Welcome to MHP Owner’s Call with Joanne Stevens January 4th, 2018 Back to Basic Series Please email questions, topics and personal stories to joannestevens@iowarealty.com Join us every Thursday, 1 pm Central: Call: 1 408 638 0968 or 1 646 558 8656 Meeting ID: 948 357 166

What is a CAP Rate? And why is it important? Legal Disclaimer: Joanne is a Real Estate Broker with NAI Iowa Commercial, a Berkshire Hathaway Company.  This recording and its content are not meant as a solicitation of any property or properties that may be listed. This is a creation of Joanne M. Stevens with NAI Iowa Realty Commercial, as a resource for mobile home park / manufactured home community owners. 319-378-6786

What is a CAP Rate? A fiscal snapshot is the ratio of Net Operating Income (NOI) to property asset value.  or the rate of return on a real estate investment property based on the income that the property is expected to generate.

What to include; What to exclude… CAP Rate is based on Real Estate Income only (Land, permanent buildings) Not rental income Not home sale contracts Operating Expenses do NOT include: Debt Service/Mortgage Payment & Interest Depreciation Schedules

CAP Rate Range Currently CAP Rates range from 4%-12% Lower CAP Rate = higher Sale Price; Good for Seller/Owner Higher CAP Rate = Lower Sale Price; Good for Buyer/Newly Invested

The Formula Net Operating Income = Revenue from Investment minus Operational Expenses Or (𝑁𝑂𝐼=𝑅𝑒𝑣.−𝐸𝑥𝑝𝑒𝑛𝑠𝑒) 𝐶𝐴𝑃 𝑅𝑎𝑡𝑒= 𝑁𝑂𝐼 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 = 𝑁𝑂𝐼 𝐶𝐴𝑃 𝑅𝑎𝑡𝑒

𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 = 𝑁𝑂𝐼 𝐶𝐴𝑃 𝑅𝑎𝑡𝑒 Example Valuation A Valuation B CAP Rate 8% 7% Sale Price $1,500,000 $1,714,286 MHP with a NOI of $120,000 𝑆𝑎𝑙𝑒 𝑃𝑟𝑖𝑐𝑒 = 𝑁𝑂𝐼 𝐶𝐴𝑃 𝑅𝑎𝑡𝑒 $120,000/ 8% = $1,500,000 $120,000/ 7% = $1,500,000

Why Should I Care? Always think like an Investor Operate it like you are going to sell it (cause you might…) But all so because it Maximizes Profits Avoid the Routine Expenses Trap Becoming casual about expenses; not bidding out vendors; not matching market rent levels

CAP Rate as a Tool CAP Rate is a ROI (return on investment) tool used by Bankers Investors Appraisers Too Low = Danger

CAP Rate as a Tool CAP Rate can help you choose investments You have options for your investment dollars Compare the CAP Rate to other investments (Stocks, Land, CDs, Etc.) A 4% CAP on a MHP that needs extensive TLC might be more work then a CD with a 2% CAP. Pick the best use of your money, time and Energy Always WWWBD: What Would Warren Buffett Do?

CAP Rate: Risks & Opportunities Tale of Two Parks Park A (Resort-Area)- Low CAP (5-6%), High Price, Lower Risk, Better Opportunities Park B (Small in Smallville)- High CAP (10-12%), Low Price, Private Utilities-Higher Risk, Fewer Opportunities CAP Rates (and Prices) are influenced by Risk and Opportunity

Risks Population drives housing demand; small population/decreasing population can negatively affects value and can increase the CAP Rate Jobs drive Population; No jobs = No $ = No desire/ability to own a home Look for areas with stable/growing population and stable job growth Look for areas with a diverse (mix of Manufacturing, Retail/Tourism, Health & Social Services, etc.) job market Beware the single ‘main’ employer. When they die, they take the town with them…

Opportunities Low Interest Rates Availability of capital for investment Low Competition (Supply & Demand) Individual: only park in town/ few competition apartment buildings/high price homes In general: each year there are fewer MHPs in the US, closed due to Higher/better Use, Utility Issues/ Major Capital Expenses, etc. High demand for affordable housing

EASY WAY Easy Way to raise NOI: Raise Your Rent! But leave some meat on the bone (don’t be the highest in the area)

Less Easy Way Buy Homes- Fill Vacancies 100 site park A) 75 homes @ $200 Lot Rent = $180,000 100 site park B) 100 homes @ $200 Lot Rent = $240,000 Extra Ground- Storage Units, Billboards Pass-through or sub-meter ALL Utilities Control Expenses