Minimum Size Park

Hello. This is my first post on the forum, but I have been following the dialogue over the past several months. To give you some background, I've done a couple of Lonnie lease-purchase deals to-date and have been pleased with the returns. However, I'm looking to take my business to the next level and am evaluating some smaller mobile home parks (under $400k price range) to purchase.

I have a question for those investors who have purchased multiple parks over the years. What is the smallest size (# of lots) park a novice should consider for their first deal? Should I not be considering something under X number of lots? I've mostly been looking at parks with 20+ spaces, but I've found a park with only 10 lots that seems to have some potential. However, I have some concerns about economies of scale with a park this small. 10 lots seems to be a small base to spread my fixed expenses (insurance, landscaping, taxes, etc.) across. Any thoughts?

Let's start backwards and work forwards. If you buy a park with 10 lots at $150 lot rent, you have $1,500 per month in revenue less, say, 40% expenses yielding EBITDA of $900 per month = $10,800 per year. That's going to give you a park value at a 10% cap rate of around $100,000. It's going to be pretty hard to find someone who will buy a park that yields only $900 per month. They are also going to have trouble putting any type of travel expense or other administrative cost on numbers that small. Now let's change the example to 10 lots at $400 per month, where the tenant pays all utilities. Now you have an EBITDA of $2,800 per month -- and that turns a lot of people on as now it's about a $350,000 deal, and you can retire on the cash flow once it's paid off (if you live frugally). The moral is that it's the EBITDA that you need to watch, not the size of the park.

I think you will need at least a $2,000 per month EBITDA to turn most buyers on down the road, as well as maybe make it worthwhile for you now.

I bought a 15 space park once that had a stick-build house on it. The rent was $285. The EBITDA was 15 x $285 x .6 x12 = $30,780 plus the house at $495/mo x .6 x 12 = TOTAL EBITDA of $34,344. That was a perfectly decent size, and I never regretted buying it. In Louisiana, at $99 rents, it would not have been a good deal probably.

MobileHomeParkStore.com

Your Source to Help you Buy, Sell, and Operate Mobile Home Parks for Maximum Profitability

If the park cash flows "size doesn't matter" !

mhpguy Wrote:
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> If the park cash flows "size doesn't matter" !


Actually, the park size does matter. There are so many reasons but a few big ones are:

1) smaller parks sell on much higher CAP rates and are much harder to finance.
2) I fly several hours, then drive and spend the night to visit my parks. If the park is small, the cash flow will not support my visits.
3) Infrastructure problems are much more costly per pad as your overall lots diminish.
4) In many ways, it takes just as much time to manage a 60 pad park as a 20 pad park.
5) Parks over 100 pads qualify for much lower CAP rates as many large owners have 100 pad minimums.
6) Small parks do not support onsite management near as well. I pay almost the same for a 37 pad park as a 60 pad park. If that number was say, $250 per month, that is $6.76 per pad on the small side, and $4.17 on the larger one... The hard costs, computer, internet connection, phone, fax, software etc all stay the same... but distributed over fewer pads. Also, when you loose 2 homes on a 20 pad park, it is 10% of your income... on 60 pads, it is under 4%...

So... my take... try to stick with nothing smaller than 35 pads... there are exceptions... and if you have private utilities... the bigger the park the better... a sewer plant, septic replacement, new water wells, pressure tanks etc can be hundreds of thousand to replace...

case in point... 20ish pad park in Nebraska is just flat closing because they can not fix the lagoon system... they can not take the 100,000 or so hit. If that park was even 50 pads, I bet the could get it done... so those people will walk away from their investment and that park will evaporate...

off my soapbox... sorry...

Jim Johnson
Denver, CO
www.mobilehomeparkbuyers.com

Jim,
Flipside..(
1. More owners are willing to hold paper on smaller parks because they are harder to sell-easier to buy.

2. I would not recommend a first time park buyer buying ANY TYPE of property with well water and septic/treatment plant as serious dd is necessary! (avoid the infrastructure issues)--almost always to replace part of a sewer line is cheaper than a septic issue.

3.Low cap is great when you want to sell, but when buying ill take the higher cap.

4. You can pay less for management on a small park. Everyones management style is different and I see Jim provides certain/same services for his smaller park and his large parks. I for example will only pay 1/2 lot rent for a small park-not to get off topic- but its a defined number of duties for a set fee-pre pay cell, thats it--no email/fax/internet etc. They collect the rents and I record them through my office so they do not need software etc.

5. The fact that MANY investors buy only 35 (or 50 or 100) and up is an opportunity for savvy small investor!!...Less competition on smaller parks.....Higher cap, means more $$$$ in your pocket.- I try to find tiny parks near my larger ones so when I do fly out it not to see 10 spaces, rather 110.

Bottom line.....a larger park wont do you any good if its costing you money to operate. It comes down to the numbers. yes a vacancy in a smaller park hurts more than in a larger park, but if you bought the small park at a 12-14 cap (do your homework) and the large one at a 6-8 cap you will still flow.(if it doesnt do not buy it!) I started on a 27 space park and refi'd to another 25 space park and then refi'd again to a 17 space park and then refi'd to two 70 space parks, Without the little guys I would not have the big guys..I love little parks. .my 2 cents...



Edited 1 time(s). Last edit at 07/23/2010 05:12PM by mhpguy.

All good points... I will give you the bigger CAP rates and smaller parks... and stick with managing my managers at the 35+ side of the street...

J~

Jim Johnson
Denver, CO
www.mobilehomeparkbuyers.com

Jim.
Thats why this forum is such a great assett to any size investor. Small investors like myself can see how larger investors think and make money!
Thanks Again For all of The input as your points are wll taken. I hope in a few years im on that same side with all parks over 35 spaces!
Alex

Thanks for the input. It will be very useful for all.

Hey Jim,

In regard to management, upon buying and turning a park, is it usually the case that you have to fire the existing manager or give them a serious pay cut? I'm looking at a stable 30 space park (no POH's) where the manager is given free lot rent and paid 500 a month. This seems like overcompensation to me for a park that is stabilized.

Any of your comments would be appreciated,

Rob Mosher

Before you can decide the compensation level, you have to decide what the duties of the manager are. In a 30 space park, assuming no or few park-owned homes, pretty much nothing happens from day to day.Once a month, you have to collect the rent. Once a month, you have to pay the bills (maybe 10 of them). Monthly, you have to prepare a financial statement. Every once in a while you have to deal with a problem like a stopped up sewer line. Annually, you have to file taxes. If you are going to do all those steps yourself or with an outside bookeeper, then the guy in the park really has nothing to do. So I think that free lot rent is sufficient. If you are going to have the guy in the park do all those duties, then $500 in addition to free lot rent may be too little.

I find that, in general, there are more park managers who are over-compensated than under-compensated.

As far as turning a park and firing the manager -- if the park is in terrible condition, don't you think the manager has to go? Most managers will claim that the owner gave them no money to make repairs. And in some cases that's true. But it doesn't cost much to pick up litter, etc. And in most cases, the manager is as guilty for the park's condition as the owner. As a result, the manager normally needs to be replaced in a turnaround situation.

MobileHomeParkStore.com

Your Source to Help you Buy, Sell, and Operate Mobile Home Parks for Maximum Profitability

As always, your insights are great Frank, thanks.

Rob_Mosher Wrote:
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> Hey Jim,
>
> In regard to management, upon buying and turning a
> park, is it usually the case that you have to fire
> the existing manager or give them a serious pay
> cut? I'm looking at a stable 30 space park (no
> POH's) where the manager is given free lot rent
> and paid 500 a month. This seems like
> overcompensation to me for a park that is
> stabilized.
>
> Any of your comments would be appreciated,
>
> Rob Mosher

Rob,
Every park is its own animal, and every manager is their own person. When I go into a park I make a very detailed list of everything that needs to be done in the park. I then assign time and skill set values to each task. From that I develop a profile for the manager I am looking for. I put together a scope of work list, and a compensation package and then see if who is there is a good fit.

Managers are only part of the equation for a poorly run park. The skill sets and corporate oversight contained in the owner of the property is where it all starts. managers can only do what they are tasked to do, and the scope of that is in the hands of the owner. I have had my parks go both ways. The parks that really need a lot of cleanup, homes sold etc seem to lean to a new management structure. If your raising rents, installing sub meters etc, the old manager might do just fine.

Remember, if you want to keep the old managers in, present them with a management package. Tell them you always want to keep who knows what is going on in place, but some adjustments might be in order. I can always point to my heavy use of technology to a reason to cut their pay. Our systems are easy to use, we have good training and they track the daily activity of the park with the printing of a button, or viewing of a report.

Anyway- until you get the property and assess the needs of the asset, and the skills of the manager- you really have no idea what you have...

Jim Johnson
Denver, CO
www.mobilehomeparkbuyers.com