Seeking advice 1st park:
15 lot toh @250 a month rent should be 275 or 300. Park is full. On well water and each lot has it’s own septic. Well pump replaced in 2017.
Park is in a good location to local city and 10 minutes from my house.
Gross annual $45K
Asking $325k
I have negotiated down to $305K but that is as good as the seller will go. Any advice is appreciated.
I’m looking for my first park as well. I recently evaluated a 19 lot park and reviewed the deal with a seasoned MHP investor.
One thing to think about is that with fewer lots, your expense ratio will be higher. Example he shared was “if a pipe bursts or a pothole needs to be repaired. You have fewer lots to spread the expense across”.
For me, I’ve been looking at the income and expenses to determine the NOI and shoot for a CAP around 9-10.
Hopefully that helps.
Very nice that you’re looking on your first park @Jecampbell
Here’s some general advice, hope it’s helpful -
Biggest issue of smaller parks is financing it. How are you getting this deal? The bank typically doesn’t loan a deal at this price point (sub 1 million or at least close) so you’ll have to rely on connections to a local bank/credit union that you have or get it seller financed. I wouldn’t go hard money or something of the sort or it’ll kill your cash flow.
It’s hard to find and pay proper management with smaller parks. Small pool too choose from. Your best bet will be to offer a tenant 150/mo and free rent or just free rent, but then you can’t really expect much from them. From that distance being close to your home, you are likely going to be managing it yourself, but you need to be wary that you’re essentially buying yourself a new job, which may not be something you want or can do. It also doesn’t scale if you want to own more parks.
Due diligence on septic and well systems is tricky. You will want to see regular tests and paper trail that documents the proper functioning of the well system, and for septic you want to see how regularly they are pumped and if there is extra space on the park for more septic spots in emergency scenarios. One of the biggest horror of septic is when it fails and you need to occupy one of your occupied lots for a septic space. On a 100 lot park, no big deal, on a 15 lot park, it would be catastrophic to your margins. Either way you want an expert to check both systems.
In terms of calculation - typically smaller parks are at 40 or even 50% expenses, do not trust the seller’s numbers because they likely do the absolute bare minimum and don’t have management or typical maintenance. Keep in mind you’ll likely have to give a manager free rent to hire anyone, and that’s a lot of money for a park this size.
You would have: 250 (lot rent) x 15 (tenant count) x 12 (annualized) x.6 (or even split in half…) = NOI. In this case at 40% expenses (generous) it would be 27,000 NOI, divided by the price to get cap rate is a 8.8 cap. That’s an OK deal, and if you were to raise the rents to 300, it can be almost an 11 Cap. But can you do that in the market? Only you can tell by doing proper market comps and the price of apartments in the area. I cannot tell from the info you have mentioned so far. I would try to get the seller down to 270k (or 280 if you can raise rents to 300 immediately) if possible to have a margin that’s worth it. On smaller parks you really have to buy them at steal prices to make them work (11/12 cap) due to anything wrong with it costing you all the revenue you’d make on a year. Think electrical, roads, or any other annoying items. A well failure could cost you 20/50K for example and septic is cheap until it isn’t. You really need an excellent price and sizable room to raise rents (at least 50) to be ready for any and all possible issues due to you being unable to expand the park by adding more homes and paying residents.
Hope this helps!
Thanks for the response. A local bank was able to pre approve 25 years @ 4.5% and 85% LTV.
The owners expense report was around 25% expense. But I’ve heard a few people say 40% operating expense. Question does that account for self management?
With management pay/concession, you’re likely over 40% with proper maintenance (well and septic has expenses).
Maybe you can be at 35/40% flat if you self manage.
25% is extremely unreasonable, even if you self manage. This is a tell that the owner has deferred maintenance he’s not fixing.
These ranges are high because you do not have a large amount of lots to absorb and spread out the costs.