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Finding and Evaluating Mobile Home Park Investments
By Dave Reynolds, MHPS.com
Of all the questions I receive from investors
that are looking to purchase a mobile home park there are two questions that are
asked most often:
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How do I find a mobile home park deal that
makes sense?
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How do I place a value on that mobile home
park?
These are important questions and there are
several ways to find mobile home park investments and even more ways that one
can approach evaluation of that investment. When I first started in the
business about 12 years ago, I spent a lot of money driving across the country
looking at listings I found in major newspapers and on the internet. While this
allowed me to see a lot of potential deals, it was a big waste of time and
money. Many times I would get in my car and drive 1,000 miles only to find that
the park I was looking at was a complete dump, had unrealistic profit and loss
projections, or was already under contract by another investor.
I soon realized that it was worthwhile to do a
more thorough analysis before visiting the property. If it passed the initial
analysis, then I would try to get an accepted offer and request detailed
financials from the seller. If it still looked good I would schedule a trip to
visit the park. Before implementing this strategy, I was visiting about ten
parks for every one I purchased. Now, that ratio is more like two-to-one and I
am not on the road all the time.
If the mobile home park looks good on paper,
get it under contract before spending $1,000.00 in travel and two days to visit
it!
In order to find a mobile home park that makes
sense financially the most important part is to be able to quickly identify
and separate the good deals from the bad. The only way to acquire this
skill is to educate yourself on this business (through books and other
resources) and start looking at as many mobile home park offerings as you can.
With the availability of information on the internet you can accomplish this
task quickly. Go to MHPS.com and other internet websites such as Loopnet.com
where you can view over a thousand mobile home parks for sale.
Whether you are a new or seasoned investor in
this asset class I would suggest getting the information on as many properties
as you can and then put them side-by-side and analyze each one. You will get an
idea of the capitalization rates, expense ratios, occupancy levels, and rental
rates for different markets. You will find prices all over the place but if you
invest the time and effort in evaluating deals, you will start to develop an
idea of what to look for in terms of price-per-space, how park-owned homes
affect values and other important factors.
Invest the time in evaluating as many deals as
possible and invest the money on properly educating yourself on the
business so that you can separate the good deals from the bad and concentrate on
those with promise!
So where is the best place to find a mobile home
park to buy? The best answer to this question is that you should try as many
logical approaches as possible. As mentioned above, I would suggest you start
by checking out the websites that have thousands of mobile home parks for sale
like MHPS.com and other commercial real estate sites such as Loopnet.com. There
are new parks listed daily on these sites and the best way to utilize these
services is to sign up for notification of new properties for sale. This way
you have a better chance of jumping on the good deals before they are available
to the general public.
I have purchased over 50 mobile home parks over
the past 12 years and about 15 of those purchases came as a direct result of
listings on the internet.
The next strategy that I would suggest is to
start a direct mail campaign to mobile home parks that are in the markets and
states that you are interested in. This has accounted for about 20 of my 50
mobile home park purchases. If you obtain a good list of addresses, you can
target mobile home parks with a certain number of spaces in select markets
expressing your interest in purchasing a mobile home park.
I have experimented with postcards, letters, and
even actual purchase contracts and have found that the response is about the
same for each of these. The key has not been in the type of piece but in the
frequency of mailing. I have received many calls from mobile home park owners
saying that they have received our numerous mailings over the years and are
giving us first shot at the park since they know we are a legitimate company. I
actually had one seller pull out a file included over 25 mailings from us. In
another instance I mailed out 1,000 letters to two states expressing our
interest in buying mobile home parks. I followed this up about 2 weeks later
with the same mailing piece (in error) and found that my response rate was about
100% higher from the second mailing. So the key with direct mail is in getting
a good list to mail to and frequency.
There are several other options that I have used
with varying degrees of success. I have listed some of these below.
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Driving through mobile home parks in markets
you are interested in and talking with the onsite manager/owner or following
up with cold calls or letters to parks that you would be interested in
owning. The advantage of this method is that you see the park before you
start any communication with the owner and it will give the owner a level of
comfort dealing with someone that made the effort to see the park first.
This works best with an owner that lives onsite and you can meet
face-to-face. I have purchased several parks this way and there are many
other parks I still have an open line of communication with the owner that I
anticipate purchasing when they are ready to sell..
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Making cold calls to parks in markets I am
interested in. While this works best when the owner answers the phone, it
can be very frustrating. I have been hung up on many times as have my
employees. However, if you don’t mind the frustrations, this is a viable
method of finding potential deals. Besides being hung up on, the biggest
frustration I have had is that you often get the response that anything is
for sale at the right price (which is usually more than it is worth).
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Another option is to stay in contact with
real estate brokers that specialize in the sale of Mobile Home Parks. The
key here is to stay in constant contact with these brokers in order to get a
copy of all of their listings as soon as they receive them. Before they put
the listings on the internet they will send out the information to the
buyers they know are serious in hopes of making a quick sale. You want to
be on that list so you get first shot at the good listings. Once you have a
relationship with a broker and especially after you successfully close a
transaction with them, they will know that you are a real buyer. I have one
broker that I have purchased three parks from and he knows what I am looking
for and contacts me anytime he gets something that fits those criteria.
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Along with staying in contact with those
brokers that specialize in mobile home parks and commercial real estate, you
should contact brokers in those specific markets you are looking to buy
parks. Many times these brokers will not have any idea about the internet
sites that can help them sell the parks and otherwise do not understand how
to value and market mobile home parks. While many times their listings will
be grossly overpriced you will occasionally find those listings that are
priced right or even better… under market.
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Newspapers (online and offline), trade
magazines, local and national MLS services, and other websites.
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Country tax records, banks, appraisers,
movers, dealers, and other industry professionals.
The key to locating good potential mobile home
parks investments is to be diligent in your search and use whatever methods work
best for you. The best deals are usually found by finding those parks that
are the least advertised.
Once you find a potential mobile home park that
looks a winner, the next step will be determining the value of that park. This
will be the subject of my next article and will include a discussion on the
methods I use in the evaluation of mobile home parks.
Article #2
Evaluating Mobile Home Park Investments
By Dave Reynolds,
MHPS.com
In my last article I discussed several ways to
locate a mobile home park to purchase. In this article I will discuss the
methods I use in evaluating a mobile home park once I have found one that looks
like a winner.
So how do I determine what a specific mobile
home park is worth?
I want to know how many
lots there are, how many are occupied and paying, what the lot rent is, what
expenses the owner is paying, and who is responsible for the water lines, sewer
lines, and roads.
A good rule of thumb that I use to start with is
that I take the number of occupied spaces and multiply this by the average
monthly space rent and multiply this by 70 (The “70” number is an arbitrary
number based on my experience in evaluating deals).
For example if the park has 110 spaces with 10
vacancies and a monthly average space rent of $200…
Then my initial value calculation is 100 x $200
x 70 = $1,400,000.
If the park is on the market for $3 million I
will probably pass. If the park is on the market for $1,800,000 or less than I
will probably look into it further. Remember this simple calculation is very
generic and may or may not be the true indication of the value of a mobile home
park.
As you
will read in any appraisal handbook there are 3 basic valuation methods.
However, with mobile home parks two of those methods, the cost and sales
comparison methods, have some flaws that skew the results. The cost method does
not take into account the business component of the business or occupancy
levels. It would value a 100 space mobile home park the same whether it has
100% occupancy or 50% occupancy.
The
sales comparison method is also flawed in most cases due to the lack of quality
and recent comparables to select from. Mobile home parks have been increasing
in value over the last few years as has other real estate. With relatively few
sales to draw from, an appraiser will typically use sales from a couple years
ago and sales from markets 100 miles or more away from the subject property.
Even if there is a similar sale in the same market and in the same condition,
one mobile home park can be much more attractive than the next. Differences in
expense ratios, occupancy levels, and space rents can make one park worth 30-50%
more or less per space than a similar park down the road.
Due to
the flaws in the first two methods I put all my efforts into valuing a mobile
home park using the Income or Market Capitalization method. Under this method I
take the Net Operating Income divided by the Capitalization Rate to come up with
the Value. While this might sound like a simple process, it can be quite
complex coming up with the true Net Operating Income and decided what cap rate
to use in the formula.
A simple way to think about the cap rate is that
it is the return you will receive year one based on the current projections if
you were to pay cash for the property. If you put $1,000,000 cash into a CD,
you can expect somewhere in the 5% range for your money. Obviously, if you were
to put $1,000,000 of cash into a mobile home park where there are risks and time
involved in managing that investment, you will want more than a 5% return on
that money. Cap rates have been all over the place in that last few years but
they are once again rising. The parks that are selling now have cap rates in
the 9.00% and higher range. Determining the proper cap rate to use in the
formula is arbitrary and will depend on what you are looking for as an
investor. One investor may be satisfied with a 7% cap and the next investor
needs to buy at a 12% cap in order to justify the risk and time involved. I do
not even look at parks that I can’t turn into at least a 10% cap rate. The
range of cap rates on the market today fall in the 3% to 11% range with most
parks falling into the 7% to 10% range.
Another factor in determination of an acceptable
cap rate has to do with the requirements of your lender as well as the interest
rates on the loan you use to purchase the property. If you are borrowing 80% at
a 10% interest rate and are trying to buy the property at a 7% cap rate, you
will have a large negative cash flow. On the flip side, if you are borrowing
80% at a 4% interest rate on a 7% cap rate, you should have a positive cash
flow. So the interest rates are important to consider in the equation.
After determining what is an acceptable cap rate
you need to rework the profit and loss statements you receive from the seller or
broker. I call this the “Net Operating Income Reality Check”. Your
goal in this process is to determine the actual projected income and expenses
for the first year after you take over ownership.
Figuring
out the actual income is
usually not too difficult. You can take the actual number of spaces in the park
and multiply this by the actual rents being charged and subtract out a
reasonable allowance for collections and you should be able to come up with a
good estimate of the income. I usually use 2-3% as the collections expense. If
the rents are 50% below market and you know that they can be raised, you might
include a portion (maybe 50%) of this increased rent in your projections.
The next thing to do is to come up with the
anticipated expenses based not only on how the park is currently operating but
also based on how the park will operate with you as the new owner. For example,
if the current owner is managing the park, then you need to plug in an amount
for management and payroll taxes and workers comp. If the park has vacancies
and there is no advertising expense, then you need to plug in an amount for
advertising. And so on.
After coming up with the income that the park is
currently generating and deducting from that all the anticipated operating
expenses including the reserve for capital expenditures you will have what is
called the Net Operating Income.
Note:
Net Operating Income does not included deductions for Mortgage Interest,
Depreciation or Amortization. If these numbers are included in the expenses you
need to add them back to come up with the Net Operating Income.
If you take the Net Operating Income and divide
this by the price you come up with the Capitalization Rate (Cap Rate). Also, if
you divide the Net Operating Income by the Cap Rate you come up with the price
and so on.
Other considerations
on the value of the park will be the entrances, streets, landscaping, utilities,
parking, lights, storage sheds, number of singles versus doubles, swimming
pools, clubhouses, etc. The nicer the park typically the lower the cap rate and
the easier it will to tap into better financing programs. In addition to the
quality of the park considerations many mobile home parks have other factors
that need consideration. This includes such things as vacant lots, land for
expansion, park owned homes, and seller financed notes. These other issues will
be addressed in an upcoming article. |
