No, there isn’t a formula that I’m aware of. Rental home rents do add cash flow, but at a heavy price in extra management headaches, maintenance and ultimately in the value of the park as a real estate investment. That’s why I count them as a net liability.
In many cases a number of the rentals have to be disposed of as junk. But if there are some decent homes the best play is to do Lonnie deals with them and then value the notes separately from the park. That gets the best of all worlds… the notes produce mailbox money, and the owners pay lot rent which enhances the RE value.
As a practical matter, no seller is going to listen to you explain why you value the rentals at 0, or $500, or whatever. It comes down to you doing your own analysis and coming up with a valuation that you’re comfortable with, then negotiating the deal to as close to that number as you can. I refer to it as finding the mutual level of pain between seller and buyer.
When looking to buy a mobile home, I’ve found that many owners have rental homes in the park. I only want to rent the lots and get rid of the rentals. So, do I negotiate the price by telling the seller that I don’t want those rentals, I just want to rent the lots? How does that kind of a situation usually work? I know that commercial real estate is more valuable when there is more cashflow. So, do these rented mobile homes make the park more valuable? Should those rents be included to determine the cap rate?
In my view rental homes are a liability to a MHP. This is a subject we have discussed often, and there are those who maintain that the increased cash flow is worth the increased hassle of transient tenants, collection problems and maintenance requirements. In my opinion the rental home tenant removes the incentive for land-lease tenants to take care of their lots and homes, and in the worst cases can cause them to leave.
To answer the valuation question, no, you cannot capitalize the income from a MH (a depreciating asset) at the same rate as the lot. To do so wildly overvalues the intrinsic value of a used MH.
It contains an excerpt from my book, but it is not meant as a sales pitch. The topic is a frequent one, and the archives here and on the MH Forum are full of posts over the years. Use the “Search Archives” button at the top of the newsgroup page and you will be amazed at the wealth of knowledge at your fingertips.
Second, there is a four-part series of articles written by Doug Ottersberg in the Money Making Ideas section here on CRE Online called “Turning Trailer Courts Into Communities”. The direct link to the page is http://www.creonline.com/money-ideas/index.html …scroll about halfway down and you’ll see the series.
It offers an excellent guide of how to value parks with rentals. Doug is a good friend of mine and owns two parks himself, so he knows what he is talking about.
Hope that gives you food for thought. As always, feel free to post follow-up questions.
Thanks for the info! And, don’t worry, I didn’t think you were trying to pitch your book. I’ve already bought it anyways. I just haven’t received it yet.
I read those 4 articles and I understand that I’m NOT supposed to include home rental income when determining the cap. rate. But, I didn’t read anything about what value the home rents add to the park, if any. Is there a formula?