Underwriting - Do you capitalize home rent on sale?

I’m curious how other MHP buyers underwrite exits w/POHs. Since lenders don’t value home rent income, shouldn’t we always subtract the home rent from the NOI before applying the exit cap rate and projecting our sales price?

Especially for heavy POH communities, this can severely affect the projected sales price and IRR. Just wondering if others share the same train of thought.

We 100% follow this train of thought. POH’s income isn’t capitalized. A lot of sellers will capitalize rental income and that kills deals. I would take out the park owned/rental income.

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Preferably, I exclude all POH income. If the park has one or two POHs, I will throw the seller a bone and include it, but if the park has a majority of POH income, then I pass on the deal.

A park that is majority POHs is one that you should avoid.

There are several reasons for this, but the main reason is demand. If the current owner cannot sell homes, how are you supposed to? The park has problems—IE, low demand, poor tenant quality, and/or bad reputation. Etc.

There are a few threads on the forum where Park Owners have struggled to get folks to qualify to buy Homes.

If your strategy is keeping the POHs and filling the park with more POHs, I suggest you buy an apartment complex. In the long run, an apartment complex will be a better investment than owning a Park with all/majority POHs.

MHs are depreciating assets. We have seen them increase in value lately (2022-2023). I think that is more a function of the dollar going down in value (inflation) than the home going up. In the long run, MHs will decrease in value compared to other asset classes. (Apartment vs. MHs)

If you buy a Park with POHs and plan to convert them all to TOHs, pay the BARE minimum for those homes, as you will have to give them away. Most POHs are POS.

We don’t cap POH income on sale, typically we put a flat value on each home based on its condition ($5k, $10k, $15k or $35k if newer). Some operators use the NADA book value but we assign a value based on our walk through.