We are actively looking for a mobile home park to purchase here in Northern California before the end of the 2013. This is the first of many blog entries that will document our progress over the coming months. All posts will be listed under the category Investment Activity 2013, for easy reference.
In keeping with our advice about investing in mobile home parks (MHPs) and income producing property (IncP,) please review our goals, objectives and purchase criteria for this investment.
- Cash on cash return of 10% per year. If we put down $500K, we need a net income of $50K a year, pretty simply. This will be a bit back loaded over the 7 years (expected hold time for the investment) with 6-7% in the first couple of years and 10-12% in the last few.
- 100% gain on capital invested at disposition in 7 years, including appreciation and principal pay down. For example, $500K down we want $1M in proceeds at the time of sale. This might be a little aggressive but it’s our goal!
- Find out what’s currently on the market by contacting our favorite MHP brokers and searching websites like LoopNet and Mobile Home Park Store, by 5/30/13
- Qualify any good prospects we find in this first pass, by 6/30/13
- Provide “friends and family” a sample business plan to help them understand the goals, returns, how they participate, legal issues (contracts, entities, liability, etc…) and surface and answer all questions, by 6/30/13
- Build a pipeline of funding commitments totaling $1M. If the required down is $300 – $600K, this target provides some cushion if a few commitments “fall out,” by 11/30/13
- Write 3 offers, by 9/30/13
- Close, by 12/31/13
- Northern California – This is where we live, we know the local markets and population growth and demographic changes ensure continued increases in demand for affordable housing.
- 40-60 Spaces – There are 600+ parks in N. California of this size so there are plenty of prospects. In addition, our current parks are about this size so we understand the operating issues, best practices, etc…
- City Water and Sewer – It would be nice to have all city services as this reduces the physical risks and potential for unexpected expenses. However, many parks are located in areas where no public services are available (Paradise, California, all septic, no sewer services are available.) We currently own several parks with wells, septic and one with well and septic.
- Direct Billed Utilities – Having all the utilities direct billed by the utility providers reduces operating costs and losses. However, we have 2 parks with master metered gas, another park with 15+ spaces of electric meters and 2 parks with water meters. Earlier this year we upgraded our property management system to calculate utility bills in house, reducing cost and dependencies.
- 85%+ Occupancy – We want parks in areas where there is strong demand. If 15% vacancy is the result “under management” that’s a good prospect for us. It will require additional capital, time and effort to fill the spaces but the incremental revenue and appreciation could justify the investment. If the vacancy is a result of insufficient demand and an underlying weakness in the local economy, we will not purchase the park.
- Affordable Housing – This is our sweet spot and where we believe the best returns on investment are available over the long-term. Affordable means just that but not dead cars, trash lying around homes, pets running wild, drug dealing, etc…
- Rents 25% Below Market – This is more of a requirement than a goal. Why? Because we will need to raise the rents over the first 1-3 years to achieve our financial goals. Again, rents should be below market because the owner is under managing the park. Usually, they’ve owned it many years, live remotely, have friends who live on the property and for one or all these reasons, they’ve not increased rents and kept pace with the market.
- $1.2 – $1.7M Price – This price is consistent with the target size of 40 to 60 spaces and a price per space of $25 to $30K.
- “B” Market – I’d love to own a MHP in an “A” market but they are expensive and will not provide the returns necessary to meet our financial objectives. We currently own parks in both “B” and “C” markets where there is strong demand for affordable housing.
We have a couple of properties we will be considering next week so “stay tuned” for the details. If you are on our “friends and family” list and would like to receive emails with the underwriting and other financial documents relating to the properties we are qualifying, please let me know, ASAP.
If you have a comment or question, please reply below. If this post could be of value to someone you know, please LIKE and email or repost to Facebook, LinkedIn or your favorite network. I will not share your personal information with anyone for any purpose. Please see my recent articles on BiggerPockets, Online Real Estate Magazine, by visiting John’s Additional Articles on BiggerPockets, located to the right on this page.