Welcome back to the MHP Expert blog, where we discuss all things pertinent to the MHP industry. Today’s topic: MHP capitalization rates. First, let’s define what exactly it is. Also known as a cap rate, this multifaceted figure is determined by using the NOI and overall park price.
The NOI, or net operating income, refers to revenues minus expenses. Take this number, and divide it by the park’s price. So for example, if the deal is worth $1 million, and your NOI is $100,000, that’s a 10% cap rate. Likewise, if you’re looking for an 8% cap rate at the same NOI, the deal would need to be $1.2 million; at a 12% cap rate, the deal would be roughly $800,000, so on an so forth. In effect, the higher the cap rate, the lower the price.
When it comes to MHP capitalization rates, we sometimes have to split the revenues and NOI up. In situations where we have actual home rentals, it’s important to note that those dollar producing units are not equal dollars to lot rents. That’s because the home rents are typically not capitalized. As such, we would bifurcate the lot rents from the home rents.
Cap rates break down into two separate variations: lot rent cap rates and global cap rates. The global rate is all revenues and all expenses, to include park owned homes. The lot rent cap rate is what most banks will use to establish valuation. The global cap rate tends to come up more in the apartment space, but in truth, this number can be a bit misleading in our field. That’s because the homes depreciate, seeing as how they’re personal property.
With this in mind, sometimes people get a little too aggressive with how they approach the revenue stream from park owned homes. Lately, a lot of people have been capitalizing the global rate, as if it was all the same kind of risk. But most seasoned industry members will stay away from this to keep from fudging the numbers. It may seem confusing, but that’s what the MHP Expert is here to help with!
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