What are you seeing in the MHP market?

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1

I’m curious to see what’s everyone else is seeing being offered by MHP sellers and brokers.

Deal prices are still drunk, that’s what I’m seeing. Prices still way too high to make any sense at all. Interest rates are touching 9% and sellers want 4,5,6 cap’s.

You can’t ask a 5 or 6 CAP when rates are touching 9%. A lot of the deals I’m analyzing are falling apart. If rates are 9%, you need to buy a 12 cap (11 cap worst case scenario for debt to work).

I think the market needs a serious reality check. What I think will happen and what I’m seeing happen is deals aren’t getting done like they were 2 years ago. No surprise. I think prices will drop gradually over the next 6 months or so and you’ll start seeing more willingness for creative financing.

What’s your prediction for the market in near term?

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2

Doesn’t this really depend on the financials of the buyer and the community?

Many can still get financing well below 9%. We are also seeing many communities where the rents haven’t moved with inflation so historical NOI maybe considerably low compared to competitive lot and home rents. Almost all of the Increasing rents flows through to NOI, unless you have to increase services or have expenses tied to rents.

Yes 4-6% cap on historical NOI won’t leverage at 9% cap rate.

Where targets rents are not market and buyers with great financials can still get deals done.

3

One word “Crap.”

Every deal that has crossed my desk has been a 6% cap or lower. With Interest Rates at 7-8%, it is tough to justify buying with negative leverage.

I have strong financials. Could I get a deal done? Of Course, but why? I will not put 50% or more in a downpayment on a 6% deal and pay 8% on the rest. The ROI would be horrible. Of course, if a Unicorn crossed my desk, I would fire at it, but that’s pretty unlikely.

Here are the numbers.

DSCR Coverage Problem
Purchase Price $1,666,666.67
NOI $100,000.00
CAP 6%
Interest Rate 8%
DSCR 1.35%
50% Downpayment $833,333.33
Annual PMT $74,022.86
Cashflow $25,977.14
Cash on Cash Return 3.12%
4.30% Amex Saving $35,833.33

Most banks want a 1.2% or better DSCR, which pushes your Cash on Cash return even lower.

DSCR Coverage Problem
Purchase Price $1,666,666.67
NOI $100,000.00
CAP 6%
Interest Rate 8%
DSCR 1.20%
56.5% Downpayment $941,666.67
Annual PMT $83,645.83
Cashflow $16,354.17
Cash on Cash Return 1.74%
4.30% Amex Saving $40,491.67

Amex Savings is paying 4.3%
Link to Excel file.

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4

Nailed my point exactly.

5

There is no disputing those numbers, but if you’re buying Exactly what is there and its operating properly why would a seller give up their annuity for less than 8%?

The communities that have the most value are those where the rents are under market or the park is at low Occupancy.

This maybe pie in the sky for most deals but here is the example.

Assume NOI is essentially 55% of Gross rents based on a mix of lots and POH.
This doesn’t include any Infill Opportunites. Moving target from 60% to 80% Occupancy will add 30% to GR
Rents DSCR Coverage Problem Scenario 1 Scenario 2
Scenario 1 Purchase Price Cap Rate 6% GR + 20% GR + 40%
NOI $100,000 Revised DSCR Coverage Problem Revised DSCR Coverage Problem
Gross rents 55% $181,818 Purchase Price $1,666,667 $1,666,667
Rental Increase 20% $218,182 Rev NOI $136,182 $172,545
Expenses $82,000 Actual Cap Rate 8.17% 10.35%
Revised NOI $136,182 Interest Rate 6.5% 6.5%
Term in Years 25 25
Scenario 2 Mo Pmt $1,250,000 ($8,440) ($8,440)
NOI $100,000 DSCR 1.34 1.70
Gross rents 55% $181,818 Downpayment 25% $416,667 $416,667
Rental Increase 40% $254,545 Annual PMT ($101,281) ($101,281)
Expenses $82,000 Cashflow $34,901 $71,264
Revised NOI $172,545 Cash on Cash Return 8.38% 17.10%
Overall ROI 25.2% $104,931.8 33.91% $141,295.4
Debt Reduction $20,031.1 $20,031.1 $20,031.1
Appreciation Inflation 3% $50,000 $50,000
6

I suppose this is one of those ‘ride out the storm’ investing moments with interest rates elevating as they are- particularly if you want to invest with leveraged money. As with all investing the parameters fluctuate. Interest rates were at historic lows a few years ago and even at 7.5 to 8.5 right now this is not historically abnormal. The key is what does the future hold?

But then again… isn’t this the reason that each and every one of us bought our very first mobile home park. Consistent, steady, predictable returns. Through good times and bad. Passive income while we pursued our grind away day job careers?

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7

I made a mistake on my Spreadsheet. I used the Downpayment as the Loan Amount, which isn’t a problem for the 50% down payment scenario, but for anything else, it’s not correct.

I updated the Spreadsheet.

DSCR Coverage Problem DSCR Coverage Problem
Purchase Price $1,666,666.67 Purchase Price $1,666,666.67
NOI $100,000.00 NOI $100,000.00
CAP 6% CAP 6%
Interest Rate 8% Interest Rate 8%
DSCR 1.35% DSCR 1.20%
50% Downpayment $833,333.33 43.5% Downpayment $725,000.00
Loan Amount $833,333.33 Loan Amount $941,666.67
Annual PMT $74,022.86 Annual PMT $83,645.83
Cashflow $25,977.14 Cashflow $16,354.17
Cash on Cash Return 3.12% Cash on Cash Return 2.26%
4.30% Amex Saving $35,833.33 4.30% Amex Saving $31,175.00
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If rents are 50% below market you could stretch bit but raising rents/NOI usually doesn’t come without a lot of work. You can’t raise it all at once, often there are tenant or infrastructure issues/capex, homes need to be dealt with. Rates may still go up. Job losses will affect occupancy, collections and rents. If I am gong to do the work and take the risk I want to be compensated. There needs to be enough return to provide a decent risk adjusted return on capital, plus compensation for the work/value add. That’s been harder to find over the last couple of years and many who didn’t heed the risk may be staring at balloons that will result in them having worked for free. I think patience is key.

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