Posted by Chuck on July 12, 2002 at 12:56:44:
This link is worth looking at…
what to buy mh park for - Posted by Skyler
Posted by Skyler on July 12, 2002 at 08:18:33:
I was wondering when buying a mhp is there a certain formula for calculating what you should pay for it. From the people that I’ve talked to in texas they say you take the base lot rent minus the current percent of expense times it by one year then times it by your cap rate gives you the price per spot you should pay. which would look like this.
$150 base rent - $50 which is 25% expences = $100
$100 * 12 months = $1200
$1200 * 7 cap = $8400
$8400 * spaces in park 100 in this case = $840,000
Is this a standard for buying a mhp or is there a better one to determine what to pay for a mhp? If this is a standard what I cannot understand is how does vacancy rate, repairs, and rental homes factor into this calculation? If the park is currently in a negative cash flow how does that factor in? And is a 7 cap rate standard in texas?
thank you for any help.
Re: what to buy mh park for - Posted by ray@lcorn
Posted by ray@lcorn on July 14, 2002 at 19:26:10:
Skyler,
There are no standard cap rates. A deal with a 7 cap is going to be overpriced unless it is a cadillac property and you don’t care about present returns, only future appreciation.
The trick is to put the deal together so that the seller can get what he needs, you can get the return you need, and the lender (if there is one) can get the criteria met he needs.
There are a number of ways to go about doing that. cap rate is but one tool, and used the way 99% of the world uses it it is worthless. The cap rate figured on projected income for one year is nothing more than a relfectio oif what the deal would return under exactly those circumstances if it were bought for all cash. Unfortunately it is very rare that a property will do exactly what it is projected to do, that any two owners will run a property the same way, and that the past performance matches the future projection without some work on the part of the buyer. The reason brokers pitch properties that way is because you have to start somewhere, and they get paid on sales price. So the higher the better, and the lower the cap the higher the price. Always follow the money.
The proper way to look at a deal is to figure out exactly what the property is currently generating in income and what expenses are necessary. That means looking at the CURRENT rent roll, not a projection adjusted for some arbitrary vacancy allowance. The look at the actual expenses, not some figure estimated on the national average expense for parks. Then determine how you will run the property and adjust out any expense such as the owner’s brother’s lawn service that was used in the past. Once you have the true cash flow, then deduct the terms of whatever financing you plan to use. The net income after debt service is your cash flow, and determines your return on your investment and work. If that is acceptable, then make the deal. No other fancy formulas are needed unless you get off on figuring things like that. I do, and always make the calculations, but the point here is that you can make a lot of money in this business without knowing the first thing about a cap rate or internal rate of return.
By the way, if you were to use a cap rate as you show in your example, there is an error in your math. The income after expenses (NOI) should be divided by the cap rate, not multiplied. Makes a big difference. If you’d really like to know more about how to use a cap rate to value deals, see this post… http://www.creonline.com/commercial-real-estate/wwwboard5/messages/4435.html
You might also want to read my article on performing commercial property due diligence. The direct link is http://creonline.com/art-148.html
ray
caps are for bankers INMHO - Posted by ScottS(NC)
Posted by ScottS(NC) on July 12, 2002 at 08:33:14:
Skyler,
Your paying for an income stream. Vacancy rate around 10% here, repairs/maintenance and ALL other expenses should be taken off the gross income before doing any type of formula for value. Cap rates can be very misleading Here a 11% cap is about average for a average park. There are SO many variable to estimating the value of a park 100 posts could not do you justice. If you are planning on buying an asset of this magnitude first invest in you education. Ernest Tew has a couple courses on park’s and Ray Alcorn on the commercial site also has a good course available on parks. If you wont spend $1000 on education the easy way, I promise you will spend much more for the school of Hard knocks the choice is yours Take Care ScottS(NC)
Caps are for BROKERS and BANKERS (nt) - Posted by Chuck
Posted by Chuck on July 12, 2002 at 10:31:03:
nt