Reading market demand signals correctly

We’ve started due diligence on a 140 lot park located about 70 miles outside of Chicago. The initial market looked OK - i.e. 2BR rents in the area for $750 and average SFH $80,000, with average SFH for the county even higher at $120,000. However, as we have begun speaking with realtors and checking out SFHs on the market currently we are finding that there are many $50,000 (and even several $40,000) decent-looking SFHs currently on the market.

Lot rents for this park currently sit at $250 (tenants pay utilities) - and the park is about 85% full. We were planning on raising rents about $30 (based on parks in nearby towns) but now I’m questioning that assumption. Logically, I’m having a hard time moving forward on this park when I know potential tenants can get a decent single family home for about the same monthly payment.

On the other hand, our test ads have been strong - getting about 30 responses per week advertising for sale or rent-to-own for $600, including lot rent.

Can anyone help me interpret the above data points. Should I drop this park, or am I overreacting to the low SFH options in town?

Based on 85% occupancy I do not see any reason not to raise the rents to market. Based on the occupancy they are not buying the SFHs you are concerned about. Realistically the reason they are not buying the homes is because they can not qualify. Saving for a down payment on a mortgage and credit wise qualifying for one is generally beyond their skill set.
Purchasing the community will depend on the numbers but I would not be interested if there are many POHs.

@Greg Thanks for the comment. I should have mentioned that this park has less than 5% POH and is submetered and if we did not raise rent the day 1 cash-on-cash return would be around 16%.

While SF prices are indeed important, it’s also worth considering that most of your tenants will never have the credit scores or down payment required to buy a SF. The test ad you ran, which sounds like it did well, is a better gauge. Your primary competition are Class B and C apartments, and most people prefer having no neighbors up against their walls, a yard, and being able to park by their door. I see nothing from what you have described that would be a deal killer for me.

Look at the data points for vacant housing and then hop over to trulia and look at what’s available in the price range you are worried about. This is a decent exercise, but I agree wholeheartedly with Frank on this. Your perspective tenants would still need to qualify for a loan to achieve an $80,000 stick-home purchase. Your test ad is the real indicator because it is a true, actual test. Test ads will always trump data because it is a true test of performance…

As an aside, a lot of Mom’s and Pop’s we’ve run into recently have been very concerned about the market. If you do decide to renegotiate, use this concern as leverage. 99 times out of 100 they will agree that the market is weak right now and there is nothing on the horizon that is promising.

Nearly half of renters (USA statics) are presently paying OVER 30% of their income on rent. For the last 30 years the average net income of workers (disposable money) has not risen. Notice the sales of autos is good but noticed zero interest, deferred down payments, balloon payments 3 years later, and all kinds of future problems for the debtors… Collage loans 25% default and we notice the credit available for increase spending or increase pad rent questionable. The present disposable income for the lower middle class and below is very questionable and the need for two jobs is increasing with employers struggling with health insurance costs and presently we have the lowest % of the able workforce working in history (believe 80 million able bodies without full time job). Our government is fudging on the real problems such as spending 8 billion dollars helping Wall Street and Bankers but in reality we are no better off as a nation than in 2007 and the excess money for lending at crazy rates and companies buying back their stocks that look fine on paper but the companies continue to outsource to Mexico and others. Time to put on your seat-belts there is lots of volatiles and the stock markets PE’s of over 20 is not the only problem. With oil prices so cheap our economy should be booming and presently Canada is really suffering with the low oil prices.