During the Great Depression in the 1930s, Conrad Hilton built a hotel empire by buying all the major American hotels: Plaza, Drake, Palmer House, etc. – at 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 could be the next Conrad Hilton if you know the tactics necessary to buy mobile home parks in distress.
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 how much it costs to build one. This is called “replacement cost.” For mobile home parks, it costs about $8,000 per lot to build one, plus the cost of land. For a 100-space park, that equates to $800,000 in infrastructure costs, plus the cost of land. The average mobile home park is based on a density of 7-10 units per acre. So a 100 space park would be between 10 and 14 acres. You can add the cost of the land based on the value of the 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 pretty good deal, right? Not always. There is 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 from 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 at different capitalization rates, or “caps.” If a mobile home park has an EBITDA of $100,000 per year, and you value a mobile home park at a 10% capitalization rate, then it would be worth $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 at the other mobile home parks may not have made smart purchases.
However, this is more true for past compositions than for 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 of recent sales, which have built on the new reality. Putting it all together.
To make good purchases during a depression, you must be able to define and support the big, distressing purchase of the mere average. If you have a 100-space park in jeopardy and you have it under contract for $400,000, with EBITDA of $60,000 and compensation of $12,000 per space, here’s 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% cap 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 rush purchase worthy of Conrad Hilton. And that’s how to make a fortune in the current depression.