How rent raises affect ROI/Cap rates - Need my math checked

mobile home university
1

Hi all,

First post here. I attended MHPU in Orlando a couple years ago. I’ve invested passively in some of the funds but am wanting to buy a park or two and get into ownership.

One of the main advantages I see to owning a park is the incredible inflation hedge they provide. I was just wanting a few of you all to make sure my math is right as the numbers can look quite interesting.

I’ll use a simple example.

Let’s say you buy a 100 pad park with $200/month lot rent at an 8% cap rate for a purchase price of $2,100,000. (I’m assuming a 70/30 rent to expense ratio).

You put 25% ($525,000) down at 6% interest fixed for 5 years (amortized over 10).

So your debt service is right around $70,000/year. So 1st year numbers look like:

$168,000 net
$70,000 debt service

$98,000 cash flow for a cash on cash return of 18.5%. Now in years 2 and 3 you bump the rents a modest 5% per pad or $10/month.

This raises overall park net by $12,000 per year. Expenses should stay the same roughly right? Provided your interest rate is locked in for a while I would think this would all go to net and push your cash on cash returns to 21% and 23% in years 2 and 3 (and on up from there).

Even if you allow for a 5% increase on the expenses at the 30% expense margin ration you’re still coming out way ahead.

Anyway, I just want to be sure I’m crunching those numbers right. Any help is appreciated. Thanks!

2

Your debt service number is off on an 10 yr amt. 210k per year would be debt service in your example. Giving a neg. 42k noi.

3

Wow, you’re right. That was a bonehead move. I was calculating off the down payment amount, not the remaining balance. So that miscalculation aside are my assumptions current on the increased net revenue each year as a result of rent raises?

Also, what kind of cash on cash returns do most people want to get? It looks like you would have to push the cap rate to 9% and the loan out to 20 year amortization to get to 12% in this example.

4

I think the amortizations on these larger loans can run up to 25 years. If I’m not mistaken there may be some 30 year programs.

Your premise is right though that your returns increase if your rents increase while your expenses remain fixed, stable, or even if you are able to lower them.

I think if you are investing yourself you should shoot for at least 15-20% CoC. There are funds that can deliver less but if you buy the right property,with the right circumstances, you should be able to exceed their returns ( but will come with additional work ) . If that is not the case, it may not make sense.