How to Value a Mobile Home Park Investment: A Comprehensive Guide for Investors

Mobile home park investing can be attractive for those looking for steady cash flow and long-term growth potential. Evaluating a mobile home park can be a complex process, as there are many factors to consider when determining the value such as:

  • Location: The location of the park can greatly affect the occupancy rate and the potential for future growth.
  • Size and type of park: As parks get larger in size they can attract larger buyers, such as REITs, which can drive prices up. 55 and older communities may command different prices than parks that are not age restricted.
  • Income and expenses: There is gross income, which is the total amount of income generated by the park. There are operating expenses, which are the costs associated with maintaining and running the park. And then there is the net operating income (NOI), which is the difference between the gross income and the operating expenses, and it is an important metric for determining the value of a mobile home park.
  • Amenities and condition of the park: Amenities such as laundry facilities, swimming pools, and clubhouses can attract residents and increase the value of the park. Additionally, the overall condition of the park, including the roads and individual mobile homes, can also affect the value of the property.

There are a lot of benefits of investing in mobile home parks compared to other forms of traditional real estate. I am going to present you with all the information on how to value a mobile home park and then I will try to see if I can make it easy for you to sort through the bad deals quickly. If you can quickly rule out the bad deals, you will have more time to invest in evaluating the potential good deals.

There are a few ways that appraisers use to value a property, but only one of them really makes sense when dealing with mobile home parks. It is called the income approach and it is how I evaluate all my deals.

Evaluating a Mobile Home Park Investment With the Income Approach

The income approach to valuing a mobile home park is based on the idea that the value of the property is directly related to the income it generates. To determine the value of a mobile home park using the income approach, you will need to have the following information:

  • Gross Lot Income: The gross lot income of a mobile home park consists of lot rent from the residents. We do not include other income sources, such as laundry facilities, vending machines, late fees or park owned homes in the gross lot income calculation. The reason for this is because it is not income that is considered to be reliable in the foreseeable future. And lenders will not include this income when they go to underwrite a loan on the park.
  • Operating Expenses: These are the operating costs associated with maintaining and running the park. These expenses include things like utilities, trash service, lawncare, maintenance, repairs, management, property taxes, insurance, legal fees, and advertising expenses.
  • Net Operating Income (NOI): To determine the NOI, you will subtract the operating expenses from the gross lot income. This will give you the property’s net income before the debt service. In other words, if you did not have a loan on the property then this would be the profit that goes in your pocket.

Let’s do a quick example from a real park I own because numbers always help to see things a little clearer:

  • The Formula: Gross lot income – operating expenses = net operating income (NOI)
  • A mobile home park has collected $165,000 in lot rent income this year.
  • The water/sewer expenses for the year totaled $11,000.
  • Electric bills for streetlights, water, and septic pumps totaled $3,000.
  • Trash removal totaled $7,500.
  • Repairs and maintenance totaled $15,000.
  • Management total $8,000.
  • Legal fees, accounting, and permits totaled $5,500.
  • Insurance was $5000.
  • Real estate taxes were $11,500.
  • If we add all the expenses together: The total operating expenses are $66,500. This is around 40% of the gross lot rent income which is about industry standard for a park with private utilities. The expense ratio for parks with public water and sewer is closer to 30%.
  • NOI: If we plug in the numbers to the formula above, we get a net operating income of: $165,000 – $66,500 = $98,500.

Okay great you now understand how to calculate the net operating income, but what do you do with it? Well, there is another formula we need to use to come up with a valuation for the mobile home park. First you need to understand a very important real estate term used in the next formula and it is called the capitalization rate or “cap rate” for short.

How to value a mobile home park

Capitalization Rate

The capitalization rate, also known as the “cap rate,” is the ratio of the net operating income (NOI) of a property to its purchase price. In math terms it looks like this: Cap Rate = NOI/Purchase Price. The cap rate was invented because we needed a way to compare what other investors were paying for the income a property generates.

If we know that investor A paid $1,000,000 for a property that was generating a net income of $100,000 then we know investor A bought the property at a 10% cap rate (10% = $100,000/$1,000,000). If multiple mobile home parks in our location have sold at 10% cap rates, we understand that we can expect to buy similar parks at a 10% cap rate in our market. If we didn’t have a cap rate, then we would have no idea what our $98,500 income in the example above is worth.

I know this can be a little confusing at first, but I’ll try and make it simple for you to understand. In our example above we have obtained the net operating income, but we need to figure out the cap rate that other parks are selling at in order to obtain the value of the park. The formula can be switched around to this: Purchase price = NOI/Cap Rate.

There are two approaches to finding the cap rate in your market:

  1. Research: You can perform all kinds of research online or in person. You can contact a local appraiser or real estate broker and ask what cap rates recent mobile home parks have sold at. You can also research online. There are sites like mobilehomeparkstore.com, Loopnet.com, and others that show you mobile home parks for sale and that have sold. There may also be information on these sites for you to calculate the net operating income for our equation.
  2. Make up your own: Sometimes there aren’t many parks in the area and the ones that are don’t look anything like the one your evaluating. What do you do? You decide on your own cap rate that fits into your portfolio and investment goals. This will make more sense shortly.

Let’s take our example above: We can take the net operating income of $98,500 and plug it into our formula. I was unable to find many comparable sales in the area, so I am not sure what cap rate to use to value this park. Using the income approach, if I choose to buy this park at a 10% cap rate then it would cost me $985,000 ($985,000=$98,500/10% or .01). Is $985,000 good or bad?

If I am paying all cash and there are no initial capital expenditures, then I would get a 10% cash on cash return on investment. If you pay all cash then your return on investment is just the cap rate. 10% is much better than money sitting in the bank, but you could probably achieve close to that in the stock market with less work. Most mobile home park investors aim to get around a 20% cash on cash return on investment, so this may not work for them.

What If I finance This Deal with a Bank That Makes Loans on Mobile Home Parks?

Let’s see if the 10% cap rate we chose in the last section makes sense if we go ahead and find someone to lend us 75% of the money to buy this park. If you remember we need $985,000 to buy this deal at a 10% cap rate. We calculated this using the net operating income of the property.

We need to consider the variables we add by financing this park to see if it might fit our investment goals. See below:

  • The bank will lend us 75% of the purchase price or $738,750.
  • Our down payment will be 25% of the purchase price or $246,250.
  • The bank will charge us for closing costs, fees, and third-party reports that add up to another $10,000.
  • We are dealing directly with the seller so were not paying any broker fees in this case.
  • We secure a 10-year loan with a 6% interest rate, amortized over 30 years

This is all we need to know about our financing to calculate our cash on cash return on investment. With the use of a simple mortgage calculator we can calculate our annual mortgage cost to be $53,150. We know we have $98,500 in net income so if we subtract our mortgage cost, we are left with $45,350 in annual income. Great is that good? Well, we need to figure out what our cash on cash return on investment is to answer that.

Instead of paying $985,000 cash for the property outright, we chose to put a down payment of $246,250 and we paid another $10,000 in closing costs. We are all in for only $256,250 and we are receiving $45,350 per year in income after the mortgage is paid. If you recall, I said that if you pay cash then your cash on cash return on investment is the same as the cap rate. That’s because the formula is CoC ROI = Net Income After Debt Service/Amount of Cash Invested. Without financing we had $98,500/$985,000 or 10%. With financing we have $45,350/$256,250 or a 17.6% cash on cash return on investment. That’s not too bad, I might do this deal.

Remember in this scenario we chose a 10% cap rate, if I chose a 12% cap rate then the return on investment will be higher. If I chose an 8% cap rate, then my return would be lower. You set your criteria for your investment goals and make offers based on that. You might not get many offers accepted though if you choose a 20% cap rate. Mobile home parks that have paved roads, new homes, and great locations will sell for lower cap rates (aka higher price) than parks that have dirt roads, older homes, and more rural locations.

This is the income approach that I use to value mobile home parks. It may look like a lot but go back to the top and run a couple examples yourself and I promise this will make sense to you. If you noticed this all depends on an accurate net operating income (NOI).

how to value a mobile home park

The Importance of an Accurate Net Operating Income

In our example above, I gave you the actual net operating income of one of my parks. Most of the time the seller or broker will give out this information and to me it’s pretty much worthless because I am going to be a diligent investor and do my own research.

Never ever rely on a NOI that has been given to you or even worse what’s called a “proforma.” A proforma is something that is usually created by a broker and shows the buyer how a park could be operating under near perfect conditions. You are not buying the park for how it could perform if all the lots were filled at market rate, you are buying it at a price that reflects how the park will operate the day you become the new owner.

As a diligent investor I am going to gather some information:

  • The number of occupied lots: We need to know how many lots are occupied with paying residents. I don’t put too much value on vacant lots if any. If you are close to making a deal work with the seller, then you might be able to assign a small value per space. If you remember at a 10% cap rate each lot is worth 10 times the lot income. Its going to cost you a lot of money to buy and move a home to that lot though, so you have to factor that in.
  • The current lot rent: We want the current lot rent, not the park owned home income,
  • All the current expenses: This means you make phone calls. You call the city or county and get the water/sewer/electric bills, you call the trash provider and find out how much trash service is, you call the landscaping company and figure out how much they charge, you call the tax assessor to figure out what your new property tax bill may be, you figure out how much you are going to pay the manager, you get insurance quotes, etc. Don’t just assume the profit and loss statement you received is accurate. You want to get as much information on the real expenses as possible.

Now you can easily narrow down the net operating income. To get the gross lot income you would multiply the number of occupied lots times the current lot rent. I don’t worry too much about vacancy, because mobile homes rarely leave the lots they are placed on and the demand for affordable housing is so high. Next you would subtract all the expenses from the gross lot rent to get the net operating income.

If the seller has given you a list of their expenses and they have some extra things that you didn’t find in your research, then add them in. It doesn’t hurt to be conservative! You can compare the net operating income you found through your own due diligence to the one provided by the seller or broker and feel confident that you have verified what they say.

However, if you do not have the property under contract, unfortunately you have to be quick with this step or you risk another buyer tying up the property and then you wasted your time. Often times I will make an offer based on the best information that I can get within a couple of hours or so and dig deeper once we get to the due diligence period.

How to Quickly Evaluate a Mobile Home Park When Sorting Through Deals

When I am trying to figure out if a deal is worth pursuing or passing purely based on the asking price, there is a formula that I use. It depends on if the park has private or public utility services and it looks like this:

  • Public Utilities: Number of occupied lots x monthly lot rent x 12 x .7 x 10
  • Private Utilities: number of occupied lots x monthly lot rent x 12 x .6 x 10

The only reason to use this formula is to estimate if you might be in the ballpark of the seller’s asking price. The formula takes into account the industry average expense ratio of 30% for parks on public utilities and 40% for parks on private utilities. It also assumes that you are buying at a 10% cap rate.

  • For example:
  • A seller is advertising their park for $1,800,000.
  • The park is on public utilities.
  • There are 25 occupied lots and they rent for $400 each.

In this example 25 lots x $400 lot rent x 12 x .7 x 10 = $840,000. I will probably pass on this park seeing how we are about 1 million dollars apart. If we were closer in price, then I might put this park in the “let’s dig deeper” pile. I created a more advanced version of this calculator located here. You can input your own values and play around with it.

how to value a mobile home park

How to Value a Mobile Home Park: Putting it all Together

Evaluating a mobile home park investment is a complex process that requires a thorough understanding of the property and the market. As an investor, it is essential to consider all aspects of the park, including its location, financials, and overall condition. By utilizing the income approach we discussed, and verifying the net operating income, investors can make informed decisions and determine accurate values.

While evaluating a mobile home park can be time consuming, it is a crucial step where you don’t want to cut corners. I hope this guide has given you a clear understanding on how the process works and remember the more deals you analyze the better you get at it. If your interested in an essentially infinite return on your investment check out some strategies for how to buy a mobile home park for no money out of your pocket. Good luck!

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