I’m reading the MHU Mobile Home Park Home Study Course book I just got. The generic rule for valuation in the book states that if the residents pay their own sewage and water, multiple the # of occupied units times the monthly rent times 70. But if the park pays the sewage and water, multiple the # of occupied units times the monthly rent times 60.
What do the 60 or 70 represent?
That is a gross rent multiplier (GRM). This is something that is very common in almost every other form of real estate and it gives you nothing more than a quick way to evaluate leads for further review. Something that most people forget is that you need to ultimately make offers off of actual financials and not off of a GRM.
The 60 and 70 numbers are something that both Dave and I developed independently (back when we were competitors) but basically boils down to a shortcut to a 12% cap rate, assuming normal operating costs and lot rents of $100 to $400 per month.
Charles D is absolutely correct, this is just a ballpark value and you should never buy a property without doing an actual, much tighter examination of the revenue and expenses.
Here’s why we developed the formula. You call a Mom and Pop. Pop says “what will you give me for my park?” You say “well, how many lots do you have occupied? What’s you lot rent? Who pays for the water and sewer?” Pop says " I’ve got 60 occupied at $200, and the tenants pay the water and sewer". So you do the math of 60 x $200 x 70 = $840,000 and say “$840,000”. So he says, “that sounds kind of low, how about $1,200,000”. And you say “how about we split the difference at $1 million flat”. So what happened is you offered a 12% cap rate, he countered with an 8 % cap rate, and you settled on a 10% cap rate, which was your goal in the first place. Then you prove up the numbers in due diligence. That’s really all the formula was designed to do.