Posted by Ryan (NC) on June 14, 2006 at 22:12:09:
NT
19 unit MHP valuation and exit strategy (long) - Posted by Rob Wilson
Posted by Rob Wilson on June 02, 2006 at 14:34:51:
This is my first purchase of a MHP and I’ve done some evaluating and am looking for some opinions on the feasibility of my proposal.
Seller Asking $250,000
19 unit park with older MH’s (60s-80s)
Poor management which results in 6 vacancies
Currently is producing $3600/month
I want to purchase this park and sell the units back to the current renters for what they are paying for rent. So I tried to put a value on the dirt and found that locally the lot rent is about $125. With about 10% vacancy and 35% Operating expenses that puts the NOI @ $15,500 and with a 10% cap rate the value is $150,000 for the dirt. 19 of the homes at $2,000 a piece = $40,000. The value of the park is approximately $200,000 in my opinion.
If I sold the mobile homes at the current rent my income would be about $4000 for 5 years including lot rent, expenses and vacancy. After five years it would drop to $1300 a month.
I know that the owner is open to owner financing so I figure I would work the deal like this.
Offer 50K cash and the owner would carry back a note for $150,000 for 15 years with a 5 year call.
My debt Service would be $1300 a month and my income would be $4000 a month, leaving me with around $2,700 a month positive cash-flow.
I would sell in 5 years with the increased rent of $150 which with a 10% cap, minus vacancy and operating expenses will put the value at $190,000.
Now about the tax ramifications!
If I understand correctly I will be taxed on the sale of the MH’s in the year of sale…From my figures if I sell these on average @ $125/month with 12% interest and 60 months and 19 homes…puts the PV @ $110,000! So I’ll be taxed on my gain. 50K is what I paid for the homes and 110K is what I sold them for leaving a gain of $60K in the first year, ouch!
Year 1
$2700 Positive cash-flow X 12 = $32,000
- $18,000 (60K gain X 30% tax bracket)
= 14K
Year 2
32K
Year 3
32K
Year 4
32K
Year 5
32K - 20K taxes, what I owe $115,000 (balance of loan from previous owner)- $180K expected sales price = 65K with 30% tax bracket = $20,000
- 65K gain
= 77K
From these numbers I get an IRR of 40%, but…
Is it feasible to sell these old MH’s to there current tenants for the same price as their rent?
Are my tax #'s correct?
Thanks for any and all advice,
Rob.
Re: 19 unit MHP valuation and exit strategy (long) - Posted by ginplayer
Posted by ginplayer on June 06, 2006 at 08:02:49:
Just a thought you should look into installment sale
tax rules. This may enable you to defer some of the gain over the period you receive payments for the
mobile homes. There is a one year holding period for
you that may be accomplished by selling an option to
buy rather than an outright sale. This may mitigate
somewhat your tax consequences. Just a thought.
or, - Posted by Steve-WA
Posted by Steve-WA on June 02, 2006 at 18:07:17:
to eliminate the income tax on sales that have not yet put money to you, keep renting them - more income; of course, there is the upkeep and maintenance expenses . . . boy, if there was only a way to get rent income, but the residents fixed things as if they were buying . . .
RTO anyone?
AND, your tenants are probably more familiar and would more easily transition into a lease option - RTO is just like renting, which they understand. Contract to buy? Yeesh, mooks may shudder at the mere suggestion of commitment . . .
that’s my opinion, and its worth just what you paid for it -
Re: 19 unit MHP valuation and exit strategy (long) - Posted by Berno
Posted by Berno on June 02, 2006 at 15:39:53:
You could consider more of a Lonnie Deal on the sale of the existing MHs. Get a higher price and spreading the financing out a bit longer. This would help you maximize the amount that you get from the units and give you a good spread of income over a period of time.
The other point, also mentioned, was the 1031 consideration. Keep that in mind.
Re: 19 unit MHP valuation and exit strategy (long) - Posted by Joe_KY
Posted by Joe_KY on June 02, 2006 at 15:18:12:
First the disclaimer - I’m not an accountant.
That said, there are a couple of things to consider - I was doing Lonnie deals in PA last year and found that they had recently changed the law and there was no longer a sales tax on used mobile homes in that state. (This sounded too good to be true, but was confirmed by 2 parks and the notary I was using for all my title transfers.) It might be worthwhile to check if there really is sales tax where you are.
2nd - if you’re planning to sell the park in the short term (actually to sell it any time) it might help you to look into 1031 tax-deferred exchanges. In order to do them you have to be careful which type of entity you use to by the park - LLCs will work, S-Corps will not. I just bought my first park this year and when I sell I’m definitely planning to 1031 exchange up and defer all taxes from the sale.
Hope this helps.
Re: or, - Posted by John
Posted by John on June 05, 2006 at 18:55:37:
How would you handle a RTO in this situation? Do you sign a lease and a seperate option? What do you set the option price at? Can you give the numbers on an example deal?
Re: or, - Posted by Rob Wilson
Posted by Rob Wilson on June 04, 2006 at 11:41:18:
RTO/Lease Option is definitely something that I’m going to strongly consider. It does have some psychological advantages. Thank you for pointing that out. I’m still a little bit concerned about the mobile homes being 60’s-70’s models. Any thoughts on this?
Thanks,
Rob.
Re: 19 unit MHP valuation and exit strategy (long) - Posted by Lyal
Posted by Lyal on June 03, 2006 at 15:15:32:
Joe
Maybe I misread the post but I don’t think sales tax was the issue. It was IRS tax on the gain (sales price minus purchase price + improvements) that was being discussed. That’s a whole different issue but one that can be easily addressed.
Lyal
Re: 19 unit MHP valuation and exit strategy (long) - Posted by li-pa
Posted by li-pa on June 03, 2006 at 08:44:54:
Hi Joe,
I live in PA and i’m interested in this niche, could you share the + & - of doing this in PA. I can see the taxes are a plus, thank you for the info.
Where in PA did you do Lonnie deals? since you are from out of state how did you manage this?
Thank you
Lillian Montgomery county pa
whatev’ - Posted by Steve-WA
Posted by Steve-WA on June 05, 2006 at 21:09:20:
yes separate L and O
option price is at whatever fits the situation: 500, 1K, more . . . whatev’
sample deal - 500 option money, 300 pmt + 300 lot rent that I have to pay = rent of 600, and I give rent credit of 100 for every on-time payment ($0 for late pmts), with a three year lease term - at the end of 3 years, they pay off the balance, or even better yet (and more likely), the LO converts to a note for the remainder of the oiriginal price minus the option minus the cumulative rent credits.
Some people give 100% rent credit, some give none - I figure 25 to 30% or so - actually, its whatever round number I want to pick.
Buyers, or T/Bs, I find, almost NEVER negotiate, and NEVER NEVER negotiate anything that you cant get something else somewhere else, so its really whatever you want to do - they’re the ones with crap credit, and you’re the one giving them a break where no one else will - you hold the cards.
Case in point: long ago, I had a buyer balk at the 12% interest, so i asked them what interest they did want - 0%? they dropped their jaws, and said, yeah! can you do th at? “Of course! But i’ll have to raise the total price a bit to compensate” (so I figure what their total payments would have summed up to at the 12%, and that was the new sales price!) And they were happy little clams.
See what i mean?
Re: whatev’ - Posted by Rob Wilson
Posted by Rob Wilson on June 06, 2006 at 08:15:04:
I do see…I will most likely give 25% rent credit. Here is another question…For the $50,000 down payment I was going to give this guy. I don’t have the liquid cash right now, but I do have several rental properties that have no mortgage and are worth about 50K. What do you think of offering to sign over the deed on one of these properties for $1 for the down-payment? What about taxes on that transaction?
Thanks in advance
Rob.
why not get a mort? - Posted by Steve-WA
Posted by Steve-WA on June 06, 2006 at 17:54:52:
land bank one of those props and use that money - assuming there is rental income to cover the pmt - - - why give up the deed to the prop?
Re: why not get a mort? - Posted by Rob Wilson
Posted by Rob Wilson on June 07, 2006 at 13:26:41:
check and mated
ah, my dear Rob Wilson . . . - Posted by Steve-WA
Posted by Steve-WA on June 07, 2006 at 19:15:25:
that’s what I do!
One beer please!
Not a good idea . . - Posted by ginplayer
Posted by ginplayer on June 08, 2006 at 08:04:09:
Not a good idea if the property has appreciated since you bought it. You would cause a taxable event to the
extent of the gain. You should consider a 1031 exchange this would allow you to defer the taxes.
Make sure you get someone who knows what their doing
if you go the 1031 route. JMHO
Re: Not a good idea . . - Posted by Ryan (NC)
Posted by Ryan (NC) on June 08, 2006 at 08:37:07:
I think we have a little misinformation here… 1031’s are great for outright sales if the right buyer comes along and the sales price is right, but taking out a new mortgage or refinancing are NOT taxable events.
Best wishes,
Ryan Needler
No tax on re-fi - Posted by roundhouse
Posted by roundhouse on June 14, 2006 at 11:52:44:
I do not think there is a income tax due on a re-fi.
If you re-fi your rental and use the re-fi money for the down pay.
then you still get the appreciation on the rental prop.