Buying distressed mobile home parks
During the Great Depression in the 1930s, Conrad Hilton built a hotel empire by buying all the major American hotels: the Plaza, the Drake, the Palmer House, etc. – to a penny on the dollar. He boldly went against the grain of average investors and built an icon that exists to this day.
In the mobile home park business, you may be the next Conrad Hilton, if you know the tactics needed to buy distressed mobile home parks.
Understand the real costs of building a mobile home park.
Before you can start buying distressed assets, you must first understand their true value. One of the best starting points for understanding mobile home parks is understanding what it costs to build one. This is called the “replacement cost.” For mobile home parks, one costs about $ 8,000 per lot to build, plus the cost of the land. For a 100-space park, that equates to $ 800,000 in infrastructure costs, plus the cost of the land. The average mobile home park is based on a density of 7 to 10 units per acre. So a 100 space park would be 10-14 acres. You can add the cost of land based on the value of acreage in the vicinity of the park.
So if the “replacement cost” of a 100-space park is 100 x $ 8,000 in infrastructure and 10 x $ 20,000 in land cost, then it would cost you $ 1 million to build it from scratch. If you can buy that same park for $ 500,000, then it’s a good deal, right? Not always. There is still more you need to know.
Know the current EBITDA.
EBITDA stands for “earnings before interest, taxes, depreciation and amortization,” basically the true cash flow of the property. This is the measure that allows you to assign a value to it. Once you know this amount, you can calculate the price with different capitalization or “cap” rates. If a mobile home park has an EBITDA of $ 100,000 per year and you value a mobile home park with a capitalization rate of 10%, then its value would be $ 1,000,000.
Understand the compositions.
When an appraiser tries to determine a value, one of the factors they look at is what the other mobile home parks in that area are selling for. This is perhaps one of the best indicators of value, except for the fact that buyers of the other mobile home parks may not have made smart purchases.
However, this is more true of past compositions than recent ones. While buyers made some really stupid purchases a few years ago and borrowed from banks with the same lack of discipline, this is not true for recent sales, which have been built on the new reality. Putting it all together.
To make good purchases during depression, you must be able to define and support the great distress purchase from the mere mean. If you have a park of 100 spaces in distress and you have it under contract for $ 400,000, with an EBITDA of $ 60,000 and compensation of $ 12,000 per space, then this is what we know about it:
* It would cost $ 1,000,000 to build that park, so that’s 40% of the construction cost, which is a very attractive discount.
* It’s a 15% capitalization rate, which is extremely attractive.
* It would show compensation values of $ 1,200,000, which is 300% more than its price.
That would make a heartbreak purchase worthy of Conrad Hilton. And this is how to make a fortune in the current depression.