Posted by ray@lcorn on October 21, 2002 at 10:58:03:
You’re right, I don’t like the 51 park owned homes, but that wouldn’t keep me from looking. That’s where upside resides…
However I’m not too clear on your numbers… the monthly income of $16,700 per month ($200,400 per year) obviously includes the rental homes… soooo, if there are 48 spaces @ $110, that means $5,280 of the monthly is from space rent, leaving $11,420 for the rentals, or an average rental amount of $224 per month, which includes paid utilities and the grass mowed. I can imagine that the tenants have to be loving that… more on that in a minute…
Next, the expenses are quoted as January to June, which I will assume means through June. Expenses without interest for the six months equals $71,306. Double that and you get $142,612 for the year, deducted from the gross of $200,400 leaves an NOI of $57,788 before debt service? With a sales price of $650T, that gives a going in cap rate of 8.9% on a rough property that is maintenance and management intensive. I don’t like it already, but I may be wrong about how I interpreted the numbers above. If so, let me know what the real scoop is.
As to how to verify the expenses, you have to dig in and get as many third party confirmations as possible. The first one I would want to know about is the $16,750 in labor. That over $16 bucks an hour… is that a standing wok crew of two, a manager? That’s a lot of labor for a little park… 17% of gross, and shouldn’t be over 10%. The rental homes are likely driving a lot of that expense, and I would spend some time trying to separate the maintenance on the homes from the spaces. It never fails when I do that an owner realizes the rentals are actually costing money instead of making money.
The easy way to capture upside in a deal like this is to sell the rentals to the tenants, but that assumes that the units and the tenants are decent. Here I would question both simply because of the economics above ($224 per month). That’s cheap rent, and it’s going to be hard to find a tenant that could see an advantage to buying, paying lot rent, mowing the grass and paying a payment. Another way to capture upside is through submetering, but in a park full of transient tenants this is also hard to do.
So I’d slow down a bit here… ask some hard questions of the owner and get the straight story. Let me know if I screwed up on the numbers and I’ll revisit the opinion!