Re: Converting Rental Homes to LD’s or… not - Posted by Daphne Lowe
Posted by Daphne Lowe on April 14, 2006 at 14:49:46:
What you’re essentially buying is an income stream. Comparing it to owning a park is really an apples to oranges comparison. There is a risk associated with not owning the dirt, but owning a MHP comes with its own set of responsibilities. Comparing it to LDs isn’t fair either, because it doesn’t place a value on the time and resources it took to accumulate (find, buy, fixup, lease up) such a portfolio. Furthermore, LDs are for a finite period of time while rentals are infinite. I don’t see how it would be feasible to convert this portfolio to LDs/LOs. You’re paying 6,500 per home, how much would you sell them for? With such a small margin, you would have very little profit left after paying off your 432k purchase price. If you lower the amount of income or its duration (ie. the typical 3-4 yr LD), the income stream becomes less valuable.
So, here’s how I analyze the deal:
First, there’s a vacancy factor, a number of units will be vacant at any given time, and that amount is subtracted from gross income. Not knowing the market, I’ll use 10% (adjust accordingly based on your local knowledge). Then there are repair expenses associated with wear and tear, and rehab costs on turnovers. Some units will have no repairs, while a few will require major overhauls, so I’ll use 10% as a rule of thumb. Taxes, insurance and miscellaneous expenses, 5%. I’m assuming tenants pay all utilities, if that’s not the case, that needs to be added in. You didn’t provide details on the owner financing, so I used a payback period of 10 years at 7%. Lastly, since maintaining rentals can be very time consuming, my numbers include hiring a full time handyman. This will free you from grunt work and allow you to focus on building your empire (or allow you to keep your day job).
lot rent -12,500
cash flow 4,300
COCR 52% (based on 100k down)