Issue link: https://read.dmtmag.com/i/633345
FEBRUARY 2016 24 THE JOURNAL Ask Eddie BY ED HICKS DEVELOPMENT MARKETING Why do most of the investment mhp prop- erties I review in FL, CA, AZ and other pop- ular retirement areas, including the one you sent me last week, have what I consider to be such low "cap rates" (high prices). Johnny M., Slidell, LA Please let me respond to your question about mhp valuation and in particular what you con- sider a "low cap rate" for the combined two parks I send you info on. It's a somewhat complicated issue since so many variables enter into valuation: the investor's objectives, investors willing to take a risk, investor's willingness to ad value in the form of capital and/or management time, the stability of the residents (keeping it full), over- all market stability, comparable properties, ex- pense analysis, review of the Prospectus (FL), upside possibilities, amount of time taken to manage, etc., etc., etc. First, "cap rates" or what are commonly more appropriately capitalization rates for various in- vestments. As you know, they are used by many investors as a "quick or snapshot review" of the static annual "un-leveraged" (or pre-financing) cash on cash return for a given property. These depend on a consistent analysis of the variables: gross potential income, vacancy and collection, operating expenses, etc. Please remember the old expression "garbage in, garbage out". Most importantly therefore, it is important who is providing the income/ex- pense information: those with prejudice such as the seller or seller's agent. More often, an ap- praiser, bank audit, or other third party data may be more objective. Many brokers are reported to be intentionally helping the seller by "overlook- ing" an operating statement which has either er- roneous or misleading information, to wit: commingling community expenses with personal expenses, leaving out external management fees and/or maintenance reserve, etc. This issue is one which can make a difference in how you evaluate a property. If you are used to seeing properties listed on "national" broad brush sites like ****.net, you are sure to find some pretty good cap rates in their description, but when you perform due diligence, and add in expenses either misstated or left out, the cap rates almost always go down, indicating a l owner return. So if you are comparing an accurate statement which is very accurate and reflects the true nature of a property, it may seem unusually low when compared to something found on an unreliable source like ****.net. Another issue to consider is: "cap rates" for properties in some locations are inherently lower than others due to the market demand. For ex- ample, in resort and retirement areas like Ari- zona, California, Florida, or those which are located near major cities like Chicago, New York, Los Angeles, Seattle will also tend to be higher when compared to places in. Arkansas, Mississippi, Michigan (temporary), Oklahoma, parts of Texas, etc. Reasons for these differences are obvious: there are more buyers who are interested in an invest- ment which is in a nice, sunny, resort oriented place for considerations of appearance or write offs of expenses, etc. Or if near a major metro- politan area, there is usually a higher demand for low income housing nearby for which mhp prop- erties almost always are able to provide. There are exceptions to these issues as you may expect. For example, about 20 years ago, there was a large exodus of double wide homes from rental parks in the Atlanta to the nearby countryside because of the opening. Up of some very low prices and excellent financed subdivision home- sites. Occupancy levels went from high to al- most nothing in just a couple of years. When the recovery took place, many of the new doubles had been replaced by the less attractive single section home, and were often owned by landlords who quickly filled them largely with undocu- mented aliens. For just these few examples, I suggest you re- view your investment objectives in terms of: eq- uity, available debt, your time to manage, and then review the operating statements the seller has provided. He is a very experienced property manager with a lot of experience and education with excellent credentials. So the statements he is providing will be as accurate as any you will find, and when comparing them to a typical ****.net property after adjustments, should paint a more complete picture. I suggest you and I go over a typical operating budget for properties (including those of your currently owned communities) and compare them with these to see what the differences may be. Many properties, which are listed on the In- ternet properties, which listed, may be "picked over" by many buyers, and yet they remain. Why? In the case of the properties I sent you, the seller, at my request provided them as older, mature properties, which are considered to be good investments, which he has operated for several years. They are not properties which you often find on sites like ****.net which have lots of uncovered flaws, only to be discovered after a lot of time has been spent in due diligence. There is also some upside with a little addi- tional work, by virtue of the adjacent vacant commercial site which entitled and can be devel- oped into a few more sites. Even after the capi- tal costs to add the spaces, it can easily be shown the additional chino me and minimal marginal expense will bring the cap rate up and put it into your perceived range. Edward "Eddie" Hicks, lic. RE Broker, and Lic. Mortgage Broker has been a manufactured housing community de- veloper and industry consultant, retailer and home manu- facturer since 1963, and is currently a manufactured home resident of a seniors Age 55+ m/h condominium homesite community in Central Florida: Hidden Harbor on Lake Harris. He He may be reached at (813) 300-6150 and at easteddie@aol.com His websites are: www.mobilehome- park.com www.factorybuilthome.com T J