Hello there, looking for some advice on a deal I am looking at. There is a small MHP with 5 lots, 4 of them have trailers that would convey. All are rented and gross income is 2,300 per month. Property tax and tax on the 4 homes is around 1900 per year. Asking is 140,000 which I could do as much as 40% down and finance the rest at around 5.5%. Homes range from 1988 to 2000, and one has been refurbished but the worst one has some soft floors. When I use a calculator it seems like a really great idea, but would love some thoughts on what I might be missing or not thinking through.
The mobile home park sector is built around lot rent only, not home rent. I don’t know the lot rent on this park, but assuming the U.S. average of $280 per month, the value of the real property (land) would be:
4 x $280 x 12 x .5 = $6.720. Based on a price of $140,000 that’s a cap rate of 5%.
However, then you have to add in the value of the homes. Let’s assume they’re worth $10,000 a piece (which is probably a stretch) that would knock your investment down to $100,000 (and that’s being way to aggressive since those homes probably need rehab).
But even then you’re at a cap rate of only 6.7%, That’s not good.
So let’s instead look at the deal the way you’re presenting it, which is as a detached apartment complex.
Your total revenue is $2,300 per month. But the actual cost ratio will be at least 50%. So the net income will be around $13,800, which is still a not great cap rate of around 10% based on the $140,000 price. That’s a decent cap rate on land only, but not when you stick the homes in there.
Then comes the problem of financing. Banks don’t use the homes in their calculations, so this deal will probably only appraise at around $100,000 best case. That would force you to put up $60,000 [20% of the $100,000 apprasied value + the amount you’re short of $40,000]. That’s way too much capital to tie up in a deal like this. That’s what you’re proposing at 40% of total price.
The only one making any money on this deal is the seller.
You would be far better off finding a smaller mobile home park deal that’s all lot rent at a price range of $280,000 based on your 20% down of $56,000. Assuming a 3 point spread between the cap rate and interest rate on the loan, you’d hit 20% cash-on-cash which is much higher than what your current deal can muster, and with the upside of raising rents and maybe filling lots and without the downside of having to maintain 4 old trailers.
If you love this particular deal, you need to at least get the price down closer to $100,000 and force the seller to carry the financing at 4% for at least 10 years with maybe $20,000 down. That would at least tip the scales in your favor.
There’s an universal axiom that you always find another deal that is better the minute you buy a park, so you don’t want to buy anything unless it’s really, really compelling. Don’t be in a rush to buy something unless it is really exciting.
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Wow, thanks for such a detailed response. Based on what I am seeing in the area, lot rent seems to run more in the 175 to 250 range, probably due to how low SC property tax is maybe?
I guess I was adding way too much consideration into the gross income versus what the lot rent would be for 5 lots, really 4 since I am not sure if a unit could even go onto the 5th lot.
Thanks again.