Hello…I have an opportunity to purchase a MH park in Texas that I’d like some feedback on. Here are some specifics:
Asking price = $180k
16 total spots in park
a) 10 POH homes
b) 4 tenant owned homes
c) 2 empty lots
City water and sewer, i.e. no maintenance
Total rent currently $5,025
a) rents from POH homes (10) = $4,275
c) rents from tenant owned homes (4) = $750
Park currently pays water bill (avg. of $1,000/month)
Maintenance averaging about $500/month currently (should decrease after neglected items are addressed)
POH homes range from 1991-2000 year models
Taxes running $1,300/yr
Inside city limits
- 1 dirt/grass road in & out
First thing I would do would individually meter the water consumption to reduce out of pocket costs. That being said, I’ve run my own numbers assuming 20% down and $20k/yr for maintenance, repairs, water, trash, etc., I’m still coming up with approx. 20% cap rate with 90% occupancy.
Once I pass the water bill back to the tenants completely as well as take care of the neglected maintenance items, I’m guessing I can reduce my out of pocket maintenance & repair costs to around $10k/yr, therefore increasing my cap rate to over 26%. Rent out the 2 additional spaces and this cap rate goes higher.
This looks to be a fairly attractive deal…what am I missing besides a large percentage overall being POH’s? I have a full time job and this park is approx. 1 hr from my house. Local maintenance people for A/C, plumbing, general maint. already in place and on call.
Thanks in advance…
So… here is what I see- opinions will very…
Space rent is about $185 / month
I work the park as if it is space rent only, because the extra money you get from the rentals almost always goes into fix up costs and maintaining them. So your Gross is in the 35,000 range, net is in the 21,000 range- maybe lower because of the very high Texas taxes. So your at about a 11.5 CAP. Remember- the CAP is ONLY used the first year- there after your looking at cash on cash- or if your really savvy, cash on equity as well.
The $1,000 per month you get back in water charges will give you $12,000 to your NOI- at that 11.5 CAP which is about right for this small of a park, is about 100,000 bump.
I will warn you of this- rental parks are like flat apartment building- but they do not fair well without a lot of TLC… and when people are upset because they are being evicted they can do a lot of damage in about 5 minutes of rage.
I will strongly advise you- DO NOT CAP RENTAL INCOME THAT IS NOT SPACE RENT. Rentals are a side business and the income and expenses need to be separated into the two models.
This from the numbers is not a bad deal- but it is not a 20 CAP deal.
again- opinions will very- but there is mine.
I respectfully disagree with your comments that the extra money made from rentals (on top of lot fees) does not count in the cap equation and as is sunk for repairs and maintenance. If that were the case, traditional condos, single family homes, duplexes, etc. would never be attractive to traditional investors (besides the “guarantee” of property appreciation). One of the beauties of the MH is that EVERYTHING is accessible and fixable with a little know how…and for fractions of a bricks and sticks home. Certainly there is an element of the extra monies that must be allocated for repair and maintenance, however not enough to completely ignore in your cap calcs.
Looking further, this deal would produce approx. $2k free cash each month in its current state (without ind. water metering and current maintenance figures) which is just as important to me as the long term investment value due to my wife quitting her job to take care of our newborn…not to metion city water, city sewer, and 2 acres of land within city limits. What value do you place on the fact that city utilities are provided vs. the alternative water well & septic?
What if we also said the seller was willing to reduce price to $160k as a bottom dollar deal? The lot rent of $185 is low and could easily be increased to $200 in conjuction with ind. water metering.
FYI…I have small 7 unit park (4 POH, 3 tenant owned) with 1/2 city block downtown in a booming Texas city that does very well, approx. 17% cap with repairs and maintenance figured in the POH’s. I was advised against this purchase from a resource on this site before I bought it, however it makes enough money naturally to pay for itself, my personal home mortgage, and a vacation home w/50 acres…not too shabby. It’s worth noting, but there is a probably a good chance that I have different goals than the next guy and are more interested in the supplemental monthly income more so that a quick flip type opportunity as well as don’t mind a little sweat equity.
Thanks again for the comments…
Everyone has their own investment goals. If you’ve found a park formula that works for you, that’s great. However, for most people, this type of deal would not work. Most investors are going to have to subcontract the repairs, and the costs are huge. In addition, no traditional lenders use the home income in their formulas, just the lot rent. I’ve got a neighbor who runs his car on bio fuel he makes with corn, but that doesn’t mean that it’s a great idea for everyone. But if something works for you, keep doing it.
The beauty of this forum is that people put all their ideas out there for everyone to pick and choose what makes sense based on their goals.
I actually found a traditional lender that did include (and had to) to make the numbers work for my current park despite the cash flow numbers. It is a smaller bank that still has a fair amount of flexibility in their decision making. You are correct though…most don’t consider mobile homes assets or a part of the lending equation. In my particular case, the land will be very attractive in time.
How do you factor in city water and city sewer in your equations. Obviously a private septic is the biggest $$ item and of great concern when evaluating a traditional park on private water well and private septic. How much of that risk is removed when city utilities replace private utilities?
City water and sewer are a great security blanket for most operators, as you are insulated from such issues as making sure the water is potable, and that the sewage is treated corectly – it’s a whole lot easier to let the city or county worry about this stuff. In addition, repairing private water or sewer is extremely expensive; in some cases more that the price of the entire park.
To buy a park with private utilities, you need a higher cap rate – but you need even more than that. You have to do terrific due diligence to know if the private utility is currently legal, how many years of life are left on it, and the cost to replace (as well as guarantees that you can replace without city or county intervention). If a packaging plant costs $500,000 to replace – and the park only costs $400,000 to buy at a 10% cap rate – raising the cap rate is not going to help much if that packaging plant fails and you have to write a $500,000 check.
The biggest problem is how much you worry about things. If you are going to worry 24/7 about having to write a $500,000 check, then it’s not healthy for you to buy that deal. The deal has to fit your goals (and priorities) and many people just don’t want to worry about private utilities, regardless of the cap rate.
Just a quick addition- different private utilities will cost differing amounts to connect if public options become available. So if a park is septic, not a master septic, but each home or two shares a field, new sewer lines will have to dug to each home. Depending on your parks layout, and where the other utilities are already in the ground, this could be a pretty huge expense. If this is part of a end game, you better have the park located for all of the utilities and know how you might put in the lines. Same could be in order for water. The city or supplier might have a material requirement, or if your galvanized on the water side the pressure might blow your pipe in the weak wall areas.
Frank mentioned a packing plant, and they have all of the sewer lines go to one spot. This can be good, or could be a challenge as well. You need to know where you will connect. If it is on the other side of your park, you might need a lift station and to dig a new line across your park to get to the connection.
Not too long ago I looked over a park for a friend while I was trucking across Nebraska. It was a evaporation pond, which is another kind of private sewer system. During my walk of the park and then the banks of the pond, I noted the water line never seemed to drop, or rise. It should in this type of system, but there were no high and low water marks on the banks. Sure enough, on the backside of the pond there was a leak, and the water was not evaporating but it was running into a small meadow and then into a creek.
The point- if the park was bought, and that would have not been caught- a new packing plant for that park might have run $500,000 or more. And while the permits are being processed, and the plant is being designed, he owners would have been trucking the waste to a plant to have it processed.
Frank made a stellar point- private utilities = higher CAP rates. More risk in operating, way fewer people will be buyers once you go to sell. So you need the higher CAP to attract the buyers that will take on the risk and headaches of the private utilities.