During the Great Depression in the 1930s, Conrad Hilton built a hotel empire by buying all of the major American hotels – the Plaza, the Drake, the Palmer House, etc. – at a penny on the dollar. He boldly went against the tide of average investors and built an icon that exists to this day.
In the mobile home park business, you can be the next Conrad Hilton, if you know the tactics necessary to buy mobile home parks in distress.
Understand the actual costs of construction of a mobile home park.
Before you can start buying distressed assets, you must first understand their true value. One of the best starting places in understanding mobile home parks is to understand what it costs to build one. This is called “replacement cost”. For mobile home parks, it costs around $8,000 per lot to build one, 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 on between 10 to 14 acres. You can add in the land cost based on the value of acreage in the immediate 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 that’s a good deal, right? Not always. There’s still more you have 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 measurement that allows you to place a value on it. Once you know this amount, you can then figure out the price at 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 at a 10% cap rate, then its value would be $1,000,000.
Understand the comps.
When an appraiser tries to ascertain a value, one of the factors they look at is what the other mobile home parks are selling for in that area. This is perhaps one of the best indicators of value – except for the fact that the buyer(s) of the other mobile home park(s) may have not made intelligent buys.
However, this is more true of past comps than recent ones. While buyers made some really stupid buys a few years ago, and received loans from banks with equal lack of discipline, this is not true of recent sales, which have been built on the new reality. Putting it all together.
To make good buys during the depression, you must be able to define and support the great, distress buy from the merely average. If you have a 100 space park in distress, and have it under contract for $400,000, with an EBITDA of $60,000, and comps of $12,000 per space, then here’s what we know about it:
* It would cost $1,000,000 to build that park, so it is 40% of construction cost – which is a very attractive discount.
* It is a 15% cap rate – which is extremely attractive.
* It would show comp values of $1,200,000 – which is 300% more than your price.
That would make a distress buy worthy of Conrad Hilton. And that’s how to make a fortune in the current depression.
