Would you buy a park already at market-rents?

Hi all-

i am looking at a 52 space park - 41 of the spaces are occupied with all tenant-owned homes. They currently get $345/mth lot rent and that includes utilities (public water and sewer). The other neighboring parks are on WWTP and charge $275+$70 ($345 total) for utilities.

I can buy this park at a 10 CAP off of current income. Do you still feel it is worth purchasing if rents are already at market levels? One thing i was thinking of doing was lowering lot rent by $20-$30… and sub-metering the utilities (which would be an ~$30K/year net boost to NOI). Also, just b/c it is as market-rent levels, can you typically still institute rental increases each year of $5-$10 when it’s all TOHs?

MSA is ~75K but close to bigger cities and population has increased 25% on BetterPlaces. Ave home price is $135K and unemployment is 4%.

Thanks in advance!

Expenses rise every year therefor market rents should rise every year. You should be increasing rent annually by a minimum of your yearly cost of living index.
If any other community expenses rise , such as property taxes, the tenants rent should be increased to cover that cost as well.
It is not wise to ignore annual rent increases as it will ultimately result in the reduction in the value of your investment and will require a major rent increase at some point t catch up.
I prefer to lead the market as opposed to following it since the quality of my community is higher than average.

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You didn’t give us enough info to help. For example, how much are you putting down? What is the interest rate on your financing? Do you have capital expenditures to make in the first year? What is the local rent for a 3BR or 2BR site-built home? Median home value? Median family income?

But, that said, here’s my two cents: I wouldn’t DROP the rents (to allow for billing back water and sewer, or for any other reason). I would raise them by 3-5% per year, each and every year, on the same date. Tenants will expect it can budget for it. Maybe not the first year, as I would bill back utils. first so tenants can control their own expenses and total water consumption will decrease 30% or so.

You still have plenty of growth opportunity: Billing back utils. and filling empty lots, plus annual small rent increases. Provided the market supports it.

Thanks for the feedback. I’d be putting down 20% - bank financing - 30 year term. No real cap ex to make. Local 2BR rents are $550-$700+/mth – is that enough spread for $345/mth (utilities included) mobile home rent… or is the spread not great enough?

That seems like enough spread. $550 is not-so-good IMO. I’d rather see $650 or $750 is fine.

The monthly payments on a $30,000 MH loan with 5% ($1500) down, 7.5% interest for 10 years are $338/mo. Added to the $345/mo. space rent, we’re at $645/mo. If the $30K buys a 3BR mobile, you’re golden. If it only buys a 2BR mobile, you’re at the top end of your range for site-built homes and I’d be a bit nervous.

Of course, if you can offer people homes for well under $30K, then the payments would be low enough compared to site-built.

Would you buy a park already at market-rents?

One suggestion, If rents are at “market” their is an opportunity to operate the park more efficiently, controlling expenses, specifically water/sewer utilities. Allowing your residents to control (and pay for) water/sewer expenses, will reduce your community’s water/sewer cost by 25 to 35% (documented).

So even if you reduce (not often done) your rent by an estimated per unit utility cost and have your residents pay for their fair share of the expense (now reduced 25 to 35%) through sub-metering, your still ahead.

Sub-metering is a sure fire way of increasing your net revenue.

We’re here to answer your water sub-metering questions.

Dan Helton
Southern Water Management

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a true ten cap works for me. usually the parks that earn a ten cap and needy. in maintenance, management, tenants quality etc.

@OPMMHP - if mostly lot renters in the community don’t lower your rent, it isn’t necessary. People won’t move over $30/month especially with high moving and setup costs.

I think you’re overthinking the deal. If it is a true 10 cap with some upside then it should be a deal to consider. I don’t know your return thresholds but just because it doesn’t check every box doesn’t mean it isn’t a good deal. Real estate has a lot of nuisance. But you’re in a good place from the limited information you gave. Trust yourself!