Does this look like a viable land/bank deal? - Posted by Ken L (MI)

Posted by Tony Colella on March 18, 2006 at 17:55:00:

CAP rates are still a matter of opinion, just usually someone elses.

Your post details why you as an appraiser are comfortable with CAP rates. My post as an investor detail why I think they are meaningless when I buy.

One word I would suggest you reconsider is “ALWAYS” proper. We invest in a fluid, real world environment where no one way works in every scenario. Personally by defn and use I think CAP rates are flawed from the beginning but I digress and don’t wish to argue this further than has already been buried in the archives here. Again, let’s just admit and agree to disagree.

I see money on the table for deals like these and though they may be small, they put food on the table and act as building blocks to wealth.

This contrast between cap rate folks and myself is not unique. I have and will continue to have a different opinion.

The simple math of money in, less money out, pay myself first and what’s left to cover the debt service works well for me. Your mileage may vary. Even this simple formula is subject to opinion. What is valuable enough for me may not be for you and vice versa.

Even using that simple formula I would tweak the terms of the deal as detailed in the other posts to make the money work.

So the deal is too skinny for you. I will take it and others like it. To each their own.

Tony

Does this look like a viable land/bank deal? - Posted by Ken L (MI)

Posted by Ken L (MI) on March 16, 2006 at 11:11:43:

I was looking through my local realtors, the smaller town ones. And I found this home listed. I am confident that I can find out who the seller is and speak with them directly is this is a town of about 800 people.

I have to do some research on the Rent rates in the area, but I am thinking around $350 bucks is about right for the area. I’ll investigate that a little better.

I am thinking I can buy this for about $13,000 and fairly easily get my credit union to finance 80% of the price. This leaves me about $1600 in the hole. Say another $1000 (just roughing this in here) for various expenses and what not. I am out $2600.

Then I can either rent or sell the mobile and rent the lot (still getting through Tony’s book, although a have read DOW a few times).

Looks like I’d have my own money clear through rent income within a year if I can get $310 for it a month. This is a lower income area up here.

Is this the right idea, and am I missing something in my initial number crunching for this thing. Miscellaneous costs and stuff like that.

My numbers break down like this:

Sale Price: $13000
My contribution: $2600 ($1600 down payment + $1000 for misc expenses)

My financing: 5 years, 9%, $10,400 = Payments = $215

Rent should fetch me, like I said about $310 or so, just say $315 for roundness.

That give me $100 cash flow on a $2600 investment that will pay itself off in a year. Seems to good to be true, so I am wondering if I am missing something.

Re: Does this look like a viable land/bank deal? - Posted by bill hicks

Posted by bill hicks on March 17, 2006 at 18:33:33:

Dear Lee,

I think this is a good deal for you. Steve is being a little pessimistic I think. He’s listed $949 in estimated expenses but I doubt you’ll have a management expense here. You’d be safer with a 15 year loan or you can refinance it out to 20 years if need be by simply creating your note and selling it to a note buyer. I’d ask the credit union for 20 years though and settle for 15. you make money on other deals you can always pay it off after 10 years. Just my thoughts. I think a buy
at $13,000 with a monthly rental of about 2 and a half percent is "good enough."
Bill Hicks

I have done a similar deal - Posted by Gene

Posted by Gene on March 17, 2006 at 14:44:56:

I bought a older mobile on a lot for $20K in CA. I mainly bought it because the lot alone is worth over 35k. And because I figured out a way to do it without using any of my money.

I then sold the trailer (just like a loonie deal) for $4,700
$500 down
100 per month (4 yrs).

Then I rented the lot space for $250 a month. (and its in the contract that space rent will increase every year).

The total gross income is $350.00 per month.
(a little bit more than I could rent for)

The main advantage is…
1 - the trailer was really old and trashed and was going to need a lot of work. Keeping up with repairs just wouldn’t be worth the effort to me.
2 - I got a diffrent type of person. I got an owner, not a renter. They have tremendous pride of ownership and really fixed up the place.
3 - The buyer should stay longer then a renter. Which will decrease my vacancy rates.
4 - Its a win-win situation.
5 - The trailer sold in 2 days. There was a huge demand over a MHP because its a nice private lot with lots of oaks, ect.

My expenses are… Taxes $200 a year, insurance for the lot is $170 a year and my payments on the loan (20% to private investor…secured by a diffrent property and 80% to previous owner) are $235 a month. That total up to $272 a month.

So here is where I stand…

1 - I am into a lot that is worth arond 35k with no money down and will be paid for free and clear in 10 years.

2 - The property is no hassle at all. Its as simple as a lonnie deal. I just pick up the checks.

3 - I have cash flow out the door and I with small increases in space rent I will always have positive cash flow.

4 - the tenants have actually fixed up my lot very nicely. They have added a fence and a lot of great landscaping.

Re: Does this look like a viable land/bank deal? - Posted by SteveD(TX)

Posted by SteveD(TX) on March 17, 2006 at 11:49:14:

The math looks wrong. 20% down is $2600 before the additional expenses of $1,000. What about an allowance for repairs, short-lived items, etc.? By the time you add in monthly allowances for vacancy, repairs, replacement allowance, taxes, and insurance, it looks like a skinny deal to me.

Re: Does this look like a viable land/bank deal? - Posted by Joe-Ga

Posted by Joe-Ga on March 17, 2006 at 07:23:38:

In todays market , you should be able to find some good deals in mobile home/land packages… All but about 3 or 4 of the major finance companies have either gone out of business or bankrupted.I have under contract right now a double wide and 1/2 acre from a bank repo for $10,500… awaiting them to locate the titles to the home. There is also an oversale of mobile homes in america today.So a over sale and little financing, the deals are out there right now.

Re: Does this look like a viable land/bank deal? - Posted by Dan (Michigan)

Posted by Dan (Michigan) on March 16, 2006 at 15:48:02:

I like the numbers on this deal. I think anytime you can return 100% of your investment in a L/H package in 5 years or less you should give it considerable consideration.

I purchased a L/H deal in central Michigan very similar to the one you’re considering. Paid $12.7k for the package and “Lonnied” the home for $6k on terms, and rent the land for $203/mo. I paid cash for the deal. It will take 40 months to return the total investment, the rest of the way is gravy - minus property tax, etc.

Sounds like a good deal. If you don’t take, I might. So make the deal and let us know how it goes.

Dan

Re: my thoughts… - Posted by Barry (GA)

Posted by Barry (GA) on March 16, 2006 at 12:58:46:

First off, I am not sure why you mention speaking to the seller directly. It is listed with the realtor and they are going to be looking for a commission from the sale so let them do some work. Sometimes you may need to meet with a seller but not always. Also, do not discount what a good realtor can do for you. They can be another set of eyes and ears for deals, they can help get deals thru closing and they can help persuade a seller to take your offer.

Secondly, you will not get $100 per month cash flow. You did not include vacancy, repairs, taxes, insurance, etc. You will probably wind up with little or negative cash flow when you factor these things in. In Scott/Tony’s materials they give you a way to work the deal backwards and determine what is the max you can pay for it. I would do this and then make an offer BELOW this amount. That gives you some room to work up.

One more thing, why only a 5 year note? If I take you figures and change it to a 7 year note then the payment is $167 per month, at 10 years it is only $132. With a $315 rental NOW you are probably talking monthly cash flow. Unless you just want to subsidize this with your money for a quick payoff?

Just my thoughts,
Barry

Re: Does this look like a viable land/bank deal? - Posted by Joe-WA

Posted by Joe-WA on March 16, 2006 at 12:50:14:

This does sound like a good deal. There are some things you might want to consider. Do they have property taxes in your county? Are you planning to insure the property? Are there 26 months in your year? Doesn’t your loan still take 5 years to pay off?

Here is the link: - Posted by Ken L (MI)

Posted by Ken L (MI) on March 16, 2006 at 11:12:48:

http://www.wilsonrealtyonline.com/items/669.htm

Re: Does this look like a viable land/bank deal? - Posted by SteveD(TX)

Posted by SteveD(TX) on March 18, 2006 at 09:47:48:

Maybe I am being pessimistic. But I am looking at the deal as an appraiser. The management expense would be considered; take it out if you want or consider that $30 bucks a month as payment for the hassle of having to collect rent, see to repairs, etc. A “headache” expense if you will. But add that back into your net income, and still you only come out with a break-even deal. A $13,000 investment for a return of $315 a month is good, IF that is net income. In reality, net income will be a lot less since the owner will be responsible for all of the expenses.

Re: Does this look like a viable land/bank deal? - Posted by Tony Colella

Posted by Tony Colella on March 17, 2006 at 13:07:29:

Skinny deal?

How many deals are you finding in TX that you can buy for $13,000 that will rent for $315 per month?

This is not a skinny deal by my way of thinking. Nice use of $13k where I live.

His approach to the numbers might be off but the deal has value without hesitatio for me. This is not a Lonnie deal. He is buying land and home to rent.

I would either pay all cash or finance 20 or 30 years to keep the cash flow high. Depreciation adds a bonus kicker. Rental rates tend to creep up, increasing cash flow over time. Net worth goes up as the property appreciates and yes, land/home deals appreciate despite the fact that these are mobile home deals.

Value is in the eye of the beholder but for me, this deal has value. Mabye not a home run but with some tweaking it is a nice, base hit if nothing else.

Just my 2 cents,

Tony

Re: my thoughts… - Posted by Ken L (MI)

Posted by Ken L (MI) on March 16, 2006 at 13:20:22:

That was my thinking. Trying to pay it off quicker and own it outright, then I only have about 1 month’s rent per year heading out the door. I see what you are saying about spreading it out longer though. More each month, quicker getting my investment back…I just have to have it financed for a longer period. I guess the risk of somebody not paying or something like that plays a part too.

Re: Does this look like a viable land/bank deal? - Posted by Ken L (MI)

Posted by Ken L (MI) on March 16, 2006 at 13:16:38:

Property taxes: about $200 per year.
Insurance: Not sure on a price here…say $200 per year.
Years are 12 months…aha! I see that calculation mistake of mine. I can only count the gravy in my payback calculation.

Ok, refigured I see this: I will need 25 months to pay this off. Still not too bad, I don’t think I can by free and clear on a house in 2 years. So add another $400 to that and roughly speaking, I could be looking at 3 years until I own this property outright.

Not a bad deal as a long term investment methinks. I am starting to understand a bit. Of course, I could get more for rent possibly too, speeding up my payback timeline.

Re: Does this look like a viable land/bank deal? - Posted by goober

Posted by goober on March 18, 2006 at 10:21:37:

Are u kidding, you get a home and land that gets you 315 a month which means in 3 and a half years it is all gravy . You cannot buy a good used car for 13 thousand. I would take deals like this all the time.

Re: Does this look like a viable land/bank deal? - Posted by Ken L (MI)

Posted by Ken L (MI) on March 17, 2006 at 23:32:48:

I think I will look into financing it out a bit further to cover various unforeseen things such as repair and vacancy. I am thinking of possibly renting it for a year and then looking at selling it. Not sure which way I want to go on that yet as I don’t even own the property yet.

Thanks all for the input. I am going to certainly investigate this a bit more this weekend and possibly stop down at the credit union next week.

Re: Does this look like a viable land/bank deal? - Posted by SteveD(TX)

Posted by SteveD(TX) on March 17, 2006 at 17:27:59:

“How many deals are you finding in TX that you can buy for $13,000 that will rent for $315 per month?”

I think I can do even better than that.
Besides my own land I am getting ready to develop into MH lots, I am looking at another deal with a partner where my basis will be about $15,800 per developed lot with a used SW MH, that should bring about $500 per month each for 20 units if we rent them out. Here is how it breaks down:

22 acres of land at asking price of $55,000
Net developed acreage is about 20.5 acres after building road; this will be subdivided into 20 - 1+ acre lots. Costs:
Road - $3500
Wells and Septics - $120,000
Clearing and leveling - $3,500
Building gravel drive/roadway = $3,000
Elec. Hookups - $7,000
SWMH anticipated cost each $6,000 or $120,000 (incl. moving, setup, and repairs)
Misc. Costs - surveys, etc. $4,000

Total budget is $316,000 or $15,800 per unit. Market rent is about $450.00 per month for a decent SW in a park; I’m figuring $500 one on a wooded acre of land. But due to expenses being we will probably do Lonnie deals on the MH’s and just rent the lots at about $250/mo. per lot.

Re: Does this look like a viable land/bank deal? - Posted by SteveD(TX)

Posted by SteveD(TX) on March 17, 2006 at 14:33:52:

Assuming my math is correct and he has to put $2600 down (20%) plus $1,000 for a total of $3600 at 9% for 5 years, and a payment of $216 per month, I came up with this pro-forma.

Gross Pot. Income (12x$315)= $3780
Less 5% vacancy/collection 189
Taxes 200
Insurance 200
Maintenance 300
Reserves for replacement 300
Management - 10% 359
Total Expenses $1548

Net Operating Income $2043 or $170/mo

Debt service of $216 per month means his negative cash flow is $46 per month, assuming he uses outside management. This is a cap rate of 15.7%, which is not bad, but not great for a used MH. Unless the land really appreciates in value, I couldn’t see doing it, even if my expense estimates are off a little.

Re: my thoughts… - Posted by Michael(KCMO)

Posted by Michael(KCMO) on March 18, 2006 at 06:30:21:

I understand your desire to pay it off as quickly as possible. Still, what if something happens one month andy you’re stuck trying to make the higher payment. Why not stretch the financing out as far as they absolutely will (30 years?) to keep your payment as low as absolutely possible. Then, to pay it off as quickly as possible, just pay extra on the months you can. Then, if an unexpected problem/expense comes up one month, your not scrambling to come up w/ the higher payment amount.

Regards,
Michael(KCMO)

Re: Does this look like a viable land/bank deal? - Posted by Joe-WA

Posted by Joe-WA on March 16, 2006 at 13:38:49:

I still think it is a good deal. I just hope what happened to me doesn’t happen to you. A few months after I bought a property a new building inspector came to town. He wants a new foundation, new floor, new roof, new insulation, wiring and plumbing redone, repairs to decks, and move outbuildings. Sh!+.