Are mobile home parks overpriced? That question is a matter of personal opinion. The interesting thing here is that I remember cold calling back in 2020 and anyone in central Florida that told me 50k per pad, my initial thought was that this guy was a lunatic! Now we look back and say “damn!” I should have bought everything in sight!
Will that be the case here in 2 more years. My guess is probably. When you are buying parks, in my opinion, you always sort of feel that you are paying too much, but if you look a the price of commercial real estate assets, they always increase over a long period of time. Why is this? Because commercial real estate is not like residential real estate. Residential real estate values are essentially based on what Joe sold his house for next door and what Suzie sold her house next door for. Commercial real estate on the other hand is based on the Net income (NOI – Net operating income) of the property.
Revenue – Expenses = Net operating income
The values are also based on Cap rates.
Cap Rate – Capitalization Rate
The Cap Rate is essentially a percentage point, 5, 6, 7, 8 percent. This number generally tells you what your return would be on the property if you paid cash for the deal. A higher cap rate would indicate a higher return but could also indicate more risk and a lower cap rate would be the opposite. So, if the deal is at a 6-Cap, you would make 6% on your money if you paid cash for the deal. Now that number would not take into account any value-add you are doing to increase the NOI. That would essentially be on the in-place income (meaning what the property is doing now.)
The point here is, will rent be higher in 5 years than it is today? 100% without a doubt. How much higher? Well, that depends on the market you are in of course. If you think there is a 5-10% increase in rents over the next 5 years in various markets, that will essentially mean anything you buy today will be worth more in 5 years. FOR SURE.
But then we get into the headache factor. If you buy a property for 3 million and its worth 3.5 in 5 years. Ehhhhhh probably doesn’t pass the headache factor. A mobile home park will be a headache to a certain degree. THIS IS NOT A PASSIVE INVESTMENT. It can be eventually but even then, there is still craziness to deal with.
The point I am trying to analyze here (and really trying to convince myself) is now the time to buy. When most of the market is scared that usually tells me that now would be the time to take action. That does not mean make idiotic deals. That means, underwrite and find ways to make deals work and not find ways to make deals not work. Over the long run in commercial real estate, you still win.
Vicktory Real Estate Group