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This issue of the MobileHomeParkStore.com and MHBay.com Newsletter includes:

1. Finding and Evaluating Mobile Home Park Investments, by Dave Reynolds
    

2. Mobile Home Park Deal Evaluation & Consulting
    

3. 2007 and looking forward to 2008
    

4. The Only People that get Rich Renting Mobile Homes are Tenants and Maintenance Men, by Frank Rolfe
    

5. Updates and Other Announcements
    

6. Mobile Home Park Vacancy Problems can be Fixed with these Creative Steps, by Frank Rolfe
    

7. Questions and Answers with Dave
    

8. Tell us what you think and send us your articles!

Finding and 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.

This past year has been a busy one for myself and our family.  Our boys are growing up quickly (9, 10, & 14) and I get to look forward to my 40th birthday next year.  I am currently coaching basketball for the 9 & 10 year olds (same team) and probably enjoy this more than the kids. 

I just finished reading the book "The Secret" for the second time and enjoyed it even more this time around.  With this book as with most other inspirational or business success books, I think the key to being successful (financially, emotionally, or spiritually) is to imagine it, act on it, and repeat. 

In 2007, I added the educational and consulting side of the business onto our websites and have enjoyed all the comments and success stories thus far.  I teamed up with Frank Rolfe (another industry professional) and using our collective knowledge we have written 7 books and recorded over 50 hours of audio cds on the Mobile Home Park, RV Park, and Outdoor Advertising Industries. 

Most of us have seen the get rich quick, no money down courses on late night television.  I accumulated most of these products over the years and while many of them had some good points, the problem was that most of what they claimed does not work in the real world.  Our Mobile Home Park, RV Park, and Outdoor Advertising products were not put together with the hype of making you rich, but rather with what has worked and what hasn't worked for us based on our experiences.  Our theme is that we don't want to make you lose your entire life savings by not doing proper evaluation and due diligence. 

In 2007, I purchased 4 Mobile Home & RV Parks, my first billboards, and am in the process of starting several other websites. 

A few weeks ago, I had a disturbing phone call from none other than the ebay legal department.  They are strongly urging us to abandon some of our domain names that end in the word "bay".  MHBay.com, SelfStorageBay.com, MotelBay.com and the list goes on.  They recently won a suit against the website called PerfumeBay.com and I doubt it would be worth fighting them on this.  So, we will be looking for some new domain names in the near future to migrate the existing sites to. 

So far, we have come up with the following domain names to replace MHBay.com

MHSales.com or MHStore.com

Let us know which one you think is best.

SelfStorages.com will replace SelfStorageBay.com

The best vacation in 2007 had to be the trip to the Green River near Vernal, Utah.  The fly fishing was awesome and the tranquility of floating down the river through the canyon would have been worth it without the added bonus of all the great trout.  This is definitely on the schedule for 2008 and beyond.

Looking forward to 2008

In 2008, our first goal is to work towards adding more features and automation to our websites.  I have just contracted with a company that is to begin work right after the first of the year.  This project is scheduled to be done by the first of April.  We have accumulated many suggestions over the years and hope to implement most of those in the new site design & functionality.  If you have any thoughts, now would be the time to send them to us.

As far as investments, I am hoping to double the number of Mobile Home & RV Park purchases to 8 and also continue to buy or build out more Billboards.  I have seen the availability of attractive investments on the rise and look for this to continue throughout the year. 

As far as education and success stories... I hope to continue to add new products to our educational division and have the number of success stories in the hundreds this year. 

Personally, I am making it a priority to get more involved with our church and work on my relationship with God.  My younger sister and her husband and 4 children are planning to go to South Africa (Mozambique) to become missionaries this year and I plan on helping them get the support they need to make this possible.

I also am making it a priority to spend more quality time with my family.  I read an article this past year that discussed how decentralized the family has become with such things as cell phones, TV's in every room, dinner on the couch, and the list goes on.  I am looking to centralize our family once again.

On the wish list would be continued good health and the Colorado Rockies to beat the Boston Red Sox in the 2008 World Series.

Wishing you a safe, happy, and prosperous New Year!

Mobile Home Transporters/Movers:

We are in the process of creating our lead system to bring you more customers.  If you want more leads and customers from MobileHomeParkStore.com then email terri@mhps.com for more information.  You don't want to miss out on this as the spots are filling up fast.

Are you a manufactured home owner or community owner with homes or lots for sale or rent?

If so, then you can list your new and used mobile homes for sale or rent and lots for sale or rent for FREE at MHBay.com

We listed over 450 new homes on the site in December so far!

Our traffic continues to increase so if you are looking to connect to potential residents and sell or rent more homes, then place your FREE listings on MHBay.com. 

MOBILE HOME PARK VACANCY PROBLEMS CAN BE FIXED WITH THESE CREATIVE STEPS

By Frank Rolfe 

Most mobile home park owners today have vacancy problem, thanks to chattel mortgage crisis that began in 2000. It is not uncommon for a park that was full in 2000 to now be at 60% occupancy due to repossession of homes. If you have been waiting for the mobile home dealers to fill you back up, you are probably depressed and making no progress. So here are some ideas to get you back in action at increasing occupancy;

First of all, you need to locate the folks in your area that have grown to absorb some of the demand that is left unaddressed by dealers. There is still a lot of demand to rent or buy used mobile homes, even if the dealer structure has become a non-player. Most of the time these new “Dealers” are individuals who buy and sell or buy and rent old mobile homes specifically in parks. You need to find these people and get them to bring homes into your park. Two ways you can find them are to 1) talk to local mobile home movers and ask if they have had any mobile home moves with these individuals (they normally remember them because they have more than one) 2) go to competing mobile home parks and see if you can spot any for sale signs that have the same phone numbers. This is a giveaway that they are not selling there own personal homes, but rather it is a business. Offer these entrepreneurs free rent until they get their home sold or rented in your park, or whatever incentive it takes to make your park their new home base.

            Another source of homes is to “steal” them from competing park that is doing a lousy job of keeping their tenants happy. Remember that ‘mobile’ means they can be moved. Of course it is not cheap to move a mobile home, so you will have to pay some or all of move cost to get them to move to your property. But it is well worth it. Even at the cost of $3000 for the move, you will get your money back in a year if the rent was $250 per month. Be sure not to ask people to break their lease, only to move to your park if their lease is up and they have the option of moving. Once you get one to move, and they are happy, it is not hard to convince their friends. It is amazing how many park owners give no thought to the resident’s retention and just assume they are their slave forever.

            A final idea is to convert your vacant lots into something that is wanted, and that can be tapped with a small capital outlay. For example, consider opening a section of your park as an RV park. A small dedicated RV park within a mobile home park can really work if the location is right. And it is possible to test and, if failure, abandon the project with little or no downside. Or you might consider opening a park and store facility for RVs, boats and cars. Try and see what is in demand, and see if you can deliver on it.

            In these tough times, it is essential to be creative to fix your occupancy!

Q&A with Dave

Question: 

Hi Dave,

 

My name is Carsten and I live in the Seattle area.  I've been working for the County Government here for the last 23 years and I'm looking to phase myself out of my job into something that produces income and equity.  One of the investments I'm seriously looking at is mobile home parks.  In the information that I've found your name keeps popping up as a huge knowledge base for MHP's so I was wondering if I could ask you a question? 

 

I'm sure you've heard that the Seattle area has the second most expensive commercial real estate in the country at the moment.  I'm sure there are some good deals in the area but they're pretty hard to find.  So, to find properties that are affordable, I will

need to look in other states for properties.  My question to you, is it possible to purchase and operate MHP's from another state while keeping my job for awhile and not running myself ragged? 

 

I realize this is a very broad question since you know nothing about my abilities and financial status.  Assume I have no experience with MHP's and some finances available to work with.  Any knowledge that you could pass to me would really help to narrow my focus. 

Thank you for your help and information.  I look forward to your response.

 

Carsten

Answer:

Carston,

Thanks for contacting me and yes I do have vast experience investing in mobile home parks as well as running the MobileHomeParkStore.com and MHBay.com websites.

To answer, your question, with the exception of the first couple of parks I purchased the rest have been out of state and operated by the manager with us overseeing the manager.  I prefer this to living nearby the park as it gives me a degree of separation to concentrate on buying parks rather than running them.

The key is that you have to hire a good manager and stay on top of them via phone, email, unscheduled visits, etc.  Another key is to realize that just because the manager is not calling you with problems that there still may be issues that need dealt with.  You have to have unscheduled visits from time to time to keep the manager on his toes. 

I live in Colorado and have owned parks from Washington state to South Texas to Virginia.  I am only a few hours away via plane to any of the parks. 

So it is very possible for you to own parks out of state and not have it interfere with your regular job.  In the 50+ parks that I have owned, I have only had to take a handful of
emergency/unplanned trips.  (One where a tornado hit the park, one when my manager was stealing from me, and one when my manager went to jail).  The latter two could have been avoided had I done a better job in hiring and staying on top of the managers.

Thanks and best of success!

Dave Reynolds



Question: 

Dave,
 

I just finished reading the 10/20 Method which was quite interesting. My question involves due diligence in checking/verifying expenses before purchasing. Assuming that you can't get the tax returns from the seller, how do you verify if all expenses are reported? For example if the sewer line is going out and requires regular cleaning, and repairs, yet the P&L only shows half or less of the actual costs, how would you discover something like this?

 

Regards,

Tom

Answer:

Tom,

I have several methods of doing this.  One would be to check with the plumbers/electricians that the seller has been using and get their take of the current systems.  You can also hire an electrician to go through the park and check the electric boxes & poles as you would do for a home inspection.  For the sewer lines you can hire a company to run cameras in the lines to check on roots, cave-ins, etc. 

I would still try to get a copy of the owner's tax returns to verify.  You can always use the bank as a scapegoat saying they need a copy of them to make the loan.

Thanks for the comments on the book!

Dave


Question: 

Hi Mr. Reynolds

I am an emerging mobile home park investor and I am considering your first course in MHP College. I have also been watching your site for potential investments and was wondering if it is possible to buy a mobile home park for “no money down”? And if so, how frequent do these types of transactions occur?

I have my preliminary eye on a couple of transactions but have no money.

Also, in your expert opinion,   how would you approach a former colleague that is now Vice President of a bank, about funding or financing a mobile home park investment? Is there a stigma on mobile home parks within traditional lending institutions?  I wanted to use my connection to present  sound business propositions. Any help would be appreciated.

Thank you in advance

David I

Answer:

David,

As much as I would like to tell you that it is easy to find mobile home parks to buy with no money down, that is not the case.  Most of the parks that can be bought no money down are either in disrepair, have occupancy problems, or other issues.  Plus most of these type of parks will need immediate cash inflows to turn around and operate until they turn around.

It is not impossible though.  I have purchased a couple of parks in the past no money down but it is a rarity.  If I had to put a percentage on it, I would say 5% or less of all parks on the market could reasonably be purchased no money down.

I would suggest building up at least 10% down so you can find a park that makes sense.  You don't want to buy a park that doesn't make financial sense.

As far as lending, I would suggest going with one of the many mortgage brokers or banks that specialize in lending on parks.  They don't have a stigma like the traditional local banks.  I have financed many parks locally and it is hit or miss whether they would loan on parks in the first place.

Hopefully this answers your questions and does not discourage you.  I had no money when I purchased my first park and used credit card advances for the down payment.  Since then I have purchase 50 parks.  The best advice I have is to evaluate as many parks as you can and when the right deal comes along, you can find a way to make it work. 

Thanks and best of success!

Dave
 

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