Posted by Eric C on August 12, 2003 at 08:23:48:
Hi Eddie -
You might want to get a copy of William Zeckedorf’s autobiography from Amazon or another source.
Pay special attention to the portion of the book that deals with his “Hawaian Technique” where he talks at length of the differences between investors (and their perceptions) and how those differences translate into in different (and for him – higher)valuations.
He certainly makes the point better than I.
Take care,
Eric C
Valuation of MHP w/ unit incomes - Posted by Bert NH
Posted by Bert NH on July 29, 2003 at 20:35:25:
I’ve read some posts in the MH section about whether or not the income received from the rental of homes in a park which are owned by the park owner, should be added to the income stream when using a cap rate to determine the investment potential. I guess I think a property is worth ‘value x’ based on ALL THE INCOME (both lot rents and unit rents). I know some of you will not agree and I’d like to see some discussion on both sides of the issue. Thank you. Bert NH
Re: Valuation of MHP w/ unit incomes - Posted by ray@lcorn
Posted by ray@lcorn on July 31, 2003 at 15:02:06:
Bert,
It comes down to a decision for each investor. There are four financial benefits to owning real estate: cash flow, capital appreciation, tax benefit, and equity growth. Many decisions made about the operation of the property can and will affect one element positively and another negatively. Each investor has to decide which holds priority and when. This is one such decision.
In the case of rental homes, there is no argument that they will increase cash flow. But you have to understand the trade offs. The posts Eric noted below from JohnBoy concentrate on the folly of capitalizing a short term asset on a long-term rate. That’s a sure recipe to pay too much. In real estate that’s the equivalent of original sin, from which we never recover.
But further than that are the trade-offs in the asset value. By choosing the quick cash flow from rental homes you will sacrifice both long-term and upside-induced appreciation of the property. They also increase the management burden for a park by 100%.
Below is an excerpt from my self-study manual, “DealMakers Guide to Mobile Home Parks”, available here in the CRE Online bookstore.
Rental Homes
As we discussed earlier, one of the differentiating factors of a mobile home park as an investment is the stability of its tenants due to the expense involved in moving a mobile home. Rental homes negate this advantage. Many park owners look at rental homes as being a boost to cash flow, and on the surface that would appear to be true. The homes can often be bought cheaply, or in many cases, an owner will accept title to a home in payment for past due rents. Collecting a deposit and rent double or triple the amount of space rent seems to be found money, with no harm done to either tenant or owner.
But this is not the case. The home is usually rented to a succession of tenants who have no investment in the community, and no pride of ownership in their homes. As a result, the maintenance on the home remains the responsibility of the owner, and is often neglected. Many rental tenants will not even tell a landlord of minor problems such as leaking toilets or stained carpets for fear of reprisal or loss of deposit. If not totally ignored, the maintenance is done sporadically, and costs run abnormally high due to the transient nature of the tenant base and the relatively low amount of damage that can be sustained by a mobile home without incurring substantial expense to correct. Often the yard and space around the home is ill kept as well. I have seen parks where it was hard to tell which cars ran and which were yard art due to the proliferation of junk around rental homes.
The effect on the community as a whole is just as pronounced. Rather than fostering an atmosphere of neighborhood and shared responsibility for upkeep with the residents, the rental home tenants tend to come and go without developing friendships or ties to the community. Residents who own their homes will resent the transients, and have the impression (rightly so) that the owner of the park doesn?t care about the quality of life for the residents. They will cease to be community minded, and may even start making arrangements to leave. Prospective new home owners exploring parks for location of a newly purchased home will most likely not choose to locate in a community that looks and feels unkempt. The park owner will then begin to meet resistance for increases in space rent. I have very often found that parks with a high percentage of rental homes lag the market in space rent by as much as 25%. The reason is simple. None but the lowest quality tenants will choose to live in substandard conditions if better are available at a comparable price.
Finally, because of the depreciating nature of a rental mobile home, the cash flow from that home must be valued differently than that of the income from space rentals. Allowance must be made for increased maintenance costs, collection losses, and higher vacancies in both spaces and homes. Since the home itself will rarely outlast the spaces, it must be capitalized at a different rate. I will generally not count the rental income from a home in the gross income for the park. I value the homes separately, based on age, condition and size. In the case of badly worn or aged homes, I will actually deduct the cost of moving them out of the park from the final value of the park. In short, there is no scenario in which a rental mobile home is an asset to a mobile home park.
Also be aware that the potential exists for a park to have a rental home problem without the park owning the rental homes. Many times I have seen dozens of homes owned by other investors as rental housing, but shown on the rent roll as a space rental only. The effect on the park is the same regardless of who owns the home. I don?t begrudge investors that make it their business to rent mobile homes. I just don?t allow it in my park. When examining the rent roll, you should be on the lookout for the listing of the same name on multiple spaces. Or the tip-off may be a corporate tenant, such as XYZ, Inc. may be listed as the tenant of space #101. That same corporate name may be listed on the rent roll for multiple lots. If so, then you have probably found the owner of a rental home. Question any tenant listing that does not appear to be normal. Ask the question outright of the owner, ?How many of the homes in this park do not belong to the occupant?? Again, the only way to totally insure that you have the facts regarding ownership is to require tenant estoppel letters as a condition to closing.
ray
Re: Valuation of MHP w/ unit incomes - Posted by Eric C
Posted by Eric C on July 29, 2003 at 23:46:16:
Hi Bert -
Here’s two links to a couple of posts by Johnboy on this very subject.
Enjoy.
http://www.creonline.com/commercial-real-estate/wwwboard5/messages/991.html
http://www.creonline.com/commercial-real-estate/wwwboard5/messages/666.html
Take care,
Eric C
Re: Valuation of MHP w/ unit incomes - Posted by Bert NH
Posted by Bert NH on July 31, 2003 at 21:34:34:
Ray, Excellant explanation! It all seems so clear to me now. I’ve always thought of cash flow as cash flow and capitalized it all the same. In most cases it probably is all the same. But I do see why the cash flow from 40 year old MOHOs is different. Thank you so much for your detailed post. I appreciate all of you who have posited an opinion. This is what its all about!
Re: Valuation of MHP w/ unit incomes - Posted by Eddie-MI
Posted by Eddie-MI on July 30, 2003 at 10:35:38:
I hate to bother ya Eric, but I would like your personal answer on Berts question.
Seeing as to how you have owned salons and strip malls, I would guess you have owned rental mobile home parks? I guess with right price and terms anything can make sense, but would like your 2 cents on Bert’s question.
Thanks
Better late than never, … - Posted by Eric C
Posted by Eric C on August 12, 2003 at 01:36:37:
… maybe.
Hi Eddie -
Actually, I’ve never owned a MHP, but I’m still looking.
On the subject of rental MHs, I have to agree with Ray’s post and Johnboy’s earlier ones.
Personally, I don’t value all cash flows equally. To me, it all boils down to the stability (predictability) of the cashflow and the amount of effort (work) required to produce it.
Simple risk-reward. Yeah, I know everyone says that, but too few actually practice it.
Even so, I’ve known a couple of folks who have done pretty well with rental MHPs.
The first one used to rent his units out to migrant workers on a seasonal basis; and his annual net was in the neighborhood of 300K per year. Not bad for a few months work – but he also had to collect his rents with the help of armed guards, highly trained dogs (better and cheaper than the human guards by the way), and a well-worn shotgun.
The second guy was a real savvy operator. He came complete with the mortgage department of a major lender (when they closed permanently, he bought all the "good paper – and most of the “bad”, hired the best employees, and struck out on his own) and eventually owned several large parks. He had complete repair crews, excellent on-site management, and the means to both acquire units (and the paper) and handle all aspects of the business. He did better than the first guy, but he still worked too much (for me, anyway).
I tend to lean a bit more toward door number 2 – the second park operator. I don’t mind hiring employees to do the daily chores of running the business while I make it my business to do as little as possible.
Another thing to consider is that the less the income stream costs to produce (in terms of work/risk/effort), then the more value people place on it. And the more people who value it at all - read that to mean, increased demand. Generally speaking, of course.
For example, I can think of several small firms that make great profits for their owners, but which would have little or no interest for most investors. The personal attention (skills/talents/etc) of the owners are essential to the continuing success of these enterprises. Most investors just aren’t looking to buy themselves a job, no matter how attractive the salary might appear.
Smaller rental properties (multis, commercial) are often viewed in the same manner.
One of my favorite techniques is to locate burnt-out landlords and offer them a solution to their problem. These folks are often too tight (amateurish) to run their properties professionally (on-site folks, standardized procedures, maintenance schedules, etc). And although they may have been “milking” the property for years, they;ve also come to realize that the practice has taken a toll on both the property and themselves.
Bring these projects back on-line with a year or so of stabilization and you can then resell them to someone who will probably decide to scrap all those changes(and which attracted them to the property in the first place). They tend to think (just like the first folks did) that they can cut corners and make the place do even better. And for a while, they can.
But soon, the entire cycle repeats.
Questions?
Just ask.
Take care,
Eric C
PS - if any or all of this is somewhat incoherent, I plead exhaustion as my excuse. Several hundred miles have passed since you posted your question and the hour is late.
One more thing, to make these smaller properties work, it’s also essential to know how to locate and target local investors with money. Once you know their budget restraints, you’re set.
See you.