MH Park - what am I missing? [long] - Posted by Rich[GA/FL]


#1

Posted by Rich[GA/FL] on October 16, 1998 at 19:36:02:

Wow! Thanks again JohnBoy. You’ve given me some new ideas to ponder.

The park is on the city sewer/water system. I never had considered the park may be responsible for the lines inside the park. That’s a question I’ll have to ask the city.

Since the park doesn’t meet current codes for MH parks, any improvements will have to include bringing the entire park up to current standards. That’s from the city folks. That may include combining lots to allow room for doublewides but will be another question to ask.

Deferred maintenance is another good question to ask the owner. I had considered asking about problems he was aware of (implying I suppose things he was simply ignoring) but asking about deferred maintenance may be a more subtle way asking the same thing without implying blame. Good comment.

The owner said he spent about $16k last year on road re-surfacing. I’ll see tomorrow just how much of the road was done.

No clubhouse, pool or park; at least the owner didn’t mention it. Not sure about laundry; again, not mentioned. He did say there was an old 20x20 (or so) building used for storage. I suppose this could be cleaned up and used for laundry or other things. I had thought about that earlier.

HOMEWORK? I thought I could just go out and buy and it would be perfect from the start! {grin} Yea, I’ve got a lot to do I know. It’s gonna be fun and if it turns out I don’t get this park, I’ll have learned a lot in the process so I’ll be ready for the next one.

I can’t thank you enough for what you’ve offered so far. If I can be of any help to you, please give a holler!

– Rich –


#2

MH Park - what am I missing? [long] - Posted by Rich[GA/FL]

Posted by Rich[GA/FL] on October 15, 1998 at 20:43:52:

Here’s the story. Called ad in newspaper about a week ago about a MH park for sale for $450k. This is what I learned:

Park size: just under 10 acres
#lots: 100+/- a couple
#MHs owned by park: 25
#spaces filled by tenant owned MHs: 35

Lot rent is $125

Owner said last year’s gross income was $132k (still need to check this through his schedule Es)or $11k/mo.

Expenses:

Water/sewer/garbage: $2k/mo
Prop Taxes: about $300/mo ($3200 for 1997)
MH taxes: about $250/mo
Maint Exp: unknown so far, est high(?) at 2k/mo (still need to check sched E)
Liab Insurance: ?? $150/mo?

That leaves 132,000-56400=75600 NOI (lets subtract another $1k for vacancy) for $74600.

If he’s selling for 450k, this makes the CAP rate at .17?? This is pretty good isn’t it?

There is a loan on the park now. I’ve been trying to get in touch with the banker to check it out but he hasn’t returned my calls yet, or I’ve just missed them. The owner believes he has about $250k left on a short term (?) 10% loan. He purchased the park in 1988 for $412k.

Again, I need to start discussing this with the local banks but IF I can get a 60% loan with the same bank that currently holds the note (they know the potential of the park) at $270k/10%/240mo, pay off the existing $250k loan, give the seller $10k, have seller carry back a $190k note at 8% for 180 months (he’s 70 years young right now) the total mortgage would be $2605+$1815=$4420 plus I’d get $10k back at closing (less closing costs). I’d be overmortgaging the park by $10k but I think the cash flow would support it.

$11,000 gross income
4,700 expenses
4,420 mortgage

$1,880 clear income

It could also be $3,880 if there are no expenses that month, or it could be less than $1,880 if expenses are higher.

I’m sure there are other financing options available I need to explore. Like doing a 1031 exchange in Jan '99 when I sell an existing rental; that would add an additional $20k to cash down.

Other park particulars:

60 out of 100 lots rented. Park is an older one and doesn’t meet current space requirements but will remain grandfathered. Putting more trailers in the park may result in too much crowding that could result in friction between the residents. The park is mostly black in a mostly black neighborhood though the owner has said he’s had very few problems; mostly loud music, abuse of the free water, etc. On my list of things to do is to check with the local police.

I’m just getting started with this and only have my lunch hour to do the legwork that needs to be done. I have a lot to do. So, what am I missing?? What else should I add to my to do list?

No money down, cash back at closing for a nearly $2,000/mo income. Too good to be true?


#3

Re: MH Park - what am I missing? [long] - Posted by saban

Posted by saban on October 16, 1998 at 09:28:17:

you’re missing your income analysis…The total revenus is only 60*125=7500 since only 60 lots are rented.Thus it’s possible that you may have a negative cash flow on this one…

–Saban


#4

Re: MH Park - what am I missing? [long] - Posted by Rich[GL/FL]

Posted by Rich[GL/FL] on October 16, 1998 at 11:12:31:

Ooops, gues I didn’t make that clear.

Out of 60 spaces, 35 are MH owner/occupied bringing in $125/mo.

The other 25 spaces have MHs owned and rented by the park. The lot rent is part of the monthly MH rental. These MHs are rented from between $250 to about $400 each. Total income, like I mentioned in the original post, is $11,000 monthly according to what the owner said is shown on his schedule E.


#5

Re: MH Park - what am I missing? [long] - Posted by JohnBoy

Posted by JohnBoy on October 16, 1998 at 13:55:17:

You should separate the mobile homes that are owned and being rented from the park. Only count the lot rents. Base your purchase price on the income of the lot rents first. Then figure out what the value of the mobile homes are actually worth if you were to pay cash for them a la Lonnie deal.

This is how I would figure this deal.

60 spaces rented at $125 per month = $7500 x 12 months = $90,000.00 gross.

$90k gross x minimum 45% expenses = $40,500k

$90k - $45,500k expenses = $44,500k NOI

That gives you a 9.89% cap rate based on a $450k purchase. To get back to the 17% cap rate, that brings the value down to $260k based on current lot rents.

Now add in the value of the 25 mobile homes based on what you would pay cash for each one.

Let’s say the mobile homes are worth $2000 cash each? 25 x $2k = $50k

25 MH’s at $2k each = $50k plus $260k = $310k total purchase price.

You said the 25 homes owned by the park is renting between $250 - $400 each. This would have to include the lot rents of $125 each. That leaves $125 - $275 actual rental income off the mobile homes. There’s a problem here with those numbers already??

If the lot rents are $125 each, that ads up to $7500. If the total income including MH rental income is $11,000, that only leaves $3500 let over in MH rents after backing out the lot rents. $3500 divided by 25 MH’s is an average of $140 per mobile home for rental income.

You need to look at each mobile home that’s owned by the park and determine what each one is worth. Basically, how much would you pay in cash for each one if you were looking to buy these as a Lonnie deal to resell??

Just by guessing that each home would average out at $2k each, that’s only $50k towards the value of the mobile homes owned by the park. After you figure the actual lot rents and figure a 17% cap rate, that places a value of $260k on the park. Add the $260k to the $50k towards the mobile homes and the most I would pay is $310k for everything.

Your expenses seem low also. You should allow at the very minimum, 41% for expenses on a MHP.

Your estimate on insurance seems way off too. I’m looking at a 108 MHP on 5 acres. The seller’s insurance is showing $7500 plus another $1000 for workmans comp. He has a manager in the park. Will you have any employees in the park working for you? If so, you will have to pay workmans comp on them. So the insurance on the park I’m looking at is $708.33 per month which includes the workmans comp. $625 per month for just the liability.


#6

Re: MH Park - what am I missing? [long] - Posted by Rich[GA/FL]

Posted by Rich[GA/FL] on October 16, 1998 at 17:21:33:

You’ve made some very good observations JohnBoy. Thanks.

I was going to separate the MHs later, after I had a chance to actually go out and see them. (I’ve been working late at my current job and haven’t been able to get off until near dark.) I’ll get a chance to see them this weekend. As a first cut on the analysis, I simply used the current gross income to initially figure the CAP rate.

This is my first time really analyzing a MH park in detail. You suggested a figure of 45% for expenses. How is this determined? It may very well be valid for this park too once I gather the “rest of the story” when I finally get to see the owner’s Sched E. If I knew what your 45% was based on, I’d know better what to look for.

Another quick way to base an estimate on is how much would it take to build a park like this from scratch? I think I remember it being mentioned here before by someone, plus I’ve heard it too from the park owner where I currently live that it takes between $4k to $7k per MH pad to build a new park. Based on the lower figure, with 100 spaces that would make this park worth $400k. However because the spaces are so close together possibly making it difficult to, in reality, use each one, 60 spaces may be the best working number. At that rate, the park would be worth about $240k. Now this number is very close to the one you suggested with a 45% expense and 17% cap rate. Maybe we’re getting close to the actual value here!

The low MH rents, after factoring out the lot rent, I believe is very indicative of the “low rent” area of the town the park is located in, and the type of clientele who live there. It may be possible to turn this around but would probably be difficult based on the area.

I plan on visiting the park this weekend and maybe asking some of the residents there what they like about the park and what they would do if they could change anything. I won’t know until the owner returns from his vacation which MHs he actually owns so won’t be able to do the “Lonnie deal” analysis until then.

Thanks for your feedback. You’ve given me more to think about if nothing else than from a different angle. My original analysis was simply based on current cash flow with estimated expenses loosely based on what the owner mentioned. I would not have any employees work for me but would either do any maintenance work myself or hire it done. The insurance figure was literally a “stab in the dark”. I hope to get more accurate information later next week. At least initially, the numbers appear “promising.”

– Rich –


#7

Re: MH Park - what am I missing? [long] - Posted by JohnBoy

Posted by JohnBoy on October 16, 1998 at 18:59:31:

From my understanding you should allow at the minimum 41% for expenses in any mobile home park and up to 50% depending on the park. I used a middle figure of 45% to be more on the safe side. Always better safe than sorry. For an older park with a lot of rentals I would ad more for expenses, maybe even 50% depending on the condition of the park and homes owned by the park. If these are older homes in bad shape you may have to eventually have some of them removed. Unless you can sell them off to someone to haul away or possible give them away if they haul them off, its going to cost you to have them hauled away. You need to figure x amount each month to set aside to cover that expense.

When you look over the expenses the seller is showing he may not be accounting for deferred maintenance. What kind of shape are the roads in? You may have to have pot holes patched or have the streets black topped. What about the sewers? Are they on city sewers or septic? Septic is going to cost more. The park I’m looking at is on city sewers, but the owner is responsible for the sewers in the park. He just spent $65k last year replacing them! What about lighting in the park? Do you get much snow there at all? You could have snow removal costs. Vacancy factors? You need to account for the vacancies you will have. Court costs if you have to evict tenants. Lots of maintenance on the rental homes. You may need to replace a roof or some flooring after tenants move out, etc. Then all your regular costs involved like Insurance, water, maintenance, electric, supplies, taxes, scavenger, permits and license, etc.

The more rentals the park has, the less value it has.

What about the park in general? How many double wides can you put in? Would it take away extra spaces just to add them into the park? If you were to allow 30% of the park for double wides, how many single wide spaces would you have left? If you have to up date the park to allow double wides in, how much will that cost you? The less room for double wides, the less value the park has.

How much space do the tenants have around them? Do they have a yard or are they crammed in on top of each other to squeeze in more MH’s? I’ve read that you shouldn’t have more than 5 MH’s per acre. More than that takes away value from the park.

What about a club house, laundry facilities, pool, park, etc. The less of these things the park has to offer the less value the park has. A 5 star park would offer all of these things. I read that you could buy a nice 5 star park at an 11% cap rate. This should give you an idea of how much higher your cap rate should be to buy this park at.

You have a lot of homework ahead of you on this. The park I’m looking at is my first park also. These are the things I’ve been told by different park owners to evaluate in order to place a fair value on the park. The older the homes, the more rentals in the park, the more work and money your going to have to put into it, the higher the cap rate should be on the purchase price and the more your expenses could run.