Firstly, thanks to everyone for all the great advice available in this forum. I would like to hear from the experts on how capital improvements affect their offers on MHPs. I have two questions, one general and one more specific:
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In general, are you willing to buy at lower cap rates if recent upgrades have been made to infrastructure?
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Specific example:
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Small park, 30 lots, 85% occupied
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Metro area (great location)
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$200 under market rents
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Over $120,000 spent in the past year for brand new septic system and new blacktop
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Private well is 40 years old with new pipes replaced in the past 5 years
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Park was offered at 8.5% cap
Originally, I liked this park to purchase at an 11% cap. After some back and forth with the owner, I know I’m not going to get it at 11%. How much, if any, should the owner’s upgrades affect my offer and what other variables should I be considering?
Any advice would be greatly appreciated.
Thanks,
Jon
In this specific case, sadly, the upgrades do little to enhance the value. Despite the improvements, the park is still on water well and septic, and that’s a huge turnoff on a park that small. Had that money been spent to connect to city water and sewer, it would have had an impact. However, the repairs you list don’t make me any more interested than if they had not been done.
That being said, let’s look at the positives on this deal. You say the lot rent is $200 under market. Are you saying that the 8.5% cap rate is based on the current rent BEFORE it is raised $200 per month? In that case, you might be talking about turning the 8.5% cap rate into 15%+ after the raise, and that makes the deal MUCH more interesting. You can get a handle on the well and septic during diligence, and you may have city water/sewer nearby as a back-up, if it’s in a hot metro location.
So I guess my answer is that he wasted his money (kind of like somebody putting in solid gold cabinet knobs in their kitchen for re-sale) but the deal might still work if there’s $200 per month of rent raises coming on top of a 8.5% (or better) cap rate.
Would I buy this park, as described, at a 8.5% cap rate AFTER the $200 of rent raises? Not a chance.
But, again, I’ve never seen it and it might be the greatest location in the world – you know better than I do.
Thanks for the reply, Frank. I agree with you, small park, well and septic, 8.5% cap…sounds terrible on paper. I had the same question as you, why not just hook up to city water and sewer? The answer I got was bizarre:
Apparently, new city zoning laws forbid mobile home parks so hooking up to city utilities would mean the park was operating illegally. As long as the park provides its own water and sewer, it can still operate within city limits. The owner was forced to either tear down the park or put in the new septic system.
I suppose the good news is that the park remains “the only game in town.” The bad news being that the new owner cannot rely on city water and sewer hook up as a risk mitigation strategy. This is concerning. However, the park is surrounded by new development and could be rezoned and sold as a last resort.
Also, the 8.5% cap is based off of current lot rents which are $200 under market. If purchased at a 9% cap with a $200 rent raise to follow, you end up with an 18% cap.
I would question the city’s concept on the park being unable to connect to municipal water and sewer. Under due diligence, I would have an attorney call the city and get the facts. Sounds like a violation of not only grandfathering, but basic property rights – virtually discrimination, in effect. If the city is that hostile, I would also make sure that they will not restrict you in moving homes in and out, as well.
If the potential cap rate is 18% with just a rent raise, I’d tie it up under contract and see where things land in due diligence.
I am going to take your advice and pursue the park. This whole well/septic/zoning issue will be first on the agenda. Thanks again for your quick response and great feedback.