This is a mobile home park specific question, so I thought this would be the right board to post to. I would like to know what people thought about the following deal, specifically what holes or errors I might have in my approach:
The subject is a small trailer park with 3 rented trailers and 5 leased pad sites. After some negotiation I have an option to purchase the property at $150K. Gross rents are $35,520.
The place is in good shape and clean. The 3 rented trailers are old (late 70s) but in fine shape and mostly renovated.
Note: Operating Expenses the second line below includes insurance, taxes, water, electric, 10% of gross rents as a management expense, 15% of gross rents as a vacancy expense, and 12.5% of gross rents as a repairs/maintenance expense. Heat is paid by tenants.
Purchase Price $150,000
Down Payment $37,500
Scheduled Annual Gross Income $35,520
Operating Expenses $15,204
NOI (after 15% vacancy allowance) $14,988
Cash Flow $6,153
Initial Cash Cost (with buying costs) $40,500
Return on Cash (with buying costs) 15.19%
Debt Service Coverage Ratio 1.70
Total Percent Financed 75%
NOI (before P&I) / Purchase Price 10%
Gross Rent Multiplier 4.22
Comps are few and far between (as in two others in a 20 mile radius over the past two years). I would like to start my investing on a great step, but I also want to START my investing!
I think these numbers look good, however make sure your allowing for a maintenance and replacement reserve and if necessary adjust your shown positive cash flow appropriately to show and allow these reserves.
Also make sure you show a vacancy factor appropriate for your area in your projections.
From an appraisalist’s standpoint, the numbers work, but IMO it’s overpriced. If you really look around, you can find trailer homes that old for $5K. They depreciate like cars and are not really worth a lot unless they are brand new. Some people are crazy and you may be fooled on the price, but you can find them cheap.
Knowing that, what kind of tenants do you think you’re going to get in there? Generally, you’re getting a ghetto tenant, tenants with mental illness or alcohol and drug problems. For that kind of abuse, I’d need a 30 cap AT LEAST. A 10 cap might interest me on an apartment building, but on a trailer park it would have me running away unless it was in North Dakota next to a Bakken oil well, which I’m doubting it is at those rents.
And, 25% down is just awful for this kind of risk. I’d tell them no money down and a better price or forget it.
If I were you, I’d focus on real apartment buildings for your “great step” or try buying one of those cheap mobile homes and getting a land lease in a trailer park and see what it’s like to rent to these kinds of tenants and try to sell the tenants on rent-to-own by marking the trailer’s price up by a few times up from what you bought it for. A much better return. Sometimes, trailer parks will give you an old trailer home for free and you can either pay a company to move it or work out a deal to rent the land.
If you really want to lease out land instead of getting into real apartments, buy a small marina where you’re dealing with a much better class of tenant with disposable income and much less headaches.
Maybe we are thinking of different demographics? This is a rural New England property and I am confident that the risk associated with trailer park renters is not worse than that of apartment building renters (apartment buildings here are mostly limited to multi-family housing).
This park is a small 8 unit park that is very clean. The tenants for trailers in this area are okay; at least as good as apartment tenants. People view renting trailers as single family renting at apartment prices. It is rural and there is not much shame in living in trailers here.
With your suggested 30% cap rate I would need to buy the building at $50,000, which would in turn proved me a 90% ROI. That would be nice, of course, be exactly not reasonable.
I like your suggestion to buy trailers cheap and sell back at a profit.
Given that the risks associated with trailer renter is the same as with apartment renters, do you like the deal?
I can’t imagine the demographics being different. Have you ever heard the saying “trailer park trash”? There is a certain stigma associated with trailer parks and mobile parks unless it’s part of a gold or oil mining camp in the middle of nowhere where it’s the only form of housing. And there’s a good reason for it.
IMO we are talking about apples and oranges when comparing trailer parks to apartment buildings. I have never heard of high end trailer parks next to cities where doctors and dentists live even though it is not uncommon to have doctors and dentists living in apartment buildings in cities.
From everything I have seen and experienced, I can’t imagine you getting the same high quality of tenants that I could get in an apartment building unless the only tenants you can find in an apartment building in that rural area are just as low quality.
I would not touch it at those prices because it sounds way too overpriced with no upside potential; it would only appeal to me as a quick wholesale flip at a much lower sale price with no money down (and if it’s “unreasonable”, then I don’t need to buy it as there are better deals out there with upside potential–it’s not the only property for sale in North America).
Yet, there are people out there who find an emotional connection to something that will pay anything and are beyond convincing and that’s who you should be selling to after buying low, not the other way around. But, that’s your choice. You’re asking for a second opinion and I gave you one. BTW, I have been in the rental housing business for over 20 years and dealt with all types of tenants and had some mentoring for the first couple years working for someone else before buying my first duplex at 20. Not everybody is that fortune to have some mentoring to set them on the right path so I think you’re at least entitled to another opinion from someone who did it.
If you really want to get into it, like I said earlier, experiment with an inexpensive, older single trailer on leased land to limit your risks so you can experience the environment first hand and at least get something towards your exit strategy for all your time and hard ache you put into it. But, IMO I think your time would be better spent buying apartment buildings with your hard earned money like I did where there’s a much better upside potential and return to retire early and wealthy.
Hi Dave, I wanted to update you on the trailer park deal and get some feedback.
I ended up buying the park at my original goal of $150,000. So far I am doing pretty well with one month vacancy for one unit out of eight and a net income of $9,300 over five months. I put down $37,500. Obviously five months is no gauge, but so far I am very happy with the deal. My original projections at the purchase was about 24% return on cash at 25% down, including accounting for a 10% vacancy, 10% management, 12.5% repair/maintenance allowance, and all other know expenses such as insurance, taxes, utilities, etc. The debt to income ratio is 2.11 and the projected expense to gross expected income ratio is 49%.
You strongly recommended against this purchase, but I went with my own judgement and I believe it is paying off. Other than your “trailer trash” stereotype, what am I missing here? You apparently have experience and skill, and I want to know what is wrong with this deal. I believe that with my expense allowance, I have accounted for bad times. At this point with $9,300 in net income I am a mere $600 away from my annual goal at less than half way through the year. Again, I realize that a half year is no gauge.
If in fact you misjudged the deal, what was it that caused the misjudgment?
Just trying to learn here! Anyone else want to weigh in? Thanks.
Those from the Midwest see mobile home park families as trailer park trash. That is unfortunate. I lived in mobile home parks in Arizona, where you don’t hear that stereo type phraseology, and it was a great experience. Now I live in Missouri and that’s all I hear. If we would call them great investment opportunities, and owners begin to put in nice amenities the stereo type would disappear and parks will become an even better place to put your money than stick built homes that today can’t hold up to an F0 tornado.
One park I’ve seen in Arizona had 2/3rds of the cars were Cadillac’s, Lincolns, some sports cars, and expensive pickups. I’d like to hear that “trailer park trash” poster to call me that. I’ve gone from that mobile home park to Air Traffic Control, then federal law enforcement, to retail turn around and million dollar sales team development, to corporate executive and sitting on the Board of Directors of several organizations.
To buy mobile home parks these days can and will most likely in the future pay off big. The Security and Exchange Commission has approved mobile home park corporations to list on the New York Stock Exchange. Larger corporations are already looking at larger parks for investment and ownership as well as creating investment portfolio funds for investors. I would guess these parks will be 100 lots or larger. But, smaller park value will increase as the larger parks increase in value.
Warren Buffett saw this coming about 10 years ago when his Berkshire Hathaway group bought a mobile home manufacturing plant. Warren also keyed on the large number of families being squeezed out of multi family apartments due to increasing lease amounts as apartment complex vacancies declined to less than 5%. Warren Buffett’s mobile home manufacturing plants announced a couple of months ago they are building Millennium Generation model mobile homes that will sell for $80K but on the inside will look like a $200K home.
This week it was determined that the Millennium Generation has already begun to not buying real estate, cars, and are not shopping in retail stores. By 2017 there will be a huge impact on those industries. Where are they going to spend their housing dollars…modern upscale mobile homes and parks.