Re: Determining value of m/h park based on net? - Posted by ray@lcorn
Posted by ray@lcorn on July 26, 2003 at 19:53:27:
Regardless of property type (e.g. MHP, Apt., Retail), what is being valued is the quality of a stream of income. Rules of thumb are great to make an initial decision of whether to pursue a particular deal. For me, my quickie judgment is cap rate… specifically whether the price is above or below a 10% cap rate. Why 10%? Because the math is easy. Above ten and I know the seller is somewhat motivated. Below ten may still warrant a closer look for unrealized upside potential. Below eight and I’m probably not going to look any further… now. (If it’s in an area I like I’ll save it and check back i a few months.)
But that’s just a rough first cut… a way to wade through the offers to sell. If you’re looking at a lot of deals you want to be able to home in on the ones with the most potential.
Once I start looking at a property I need more accurate information in order to establish my value. It will be worth different amounts to different investors.
Price is a function of certainty. The more certain the income stream, the higher the price, and hence lower the return. Certainty increases as the risk and effort of producing the income decreases. Investments that require presence are worth less on a relative return basis than one that doesn’t. Think about the relative effort and risk required to manage the investment in a T-Bill compared to an income property.
So the real job past the first cut becomes one of verifying every piece of the income stream… money in (income), and money out (expense). That’s known as due diligence. Until you’ve done at least some due diligence you don’t really know whether the income stream is fairly represented or not. For more on that see the article at http://www.creonline.com/articles/art-148.html
After you have a reasonably accurate Net Operating Income, the real fun starts… finding the price and the deal structure that can meet your investment goals and the needs of the seller. For more on that, see my article titled, “What’s it Worth?” in the articles section of the website. The direct URL is http://www.creonline.com/articles/art-216.html