purchase based on terms that work for you. Vise-versa, if the price is justified and you want to buy it, then you buy it. If you underwrite the property correctly which means doing everything (and more) that @SDGuy is telling you then it will be much easier to obtain some type of financing. If the seller is unwilling to negotiate on either the price or the terms that work for you then you should walk away.
I could be completely wrong, but it sounds like your “friend” is dictating both price and terms and is “couching” the terms to be a benefit to you because interest rates are high, and by extension, this is “a good deal for you.” When you say “I feel like our expenses will be 15%…” that is also a major red flag because the known expenses are black and white and easy to determine through due-diligence, but its the unknown expenses such as deferred maintenance and post-close expenses such as a real-estate tax reset that can quickly turn this opportunity upside down. Most everyone commenting here (including me) based on what you have described/stated, we know expenses will initially be a minimum of 40-50%. Sweat equity is fine, but your time has value. How much would you want to be paid to mow someone else’s grass, fix someone else’s plumbing, or do any type of work repairing the POH? As you may know, most service providers charge $25, $50, $75, $100 plus dollars per hour so your time is a line item in your financial analysis.
I have not analyzed the numbers like @SDGuy did, but I would expect him to probably be fairly accurate so (based on the information you have provided) it sounds like your friend may not have your best interest in mind and buyer beware. Be patient so you do not make the same mistakes that most of us have made at least once that we can provide this type of feedback. Good luck!
Some great feedback in here Randall. MHP is a very complicated asset class for a first time or even the seasoned RE investor. If you don’t have the bankroll to cover larger Capex issues that will arise especially with a POH park you’re going to run into issues. Most first time RE investors start smaller with single family homes or even a duplex if you can find something lower cost so you’re not leveraged up as much as a deal like this with so many harder to predict maintenance expenses since there’s so many doors involved.
If the Duplex portion can be parceled off maybe start relationship there and take those down first. You also need to be to the point where you can underwrite a deal like SDguy did for you here and find all other potential CAPEX and deferred maintenance that’s upcoming so you truly know what the maintenance costs will be roughly over a 5-10 year period projected at least.
Welcome to the adventure.
If you can’t yet do the analysis by SDGuy below in your head, you may wish to practice more.
Unless I’ve missread, SD is coming up with a value of $450K based on 10% cap rate. Even if you use your 15% or ~$18k less in annual expense, have you accounted for your time to manage the homes, the maintenance…??
If you pull the trigger, you will probably learn alot and at $600k it may be a $150k lesson.
We don’t even look at deals that don’t include 10% mgmt fees and at least 20% expense rate, unless we don’t own any improvements. If improvement, then mgmt for older properties or MH use 50% to be safe.
Also if you can’t get 20% cash on cash, consider your goals. Un-leveraged you ought to get 10+% return in S&P 500 over a few decades.
On the other hand, if we are selling, which we generally don’t do, then your friends advice sounds good enough for most sellers.