Posted by New.Investor on October 14, 2006 at 24:28:12:
Is this a test or are you trying to sell me on this property?
Need Direction - Posted by New.Investor
Posted by New.Investor on October 13, 2006 at 12:03:49:
I am looking to make my first invesment and welcome some thoughts on the following.
I want to purchase a mobile home park between $300k-$600k that is already being managed by an experienced management company for additional cash flow. This would be an out of state transaction for starters. I want to put between 20-25% equity into the transaction, which could be a combination of (seller note + cash). That being said, I would not be putting in all the cash. I want to raise the necessary capital ($120,000) in a stock offer to friends and family and form an LLC. I would be the General Partner providing 15-20% of the $120K and provide any personal guarantees if necessary. My questions to all is:
1.) Do you feel this is the right direction or is there a better way?
2.) I am a little nervous about an out of state purchase, but my options are very limited in my state. Any thoughts or experience in this area?
3.) Would this be a realistic scenario for financing options? Any surprises or things to look for as it relates to financing here?
I welcome all thoughts.
Re: Need Direction - Posted by JohnP
Posted by JohnP on October 16, 2006 at 06:45:38:
New Investor,
Yep, south Florida cap rates are crazy. The financing scenario you are speaking about is possible, but do you want that many partners telling you what to do? New Investor, what is the price of the park you are looking at 300K or 600K, or is a number you are looking to purchase a MH park for? Tony’s suggestion of a fractionalized 2nd mortgage would be a way to go. Another scenario could be a loan with a quick payoff, if possible, plus a minor share, say like 1% in the LLP to sweaten the deal. My sugestion to you is get in Contact with Karl Weiner, he frequents this board. He can help you structure the financing for a park deal. I hope this helps.
JohnP
south Florida
www.provestors.com
Way Too Freaking Complicated - Posted by PeteH(NYS)
Posted by PeteH(NYS) on October 14, 2006 at 21:03:13:
Here’s what jumps out at me: “I’m looking to make my first investment” and “I want.” Between those two statements, I believe your eagerness outweighs your knowledge. Add the complicated capitalization structure you’re proposing, and my answer is No, this is decidedly Not the right direction for you.
By which I don’t mean to rain on your parade; more like I see you walking into a dark alley with blinders on, and I want to yell “Hey! Look out for those five guys with knives!”
In one of your other responses you said you just want to get out of your desk job, and trust me: I feel your pain. But don’t let that motivation buy you an even bigger world of hurt. What you need to be doing right now is gathering information.
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If the only deals that make sense for your financial situation are out of state, and your biggest motivation to make this investment is to dump the job, why not move to the park to oversee the management? Two HUGE advantages: the money you would otherwise have paid a manager will now stay in your pocket, and you will get first-hand experience with the issues that crop up with this kind of property. That will go a long way toward saving you from being overcharged by a manager or serviceperson for work because you don’t understand it. Think of the mechanically inept fellow who takes his car to the garage, where the mechanic tells him “oh, your entire flapdoodle needs replacing; that’ll be $2200, please.”
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You’re asking us for thoughts on a capitalization structure you have created without any feedback from a real-world seller about whether that offer would work for them. This information is best gotten by talking to real-world sellers. Two options here: one, start floating offers on listed parks; two, join an investor club and start asking park owners, whether or not their properties are listed, about what kinds of offers they might be willing to entertain. “So Mr. Park Owner, I know seller financing is common on these types of smaller properties – is that something you would entertain when you are ready to sell?” The key being, you’re not asking him to commit to financing you, you are approaching him as an interested student of the field he has experience in.
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If I read correctly, you’ve got about $25K to invest (20% of the LLP equity). Rather than getting yourself into a passive management situation relying on outside managers in which you are beholden to your limited partner investors, PLEASE consider using that $25K to do 8-10 small Lonnie deals more locally first. Advantage no. 1 is, you would be putting yourself in a position to learn about how these properties work without having to answer to any other partners in case something goes wrong. Advantage no. 2 is, those small deals could turn your $25K into a much bigger grubstake ($75K? $100K?), which would then put you in a position to invest in a park without all the complicated LLP folderol. Frankly, for a smaller park – and under 75 spaces (maybe under 40) is what you’ll be able to afford for $600K – you’re not going to want to split the profit, which will be meager some months, among a bunch of investors clamoring for the healthy return you promised them.
So I’ll get off the soapbox now. Good luck gathering information; just remember that no seller is going to paint you a picture that’s anything other than rosy.
Re: Need Direction - Posted by jb (IN)
Posted by jb (IN) on October 13, 2006 at 20:56:25:
Having bought a park out of state a year or so ago I might be able to offer a few nuggets of wisdom I didn’t have 15 months ago when I “had to have” a MH park.
1 - be very careful in how you structure your business entity(s). Not sure about your LLC, general partner, etc. Sounds like you are mixing up an LLP and LLC, plus thowing in stock on top of it??? You’ll have enough to worry about without getting too cosmic in your structure. Tony has some good suggestions about using borrowed money. We did just that for some of our later improvement needs when we needed cash to replace some water lines in the park. Which leads me to #2.
2 - Don’t let being out of state impact your ability to do quality Due Diligence on a park. I flew in twice for 4 days of on site due diligence and still missed stuff we are paying for now. Biggest being 200K in water line replacement…
3 - Your management person/team will make or break you when you are not local to your park. We got lucky with our manager. She, for lack of better term, kicks a$$ and has saved us many times by stopping small issues that could have become big ones. I’d consider the management team very, very carefully because if you don’t and you have to structure your financing using your friends and family’s money it could get ugly if things are mismanaged and you have explain how your ‘great investment’ has caused them to lose their funds.
I know it can work because even with all of our mistakes we would buy our park again but we could have done it better…
John
Re: Need Direction - Posted by Tony Colella
Posted by Tony Colella on October 13, 2006 at 19:31:02:
A couple of concerns jump out right away here. Out of state, small park management is not a walk in the park, even with management in place. Not all manager’s take to new ownership well, especially the kind that is not seen very often.
Next I would caution you about selling stock. I do not know these laws but would caution you to be certain you do not violate any SEC regulations.
I am also concerned by your mention of forming an LLC to sell stock and you remain the Gereral Partner. You are combining legal terms in a way that leads me to believe that this idea is new to you and that you may want to do a bit more research to make certain no errors are made or accusations later asserted. Just food for thought, not a comment or attack against you or your character (I do not know you).
For me personally I want to control the deals, make the decisions etc. without 3rd party interference or unsolicited suggestions. I would prefer to borrow the money, secure it against the propert (in this case it sounds like it might have to be a second mortgage) and thus provide the “family or friend invstors” with a known, recorded security that details exactly what is owed to them as the “lender” and that nothing further exists.
Managing a multi-member LLC for this one deal seems like an extreme pain in the neck to me but that’s just me. Maybe flipping it would lead to an exit time frame that would keep me sane but because I buy and hold I can only guess here.
Tony
Re: Need Direction - Posted by Robert
Posted by Robert on October 13, 2006 at 16:17:24:
I attended a real estate investors meeting last night. A man stood up and said he has a mobile home park for sale for 500K 2.5 acres, all good payors, waiting list, and nets 5200 per month of course it is paid for. He says his expenses are 1400 per month. It is in North Carolina very near big city and commercially zoned. What do you think?
Re: Need Direction - Posted by New.Investor
Posted by New.Investor on October 16, 2006 at 12:31:39:
JohnP,
These partners would be mainly family and close friends that really know nothing of investment real estate and would not be promosing any other than a best case, worst case, and most likely scenario on their investment. My purchase price range on the ideal park is $300-600K. I also like Tony’s suggestion on the 2nd mortgage, which simplifies things. Thanks for your friendly advice. It helps to see someone else from Florida that understands what I am talking about.
Thanks again,
New
Re: Way Too Freaking Complicated - Posted by New.Investor
Posted by New.Investor on October 15, 2006 at 23:40:43:
Pete, thanks for your comments. Here are some of my own.
1.) a) It is not that there are no deals in my state (FL); however, the deal size I am speaking of does not have the ROI that is attractive to me. Cap-rates on the worst properties down here are South of 10%. b) I have a wife and children, so dumping my job and moving to a mhp is unrealistic. The divorce would cost me more that the $ saved doing my own management. In addition, I’m sure my management savings would not provide the health care coverages and other benefits that I currently enjoy.
2.) Why would the seller need to know where I obtained my down payment from (I am assuming no owner held 2nd here)? So everyone that buys real estate comes to the buying table with their own cash in hand and all buyers are aware of that? This structure is more common than you are obviously aware of; however, I will admit I have not seen it used on a mhp or on this small of a scale.
3.) I have looked at many smaller deals; however, there are no small deals 8-10 lots that could be purchased for this price local to me. Even an empty park in FL would cost more than this and I am looking to use more tradition sources of financing, which most institutions I have looked into have min. loan amounts starting at $100K. It is not that I don’t have more $, but this is all I want to commit to this project right now.
My main motivation is to start off my supplementing my income and I do respect everyones input; However, I could do without the cheesy metaphors (I see you walking into a dark alley with blinders on).
Re: Need Direction - Posted by New.Investor
Posted by New.Investor on October 14, 2006 at 24:12:17:
Your are correct, I meant LLP. I agree with your comments on due diligence. The management company I’m looking at has been in the business +/- 20 years and are also brokers. Ideally I would like to pick up a park that they aleady manage as long as the price is fair. I’m glad to see your final comment that you would have done it again though. I find some comfort in that.
Thanks
Re: Need Direction - Posted by New.Investor
Posted by New.Investor on October 14, 2006 at 24:26:02:
Tony, I meant LLP not LLC. Sorry for the confusion, just typed a little too fast. I will do more homework on the SEC regs, but I thought that on something privately held on this small of a scale was alright. This idea is not new to me, in fact this is how most large deals are structured in South Florida. Of course, they don’t usually involve mh parks rather high-rise condos. I like your idea of borrowing the money and securing it as a 2nd though. This would actually make things easier for me. I am looking to launch a buy and hold strategy/career; however, I don’t want to go “all in” if you will on my first deal. I am actually waiting on your book, so maybe that will provide more help. I will not make a move till I have read it from cover to cover. Thanks for suggestions and any additional advice is welcome. I have just pushed paper for way to long and I am looking to move to the other side of the desk some day soon. Much like yourself.
Re: Need Direction - Posted by Gino Ray
Posted by Gino Ray on October 17, 2006 at 16:30:25:
Acording to Appraisal Institute Handbook, that is an OK buy. However the net income must be absolutely varified with a min of 3 years IRS filings. Make sure management and maintence overhead are included and realistic.
True total overhead should run about 60% of gross sales.
Another check is Gross Income Muliplier = sale price/gross income. Range should be 3 to 6 times for a fee simple RV park that owns no MHs. Park owned MHs distorts purchase price, increases maintaince and decreases Cap Rate.
More desirable parks with good track records and low rents bring the high end range.
Gino Ray