What numbers do you need to know to make great mobile home park investments?
There are many, many numbers thrown around in the real estate investment arena. Here are ten that mobile home park investors need to know for each potential investment.
- Cash on Cash Returns
Cash on cash returns are the most important number for mobile home park investors. While this figure may depend on many of the others below; it shows what you actual cash return is, and what you are really making. This figure can then be used to compare investment options. To find the cash on cash return divide you annual before tax income by the actual amount of cash you plan to invest.
- Cap Rate
Capitalization rate is commonly used to compare commercial real estate investment opportunities. The cap rate is derived by dividing the annual net operating income (NOI) by the value of the property. So a $1M property with a $100k annual NOI has a cap rate of 10%. This is the equivalent to price-to-earning ratios in the stock market. However, note that the true cap rate changes over time. The income ought to go up, and so should the property value. Investors often forget this. The result is a far poorer cap rate in the future do to substantial captive equity. For example; if your property value goes to $2M, and your income stays the same you now only have a 5% cap rate. Tap this equity and expand to keep you capital and investments performing better for you.
- Cash Flow
How much cash flow will this property actually throw off? Gross and net. There can be a big difference. Big gross numbers mean nothing if there is negative net cash flow. However, there can be advantages to high gross numbers. This can act as a nice float during the year.
What loan to value can you borrow against this property? What LTV will you be able to refinance at? What LTV can future borrowers expect to achieve? How will that impact the resale buyer pool available or potential need to offer seller financing?
- Number of Units
How many units or lots are in a given mobile home park? This can impact consistency of income. Also consider if there is room to add more units.
- Per Unit Rent
How much is the rent and income per unit, door, or lot? How does this compare to other options in the area?
What utilities are to be provided? Who pays them? How much are they? This will impact your bottom line.
In terms of importance taxes are right up there with cash on cash returns. How much are the property taxes? How much are they likely to go up? What can you do to minimize property taxes? Then there are income taxes. How will the returns from this mobile home park impact your overall tax burden? How can you minimize that and turn it into a positive? How much will you really net after taxes?
- Local Unemployment
What a local unemployment rates like? How does this compare to other locations? Mobile home parks can benefit from serving lower income housing needs, but if people don’t have income it doesn’t matter how cheap the rent is.
- Local Vacancy Rates
What are local vacancy rates for rentals and other mobile home parks? How many units or lots are vacant or are going vacant in this park? Build this number in as an allowance to ensure you stay in positive cash flow territory.