Seasoned operators have an unfair advantage when it comes to MHP acquisitions.
They have:
Large databases that track details on thousands of target parks.
Deep broker + lender relationships to source the best deals & debt terms.
Seen 1,000+ listings and can underwrite deals in their sleep.
However, while off market deal flow is the best, MHP investment rookies can still compete with speed and a little bit of hustle + luck.
A big part of acquisitions is timing and plenty of older sellers would rather sell to a person than a private equity company. But only if your timing is right.
That’s why learning to underwrite deals quickly is a critical skill. You can’t spend three weeks modeling a park down to the penny.
If that’s the case you A) won’t be getting enough shots on goal and B) You’ll miss out on too many opportunities, spinning your wheels for nothing.
While you’re deep in analysis paralysis, the seller might change his/her mind, they might accept another offer, or they might kick the can. Life happens.
So, you have to get quick.
Before You Underwrite: Narrow The Strike Zone.
Go slow to go fast.
To speed things up, first simplify. List out your park deal-killers and/or must haves (type of utilities, paved roads, MSA population, median home price, etc.).
Then, assuming you’ve seen enough deals & ran a bunch of numbers already (which is good practice), stop looking nationwide to find the perfect park.
It’s far easier to underwrite deals in a focused region(s). Why? Because once you’ve done your initial research on a market (and like it) all you have to do is focus on park details for ever new deal in that market moving forward.
We’ve spent WAY too much time analyzing good looking parks only to realize we didn’t like the market (even larger MSAs) once we started digging.
In other words, if you’re looking nationally, you’ll spend too much time on google maps, demographic websites, and MHVillage. If you’re always looking at a new market, your knowledge isn’t compounding.
So, as we’ve mentioned before, we recommend becoming an expert on 1-3 markets and not branching out wider until you’ve landed that first deal.
This is just like a business that niches down to find its first customers. Odds of selling increase dramatically when you can focus your message to brokers and owners (ex: maybe you only buy 50-150 space parks in the Minneapolis MSA with public utilities).
This type of focused effort tends to beat spray and pray strategies. The more you focus your efforts on one region, the more likely you are to source a good deal.
Basic Back of The Envelop, Napkin Or Whatever Flimsy Piece of Paper You Prefer!
Once you have a lead in your focused region, you then need to analyze it quickly. Enter back of the envelope underwriting.
Here’s the info you need:
Asking Price
Lot rent (and if it includes any utilities)
CURRENT occupancy - not what the seller thinks it will be shortly after you buy the park (implying you’ll do better because he’s dumb and lazy, which he isn’t).
Expense Ratio - ideally the park’s actual ratio (from a P&L or tax return), but if you have to guess we’d usually model 40-50% expenses depending on park condition, type of water / sewer lines, occupancy, number of park owned homes (if any) etc. Unfortunately, this isn’t an exact science, but you’ll get a feel for what number to use the more deals you analyze and/or operate.
Desired Cap Rate - which we think as a risk/return score. Higher the risk (market, tenant quality, collection issues, occupancy, etc.), the higher the cap rate. Make sure you get paid extremely well for a turnaround park.
Example Deal:
Asking Price: $2.5 million
Number of Pads: 100 (100% occupancy)
Current Lot Rent: $300 / month, no expenses included
Expense Ratio: 50% (older park, big property tax reassessment likely)
Desired Cap Rate: 8%
Revenue Expenses NOI Purchase Price
$360,000 - $180,000 = $180,000 @ 8 cap = $2,250,000
Well, look at that. Your quick back of napkin model shows this deal might work.
The toughest variable to peg here is clearly operating expenses. We believe the vast majority of casual MHP investors underestimate how much it will cost to effectively run a park.
Sure, there are indeed some parks that can be run on 25% expense margins. We have owned some. But typically those:
are 75+ space parks
have little to no park owned homes
are NOT master metered and have all direct billed utilities with newer utility lines (or lines owned and maintained by the city)
or have well + septic (which leads to lower utility charges but have other risks / higher cap ex charges if something fails).
are in lower property tax (or non disclosure) states that do not aggressively go after property tax increases post sale
are in strong markets with reduced tenant issues so the manager can run the park part time (lower labor costs)
Don’t have huge common areas (mowing), are in warm markets (no snowplowing) and have concrete roads (no ongoing road repair)
Short of these qualities and you’ll be a lot closer 50% operating expenses vs. 25%.
“Advanced” Back of Envelope
You could do a marked-to-market analysis - which is a fancy way of saying let’s use fantasy math. Although, this tends to work pretty well with parks vs. most other asset classes.
Here you’d just use your planned year 1 lot rent (post increase) instead of the current lot rent. However, this might not be helpful if you plan a larger rent increase and plan to use debt. Reason being - the lender is not going to ‘size the loan’ (LTV) on your planned income.
You might also:
Add in a sizable upfront capital improvement budget if it’s an older park. You might get away with not having to replace lines and/or roads, but the math should work even if you do.
Do the same exercise on your assumed year 5 trended lot rent (to check the return opportunity if you were to sell). Use reasonable rent bumps (that are fair + what the market will bear, but are also unlikely to put you on the front page of the newspaper). If the in place lot rent is well below market you can probably use a slightly lower expense ratio in year 5 given many of your expenses will not grow as fast as your rent.
Conclusion
Of course, this is only shorthand math to decide if you want to spend any more time on this deal.
Think of a back of the envelope calculation as a first screen. If you decide the asking price is in the ballpark, perhaps you take it to the next step. This might be a one page excel pro forma that drills down into line item expense detail (a topic for another week) and layers in current debt assumptions.
But once again, don’t waste time building a financial model if the napkin math doesn’t work.
Happy Trails,
MHP Weekly