Posted by Mike Cheatwood on October 10, 2005 at 12:22:24:
Don,
Thanks for the additional information.
Lets first break this into “improvements to bottom line” and “capital improvements/deferred maintenance”.
Separating a master water meter into separate unit water meters (as well as getting individual trash cans for each lot/tenant) will make the most difference to your improved bottom line/positive cash flow and in the shortest time. While my MHP was already separated and is on city W/S/T, I have separated water meters on 10+ Apt Bldgs and have found the payback to be 1-2 years. I understand that several “posters” to this forum use the company “National Water and Power” as the mechanism to achieve this result (although I have not used them personally). Since your tenants are on M-2-M rental agreements you would be able to buy/master lease the MHP, immediately give them a notice that says "new owner but no rent raise planned - however we do plan to make some improvements to the property (clean it up, etc…) and plan to repair the water/sewer lines. A follow-up letter/notice can then be sent out/delivered that says the “repairs” will include going to separate meters and that once completed each tenant will have 30-60 days, etc… to go to the city water office and establish their individual account. You can also stand ready to receive phone calls once this is done when they get their first water bill and that running toilet (that they are now paying for in your rental MH) finally catches their attention…
Curb appeal issues - You will not be able to attract higher paying tenants until the MHP looks better (neat, clean and tidy). To get to this point to have to establish standards and get this word out to the residents. I did this by developing a “Manufactured Home Community Rules & Guidelines” hand-book that was distributed to each MH and then reinforced with a public meeting (with free pizza) at the nearby High School. Once the “word was out” and proper notice given - I started towing “junker” cars (29 in all) by working out a plan with a local towing company. I also held a couple of high visibility evictions of the worse offenders (funny how the ones that do not pay you on time also seem to accumulate the most interesting “yard art”). On the lower level problems, we talked with these tenants, gave them reminder notices to repair skirting, cut grass, etc… and in a few cases cut their grass and billed them for the service - The point is the word gets out if you establish standards and evenly enforce them. The people that do not like it and fight you on the changes are the ones you generally do not want anyway (this becomes “thick skin” time). My MHP was about 80% owner-occupant and is currently down to 9 renters (I grandfathered the existing “sandwich landlords”/renters assuming they always paid on time, maintained their lots/homes and caused no problems with neighbors/Police).
Capital improvements (roads, sewer lines, etc…) - These are items that must be accounted for as they must be repaired/replaced over time but that generally do not give you any “payback” in increased revenue (i.e., you cannot usually raise the rent due to paving the roads). Your cash flow must also allow for setting aside a maintenance reserve to fund these projects over time.
Your main concern questions -
1 hour away from MHP - This is a question that concerns your investment plan and how directly involved you will be in each aspect of the MHP turnaround as well as your current job situation flexibility. I am 5.5 hours away but my MHP is large enough to afford a manager and I have been job free for 5+ years (RE investing).
Better customers - It seems like you already know the answer - clean it up/improve the curb appeal, get rid of bad tenants and carefully screen/select better tenants.
Value - Definitely will improve if you increase your NOI by separating water meters/trash cans to the tenants responsibility. And a “neat, clean and tidy” MH Community (might want to consider changing the name of the Park to ---- Manufactured Home Community (instead of “Trailer City”) will help attract better residents…
Every since the Boot Camp last month I’ve been searching for MHPs for sale. I have crunched many a number and yet to have found one that can support my fee (pay yourself first) and debt service. Today I drove an hour away to look at a small mom & pop park. It has 29 spaces with 4 empty lots. 19 POH’s (mostly 2/1, 1960-1980) 3 of which are vacant. It also has 4 rent houses included in the sale all occupied. They have owned the park for 25 years and are in their late 70’s. It is in pretty bad condition, trash everywhere, trailers look like they need to be hauled off (like Tony’s Park)and the houses are run down. The tenants are mostly single mexican men and in the houses are long time tenants. Rent is from month to month. Big turnaround project.
The mom & pop are not good record keepers and most of the tenants are cash payers. Mom said she collects the rent on a Friday closest to the 1st because thats when they get paid. She does this in person! They are asking $450K and they would be willing to carry a note with $100K down. There best cash price would be $400K. Now here are the numbers:
16 rented POH’s x 294 avg = $4704 x 12 = $56,448
5 rented lots @ 125 = 625 x 12 = 7,500
4 rent houses @ 430 = 1720 x 12 = 20,640
Current collected rents $84,588
Est. for expenses $25,376
NOI $59,211
My Fee $20,000
Cash available for Debt Service $39,211
/12 = $3,267 mo
$389,493 @ 8% for 240 mo
It cash flows and has alot of potential when alot of work is put back into it. I am looking for ideas to increase cash flow and tenant mix. When a park has deferred maintenance and repairs do you deduct that from the sale price or ask for 6 months no payments or a smaller down, etc? Let me know your thoughts.
Re: Mom & Pop MHP Purchase - Posted by Mike Cheatwood
Posted by Mike Cheatwood on October 08, 2005 at 17:00:54:
Don,
It was good meeting you at the “bootcamp” Tony/Scott put on last month in Asheville.
My thoughts (in no particular order) are as follows:
I would first want to make sure that the sellers were “motivated” and if not I would quickly make them an offer (via LOI) and see what they say. If the response is not what you want then move on - Life is just too short to deal with unmotivated sellers.
It looks like your “buy” numbers come out to approx. $390,000 in which the sale/deal could be accomplished via owner financing (as long as they will carry most of the deal) or via a master lease with option to purchase (option strike price of $390,000 minus any DP). However, I would caution to not use “estimated numbers” for either expenses or income as these should be verified via the income stream leases/rental agreements and copies of the actual utility bills + management + repairs/maintenance reserve + your “fee”. I love the answer of “poor record keeping” - it seems that sellers/their agents love to use this answer along with “trust me that the MHP is worth what I say it is along with the implicit trust me that you will get paid on time in the amounts I have represented to you without verifiable documents”.
I would also caution to not put down a large down payment (i.e., buying your cash flow and lowering your yield) as you will need cash to turn around the MHP. However, I would also ask you what is the local market like? In order words, is there a nearterm “upside” or is this just what it is - a trailer park (warts and all) that with some effort will provide you with cash flow?
Lastly, can you provide some more information on the MHP set-up/“bones” as concerns the utiltiy arrangements, age of roads, septic, wells,water lines, inside/outside city limits-city/county water/sewer, etc… as well as who pays what?
The park is located in the city limits just off one of the main roads through the city. It has city water/sewer/trash and this is paid for by the owner. The street inside the park is asphalt but it needs to be redone with the pot holes filled and maybe a new top coat. It is very simular to Tony’s park that we had to walk up the hill to view. Mostly older units and most of the tenants are on a month to month aggreement. Owner states that he has replaced some of the sewer lines. If I clean it up and haul off all the trash it would make a marked improvement. I see that I would have to swap out alot of the older homes for newer models and increase the rent or Lonnie them. My main concern is 1) One hour drive to park, 2) How I would get new tennants/buyers 3) If the park will appreciate in value with the investment of time/money.
Thanks for your input it is greatly appreciated.