Forcing Appreciation by Adding 20 Extra Paying Lots: The same 120-space mobile home park with 120 occupied lots (forcing appreciation by having an extra 20 lots paying rent).
Note: For the sake of simplicity, I’m going to use mostly round numbers in my examples.
Adding value by raising the occupancy to 120 occupied lots: In the previous Case Study, we had 20 vacant lots, 100 occupied spaces, an average lot rent of $300, a mortgage of $8,300 a month and operation expenses at 35% of gross rental income.
In Case Study #2 we have 120 occupied lots and 0 vacant lots. This is where things get fun. You see the mortgage on this property will be the same whether there are 100 occupied lots or 120 occupied lots. Either way, the mortgage payment stays the same.
Because there are fixed base expenses in owning and operating a mobile home park (licenses, permits, corporate fees, management costs, landscaping, etc.), most of our operating expenses will remain the same whether we have 100 occupied lots or 120 occupied lots. In actual fact, we would probably only have 25% or less in operating expenses for the additional 20 lots (not 35%). To keep things simple and to be conservative, let’s say that the operating expenses stay the same for all 120 lots.
How does all this affect our numbers when we now have 120 occupied lots? Let’s take a look…
NOI Calculation, 120 occupied Lots: $300 (monthly lot rent) x 12 months = $3,600 of gross income per lot. $3,600 x 120 lots = $432,000 annual gross income for 120 occupied lots.
Now subtract 35% of $432,000 for operating expenses ($151,200) and you are left with an annual NOI of $280,800 for the 120 occupied lots. That’s an extra $46,800 in annual NOI for filling these extra 20 lots!
How does this additional NOI affect our overall value?
NOI – Mortgage = Cash Flow: Remember, the mortgage payment is the same whether we have 100 occupied lots or 120 occupied lots.
Our annual NOI is $280,800 – our $99,600 annual mortgage payment = $181,200 in annual cash flow. That’s an $46,800 increase in annual cash flow from filling these extra 20 lots.
NOI / Cap Rate = Value: We have our NOI and cash flow evaluations of these 120 occupied lots, so let’s take a look at the value of each lot and the total value of these 120 lots.
Annual NOI for one of these 120 lots = $2,340
Now apply a 10% cap rate to that NOI ($2,340 /10%) and you end up with value of $23,400 just for one lot.
Now multiply that by 120 lots and you have a $2,808,000 in value for these 120 lots. That’s $468,000 in additional value from filling these extra 20 lots!
Let’s compare (Case Study #1 and Case Study #2):
NOI = $234,000 for 100 lots vs. $280,080 of 120 lots ($46,800 additional NOI)
Annual Cash Flow = $134,400 for 100 lots vs. $181,200 for 120 lots ($46,800 additional annual cash flow)
Value = $2,340,000 for 100 lots vs. $2,808,000 120 lots ($468,000 additional value or forced appreciation)
By filling just 20 extra lots we gained $46,800 in NOI, $46,800 in cash flow and a whopping $468,000 in additional value. Of course, there are expenses involved in bringing a home in to fill a lot. You might have to put some cash up front, although as we already addressed, you have financing options. There really are possibilities to fill lots with next to no money out of pocket for the park owner. How cool is that?
To sum this up: At a 10% cap, every additional $1 gained each month from improving NOI can create $120 in return when evaluating a MHP! ($1 x 12 months = $12. Then $12 /10% Cap Rate = $120 in Value.) Way to go!
So, there you go. Securing just one mobile home park (depending on your ownership percentage and the parks size and financials) can make you financially free. Two to three mobile home parks should most definitely make you financially free. And five-plus parks should make you down right wealthy. It’s really not that hard to secure a few mobile home parks (in comparison to slaving at an office desk as an employee until 60-plus years of age and then retire with no money).
To learn more about the ins and outs of mobile home park investing, how to avoid pitfalls and maximize profits, all from the comfort of your own home: Get your hands on the “A to Z of MHP’s – everything YOU need to know about mobile home park investing – Home Study Course!” https://bryce-s-school-cb49.thinkific.com/courses/a-to-z-of-mhp-s-home-study-course
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Real Estate Investor | Best Selling Author | Syndicator | Educator