42 Lot Mobile Home Park Acquisition

I thought it might be interesting for aspiring mobile home park investors to take a look at a deal that I recently closed on. I documented the process from finding the park, coming up with a valuation, funding the deal, and due diligence, to closing on the park and creating a plan to maximize cashflow.

Finding The Deal

There are many ways to find mobile home parks for sale which I have listed in a article located here. This particular park happened to be listed on mobilehomeparkstore.com, a site that I frequently scan for deals. What I have noticed is that there are a lot of mobile home parks listed on this site, where if you follow my valuation guide you will see that the asking price is way too high and you most likely will not be able to come close in your own valuation. Who is paying these extremely high prices? Real estate investment trusts maybe? I don’t really know.

Mobile home park

Anyways, every now and then if you spend the time evaluating the parks online, you are likely to find a mobile home park where your valuation is somewhat close to the asking price. When this happens you should reach out to the broker, or owner if it is for sale by owner, and make an offer. If your valuation is higher than the seller’s asking price then you should definitely get to making your offer because this is a rare thing. Now what do I mean by close to the asking price? For me it is within $300,000 on parks that are between $750,000 to $2,000,000.

You may say that offering $450,000 to a seller that is asking $750,000 is insulting, but you never know what sort of situation in their life is prompting them to sell their park. You may be doing them a favor by offering a quick sale at $500,000 or they might not actually know what their park is worth and its up to you to educate them.

In the case of the park we are discussing in this article, the broker had listed the park at $895,000. After running a quick evaluation with the MHP deal analyzer on this site, I emailed over my offer of $700,000. I am going to show you the real numbers, so lets take a look at the valuation in the next section.

Evaluating The Deal

When evaluating deals, you don’t want to spend a ton of time before you have an accepted offer. Your offer can get rejected or you may find out the property is already under contract and then all that time was wasted. You will dig much deeper once your offer has been accepted. Therefore I use the same process as the MHP deal analyzer on this site. I have just used it so much that I can do it minutes on my Iphone calculator if I am on the go.

This particular deal has 42 total lots. There were 6 occupied park owned homes, 3 vacant park owned homes, 9 vacant lots, and the rest of the residents own their own homes and are paying lot rent. The lot rent in the park was currently set at $230 per month and the residents are billed for electric, sewer, and trash service directly from the city. This is how I came up with a quick value:

  • 42 total lots – 12 vacant lots/homes = 30 occupied lots
  • 30 occupied lots x $230 lot rent = $6,900 lot rent per month
  • $6,900 x 12 months = $82,800 lot rent per year
  • $82,800 x .7 expense ratio for parks with public utilities = $57,960 estimated net operating income
  • $57,960 / .08 (8% cap rate) = $724,500

The MHP deal analyzer can do all that for you, but that is what the math looks like. You will notice that I did not include any of the income from the park owned home portion of the rent. Instead we take the 6 occupied park owned homes and give them a shell value of $10,000 each and add it to our valuation above for a total of $784,500.

You’ll also notice that I chose an 8% cap rate for this deal. There are many factors that go into determining cap rate which you can read about here, but the largest factor was that current interest rates on mobile home park loans are around 6.5%. I knew from a cashflow perspective which we will cover later, that I needed to get a cap rate at least 1.5% higher than my interest rate to meet my cashflow goals.

Making Offers and Getting One Accepted

With my number of around $785,000 in my head, I submitted a purchase and sale agreement via email for $700,000. This gave me plenty of wiggle room to negotiate since the broker had listed the park at $895,000. I figured we would end up somewhere around $800,000. It went some like this, the seller countered at $875,000, I countered at $750,000, the seller countered at $850,000, I countered and said lets meet in the middle at $800,000. The seller said that they were firm at $825,000, which was close enough to what I wanted to pay so I said “okay but I am probably going to need some amount of seller financing to make the numbers work.”

We went back and forth a few times on the amount of seller financing but eventually agreed to $350,000 at 3% for 17 years and both signed the purchase contract. When interest rates on bank debt are 6.5% this seemed like a very attractive loan, but there was one issue. If I am going to pay $825,000 for the park and the seller is willing to finance $350,000 that means that I need $475,000 cash plus closing costs to do this deal!

mobile home park acquisition

We will discuss how I came up with the money later. We have one very important calculation to cover first. If you remember above, we did our quick evaluation based on the lot rent, park owned home shell values, and typical expense ratios and came up with a value of $784,500. Well now we are talking about paying $825,000, how do we really know that things will work out and I won’t lose my shirt. The answer is by calculating the cashflow.

Calculating Cashflow

In order to calculate the cashflow we need to have some idea of what the expected income and expenses will be each month in the mobile home park. After we subtract the expenses from the income, we are left with the cashflow that is yours to keep. The income comes directly from the rent roll that most broker’s or sellers will provide for you during your due diligence. The expenses are typically listed on a profit and loss statement or the seller’s tax returns that should also be provided to you during due diligence.

Some broker’s may offer you what’s called a “proforma,” which shows how the park could operate if the vacant lots were filled, rent was raised to market, etc. This is not what you want. You want to look at the current operations on the profit and loss statement or seller’s tax returns. We will verify all the expenses by calling utility companies and service providers later during the due diligence process.

If you don’t have access to the expenses yet or you just want to run a quick calculation then you can use the net operating income that you calculated during your quick evaluation. From the net operating income you would subtract your financing costs and be left over with the cashflow. In this deal the seller was going to finance $350,000 for 17 years at 3% interest. If we use the MHP wealth mortgage calculator we see that it will cost $2,192.31 per month or $26,307.74 per year in principal and interest. If we subtract $26,307.74 from the net operating income of $57,960 we calculated earlier, we get $31,652.26 in cashflow.

$31,652.26 in cashflow if we did nothing and operated the park as is, not too bad. Remember that we only used lot rent in our net operating income calculations. There is still a portion of rent from the 6 park owned homes that will be paid to me each month as well, but I generally assume that extra money will be used for any of the expenses associated with those park owned homes. If you don’t quite understand what I mean by “portion of the park owned home rent,” see below:

  • In this park one of the park owned homes is renting for $550.
  • In our quick evaluation of the park we used $230 for the lot rent portion of that park owned home.
  • The park owned home portion of the rent we ignored in our calculations is $550-$230 or $320.

Funding the Deal

At this point I had a signed contract with a purchase price of $825,000 and seller financing for $350,000. The first thing I did was wire $10,000 to the title company that the seller and I agreed to use for the transaction. This is money that would be held by the title company in an escrow account as “earnest money” or in other words a good faith deposit. If we subtract the financing and earnest money deposit from the purchase price, we see that I am left with a balance of $465,000. However additional cash would be required for closing costs ($3,257), third party inspections ($4700), insurance premiums ($5,327), and a few smaller miscellaneous expenses.

This was a problem because at the time I had around $180,000 of the roughly $480,000 required to make this transaction work. First, I always like to see if I can rearrange my finances to be able to do the deal without outside funding. By outside funding I mean asking my friends and family to partner on the deal with me.

For this deal I decided to sell a 4-unit residential building that I owned and transfer the profit in a tax deferred transaction called a 1031 exchange. This meant that instead of selling the 4-plex and paying capital gains and depreciation recapture tax on my profit, I could instead use the money to purchase the mobile home park and defer these taxes.

Capital gains taxes would have cost me $61,042 and depreciation recapture taxes $12,606 for a grand total of $73,648. I’m going a little off topic, but you can see I was able to avoid paying almost $75,000 in taxes by using the 1031 exchange strategy. This happened to make up the difference I needed to afford this mobile home park. I highly recommend you work with a 1031 exchange specialist like Dave Foster if you are going to use this strategy.

I profited $325,000 from the sale of the 4 plex, which meant I had to use around $155,000 of my cash reserves to get to $480,000 required to purchase the park.

Due diligence

Due Diligence

I could write an entire book on due diligence, but in order to keep this post short and concise I will share with you a few things that I always check when I have a mobile home park under contract. This will definitely not be a complete due diligence checklist, but it will give you a general idea. There are really two categories of due diligence:

Business Aspects

  • Rent roll – I look at the lot rental rate and compare it to other parks in the area. I look at the number of park owned homes and what they are charging for rent. I look to see if any park owned homes are listed as lease to own. I look for security deposit amounts. I look to see if any residents have large outstanding balances.
  • Utility bills and service contracts – I get on the phone and call the service providers and vendors that are associated with the park. I have them send me a copy of the their reoccurring invoices and utility bills.
  • Real Estate Taxes – I call the tax assessor and figure out what the real estate taxes are and what they may increase to if I buy the park. You can also go online to the tax assessors website and see what the annual tag taxes are for any park owned homes and check to make sure that none are in arrears.
  • Profit & loss statements – I look at the amount of money spent on maintenance and repair and compare it to industry standards. I look at the amount the manager is paid and more often than not see that expense left out. I look for a line item that shows amount spent on legal fees, accounting, and general administrative items to get an idea of what I might be spending.

The idea here is to try to verify as much information as you can regarding the income sources and the expenses. Then you take that information and make your own profit and loss statement.

If you remember in our quick evaluation above we used a multiplier of .7 for mobile home parks with public utilities. This is because you would expect the total expenses for a park like this to be around 30% of the gross income. If you make your profit and loss with all the income and expenses that you gathered and you see that the expenses are actually around 60% of the gross income then you know that you need to dig deeper and see where the problem is.

Here is what I came up with after gathering as much information about the business as I could:

You may notice that there is no expense related to water, sewer, electric, or trash. If you remember earlier I mentioned that the residents pay all of their own utilities to directly to the providers. This is the ideal situation, but by no means is it required.

We also see here that the expenses are roughly 30% of the total income and therefore are in line with industry standards. The cashflow is higher than in our previous quick calculation which is to be expected since we included the park owned home income here as well.

Inspections, Laws, Park Visit

Once were confident that our business is going to make money, we need to make sure that there is nothing foreseeable that will derail us. This involves a few things not limited to:

  • Call city or county governments offices – One of the first calls I always make is to the building and zoning departments. They can tell you if the park is operating legally and zoned for the correct number of lots that the owner has. But don’t stop there, call code enforcement, the health department, the department of environmental protection, the police department, the fire marshal, and the chamber of commerce. You want to find out as much information as you can on the mobile home park and the surrounding area.
  • Title search – The title company will conduct a title search looking for anything that could impede the buyer’s rightful ownership of the property such as existing mortgages, liens, and unpaid taxes. They put together a title report and if there are no problems then they issue a title insurance policy.
  • Third party inspections – I always order a phase 1 environmental report and a survey. You don’t want to buy a park and find out the neighbor’s hazardous material plant has contaminated your park or the previous owner has been illegally expanding the park onto the neighbor’s land. Another inspection I like to do is have a plumber send a camera down the water and sewer pipes to check for cracks and leaks.
  • In person visit – Once your confident that the park is operating legally and there are no major capital expenses that your third party reports have indicated, it is time to go walk the park in person. I like to walk through all the park owned homes when I am there so I know what type of repairs I could expect in the future. For the most part you want to get a feel for the general vibe of the park, count the lots, possibly meet the current manager, and plan for any repairs that may need to be completed after you close.

It took around 3 weeks to complete all these due diligence steps and for the most part I was just waiting to get the third party reports back. During this time I had an attorney create a limited liability company that I would assign the contract to at closing. The purpose of doing this is to separate your personal assets from your mobile home park business debts and lawsuits when you use this LLC to do business.

Closing and Future Plans

As you get closer to the closing date, the title company is in frequent contact with both the buyer and seller requesting last minute items and drafting the final closing statement. In the case of this park, both the seller and I were able to close remotely from our homes with the help of a couple mobile notaries. The titles to the park owned homes and any additional paperwork the seller thought I should have was mailed to me days prior. Additionally, rent that was paid by tenants for the current month was split accordingly between the seller and myself. Now it’s time to get to work and execute my plan to maximize the earnings potential.

Before we wrap up let’s discuss how I plan to make the most of this investment. In total I had to use around $490,000 to purchase this park which cashflows around $48,000 per year. With a quick ROI (return on investment) calculation we see that I am getting a 9.79% annual return on my cash invested. The math looks like this:

$48,000 Cashflow / $490,000 Cash Invested = .0979 *100 = 9.79% ROI

Now this is not a bad return at all. My money is in a relatively safe investment that I understand very well and making a decent return, but I probably could have just stuck the money in an U.S. equities index fund with less of a headache and made a similar return. For all my efforts I would expect to make more, so let’s see how we go about doing that.

If you remember, I have 6 occupied park owned homes, 3 vacant park owned homes, and 9 vacant lots. I also did my homework during the due diligence period and discovered that most of the mobile home parks in the area have lot rents in the $350 – $425 range. My goal over the next 5 years is to slowly increase the lot rent to a near market rate of $400, sell the 6 park owned homes, and fill the vacant homes and lots. It will look something like this:

As you can see in year 1 I plan to raise the lot rent to $280 immediately and I am going to set a goal of filling 3 vacant lots. This means that most likely I am going to have to purchase a used mobile home home, move it to my lot, and sell it using a rent credit program. Depending on how fast I can sell homes, I may accelerate my plan and tackle more than 3.

Now you may be thinking this is a lot of cash out of my pocket and its going to effect my return on investment. This is true in the short term, but in the long term once the new residents pay off their homes, I will most likely break even or even make a small profit from the sale and therefore I will not include the additional cash out of pocket in further ROI calculations.

The other thing you may be thinking is that I am just going to raise lot rent and nobody is going to complain or leave? Well the truth is that a few people will complain, but at the end of the day I am still the best deal in town and residents will discover that and few will leave. That being said I like to soften the blow by providing additional value to the residents as soon as I take over control of the park. In this park I have already begun trimming trees, fixing potholes, adding speed humps, and taking care of any deferred park owned home maintenance.

In the table above you will see that the amount of annual lot rent increases with the rent raises and the additional lots that are filled. The lot rent expense ratio remains the same. The park owned home income increases as new homes are sold on the rent credit program, but it also decreases slightly at the same time as homes are paid off each year. Eventually there will be no POH income when all the homes in the park are paid off. That is when I just collect lot rent each month, which is the end goal for every park.

With all this in mind let’s calculate our return on investment over the 5 years. We are going to assume that I spend around $20,000 in capital expenses during the initial park clean up. We are also going to assume that I break even filling vacant lots and selling back the new homes so we will not include the park owned home income in the cashflow calculation below. We will instead assume that I recapture around $115,000 by selling the original 6 park owned homes over the 5 year period. See below:

$423,365.40 Cashflow From Lot Rent Only / ($490,000 + $20,000 – $115,000) Cash Invested = 1.07 *100 = 107% 5 Year ROI or 21.4% Annual ROI

If all goes to plan then for all my efforts I will have achieved a 21.4% annualized return, not bad! Now what will the park be worth if this plan pans out? Well if we use the same 8% cap rate we chose initially then it looks something like this:

  • 42 occupied lots x $400 lot rent = $16,800 lot rent per month
  • $16,800 x 12 months = $201,600 lot rent per year
  • $201,600 x .7 expense ratio for parks with public utilities = $141,120 estimated net operating income
  • $141,120 / .08 (8% cap rate) = $1,764,000

The answer is somewhere between $1.7 – $2 million dollars depending on how many park owned homes we still have in inventory. I hope this was informative for you as a reader. If you like this content and want more or have any questions please leave a comment or reach out to me via email. Good luck!

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