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The Amazing Power of Income Property Math

If I had the power to make schools teach one thing, it would be this: Trading time for money is the least effective way to earn income. JOB truly does stand for “Just Over Broke.”

If I had the power to make schools teach two things, the second would be: Don’t spend 40 years saving and investing to retire, just BUY an already existing passive income stream and retire NOW.

I bought my third mobile home park three weeks ago and within one week, I had increased its value by $60,000. By the end of the year, I’ll have increased its value by $60,000 more. This doesn’t include the $4,000 income I’ll receive every month after paying all park expenses, two mortgages, and a manager to run it.

In just six months, I’ll have earned $120,000 in increased equity and $24,000 in income. From then on, I’ll earn over $50,000 in annual income and another $80,000+ every year in increased equity. Just from this one park!

Everything I’m doing is moral and legal. This type of math is normal in the mobile home park world. I pay my managers a fair salary, and I only ask my tenants to pay fair market rents. I have my managers respond quickly to tenant needs. I don’t work any schedule and only manage my managers. The income is 95% passive.

These gains are not unusual. Income property math is far more favorable than paycheck math, small business math, and especially savings & paper investment math.

Put on a Cap, so Your Head Doesn’t Explode

Mobile Home ParkI specialize in one type of income property – mobile home parks. In this world, mobile home parks under 100 lots usually sell for 8 to 12 times annual net operating income (NOI).

A loose average is 10 times. This means that for every dollar you increase park income, the park is worth $10 more.

This 10X multiplier turns normal math into mind-blowing math when talking about rent increases.

If you own a park with 50 mobile home lots, a $10 per month, per lot, rent increase adds $500 profit per month (assuming your expenses stay the same). $500 a month X 12 months = $6,000 more profit per year.

That’s a nice increase in income, but here comes the magic math. Because parks are valued about 10 times annual NOI, that $6,000 increase suddenly adds $60,000 to the value of your park!

Mobile Home NeighborhoodThat little $10 rent increase just earned you more than most people earn in a year slaving away fulltime at some job. Over time, even without rent increases, income property math gets better.

When your tenants pay their rent, you use some of that money to make your mortgage payment(s) which increases your equity month after month. The longer you own the property, the bigger your equity gains each month.

When your equity grows large enough, you can borrow enough of it tax-free to purchase another park, multiplying your returns even more.

Income Property Sprays Money At You in How Many Ways?

So let’s review. Income properties’ magic math is paying you from three different directions.

1.Monthly Income. The money left after paying all park expenses, the mortgage(s), and the manager is yours to keep and spend as you wish.

2. Equity. Every time you make a mortgage payment (your tenants are actually making this just by paying their rent), you are reducing the amount owed on your mortgage which increases the value of your equity.

3. Appreciation. When you increase profits by rent increases or expense reductions, each $1 of increased profit is worth $10 in increased park value.

This is amazing! But wait, there’s more!

The tax laws were written by the rich and more people have gotten rich over the centuries by real estate than any other way. So of course, owning income property real estate has…

4. Favorable Tax Deductions. Depending on the property, you can legally deduct enough depreciation that you may erase most if not all of the taxable income you earn from the property.

Net result? Most income property earnings can be tax free! Less taxes = more income for you. So now there are FOUR income streams coming at you from one property.

Now Do the Math on Your Time

Now consider that owning this type of income can be 95% passive. It takes good systems and a good manager. I’m fortunate to have both in my parks. So thanks to the magic of income property math, I’m able to have financial freedom and time freedom.

Income property math is amazing. Once you truly get your head around it, you’ll quickly realize that jobs, self employment, business and stock market income streams fall woefully short. The conventional wisdom of working decades to save a retirement nest egg is exposed as an unnecessary waste of time and effort.

When you consider all the ways to earn income from a time, effort, and mathematical perspective, income property truly is the vehicle that gets you to the finish line faster and easier than anything else.

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About the Author...

Mike Johnson made the journey from working jobs to freelance writer to entrepreneur to passive income and early retirement. He’s owned mobile home parks since 2003 and “retired” at age 52. He teaches others how to do it at PerpetualSaturday.com.

He's the author of “43 Ways to Earn Cash Today” (for tenants) and “101 Ways to Provide Exceptional Customer Service Today” (for landlords and managers). You can also find Mike at MikeLeeJohnson.com

Comments

  1. Great article, Mike!

  2. Joseph Lightfoot says:

    I think this is basically accurate, but misstates a couple of things: increased equity is not income until it is realized in a sale. “That little $10 rent increase just earned you more than most people earn in a year slaving away fulltime at some job.”
    You are extremely lucky to live in a market where you can buy any real estate asset at 10 times gross. In most larger, and stable, markets it’s more common for mature assets (not distressed) to be 14-16 times gross. Your example also assumes that rents are below market. In my market, Los Angeles, most of the properties are either at market rents, or rent stabilized.
    Last point, you don’t talk at all about the capital that’s required to purchase the property. Interest rates are great, but most leverage is still negative, so the more you borrow, the less you make. This is, at least in the short run, a capital intensive business, and there’s no way around that. When you leverage your first investment to purchase your second investment, you give up substantial equity and income to do so. Your article does the reader a disservice by not pointing that out.
    Generally good and valid points, but the spin on it it less than forthright.

  3. Mike Johnson says:

    Hi Joseph,

    LA is certainly a different market than Wyoming and South Dakota where I own my parks. LA has more people, higher rents, higher asset values, and many, many, many more investors competing for the same assets. If I lived there, I’d be looking for other, less expense areas to invest.

    I view equity as near cash because you can refinance it out without selling the property and it is tax free. Yes, you have to make payments on the borrowed money, so you put that money into another property that pencils out well enough to handle the extra payment. It just forces you to find better deals.

    Generally, the larger park you buy, the more multiple of NOI you have to pay. That’s why I’ve been sticking to the under 100-lot parks. They cost less, provide a bigger return, and tend to have a larger upside because they are most often mom & pop-owned parks that weren’t run perfectly.

    I bought my first park for just $1,000 down so that’s certainly not capital intensive. But that was in 2003 when banks were far looser with their terms. I bought my second park in 2009 for $180K down but got seller financing for the balance (no banks). I just bought the third park for $275K down which I got by refinancing the first park (equity became real money without selling the property). All three parks still make terrific monthly positive income which gives me the wonderful tandem of financial freedom and time freedom.

    I’m ecstatic with the results so there was no less-than-forthright “spin” purposely put in the article — just valid enthusiasm that I hope comes through. Income property math is so favorable that it overcomes the challenges you mention above. At least it did for me. There’s a learning curve for sure, but being able to retire after buying just one large enough property is motivation enough to power through that learning.

    There are still plenty of great deals out there between the coasts. And there are still many opportunities for creative financing that greatly lowers the mount of capital to get into your first deal.

    Good luck!
    MJ

  4. James says:

    I’m in negotiations with a couple of sellers in Ohio for seller financing, or partial seller financing. These guys seem receptive because their parks have been on the market for over 6 months. They finally realized that an all cash buyer is not walking in the door. These parks are 33 and 42 pads. Not huge in size but very good on cash flow. If Joseph actually looked outside his comfort zone he might find a good deal. Just sayin’.

  5. Mike, great article, I have myself been in rental real estate since 2003. I have enough buying power to purchase a mobile home park which I have been trying to do for about three years but cannot find it. My concern ids going all in and missing something that would cause me to lose it all. Do you have any suggestions on how to find one that the returns are worth the capital and risk involved?

  6. Mike Johnson says:

    Hi Tim,

    Thanks for the nice comment and congrats on your real estate investing.

    The best way to reduce risk is increasing your knowledge about what you’re trying to do. This website has lots of great how-to articles and success stories about mobile home parks.

    More specifically, I do the following to reduce my risk:

    * Put down the least amount of money possible. You can often get some or most of the purchase price from a mortgage payable to the seller. Using borrowed money is also a great hedge against inflation which is really closer to 10% a year rather than the 2% a year the government claims (ShadowStats.com). A 5% loan is actually EARNING you 5% more on your purchasing power compared to buying the park for cash. Over time, you are then repaying that loan with cheaper and cheaper dollars.

    * Put a 30 or 60 day due diligence period in your offer. This gives you time to study and inspect any aspect of the park that is giving you the willies. Infrastructure is usually the biggest concern because you can’t see underground. But you can call the plumber or electrician the park has been using to gain more insights about what they know. If big problems are mentioned, you can then pay experts to inspect closer.

    * Close the deal on the 5th of the month. The seller then has to collect the rents for that month and hand over 25 days worth to you at closing. They also have to hand over any deposits. Then delay your first mortgage payment(s) until the 15th of the following month. This creates an instant reserve account that helps handle the unforeseen.

    * Buy the largest park possible. More tenants = less risk from vacancies and late payers. Small rent increases also provide big income increases to you when you have more tenants.

    Here is an article on this website that I wrote about how to find parks.
    http://www.creonline.com/blog/how-to-find-profitable-mobile-home-parks/

    Nothing is risk free of course, but income property math is so strong it helps you overcome about any big expense surprises that crop up. If you are buying to gain maximum cash flow each month (positive, profitable income) usually the worst that happens is a big, unexpected expense just eats a big chunk of your income that month. You then bounce back to normal the next month. If you had a catastrophic infrastructure failure that required rebuilding water, sewer or electric lines, you could always refinance for the repair funds and then raise rents to overcome the increased mortgage payment.

    Finally, I suggest only buying parks priced 10X annual net operating income or less. These parks typically earn at least $3,000 a month positive cash flow (profit) before you do anything to increase them. Obviously, more monthly profit is better. It takes the same amount of effort to buy smaller parks as larger parks, so go after the largest, most profitable parks you can. Parks that need some work provide the most upside.

    Good luck!
    MJ

  7. mr iris paige says:

    i think this is very powerful knowlegde i would like to know if you have a program that help you estamate
    the value ofthe property and offer or arv software

  8. Mike Johnson says:

    Hi Mr Paige,

    I don’t have a program or software to offer that helps determine a property’s value. I just look at annual net operating income (NOI). Typically a mobile home park income property is worth about 10 times NOI. More if condition and upside is strong, less if condition and upside is weak.

    Good luck!
    MJ

  9. Jeri Frank says:

    Hi Mike –

    Thanks for sharing this and what has worked so well for you over the last decade or so! I love seeing how people have made real estate a success for them and it is always nice when people share how they did it!

    Good luck and will continue to follow your posts!

    Jeri Frank

    • Mike Johnson says:

      Thank you Jeri! I appreciate you taking the time to read and comment.
      Good luck!
      MJ

  10. Scott says:

    Hi Mike,
    I live in the Twin Cities of MN. I only have about $100k of my own cash, is this something I can pursue with this amount to invest? Where do I start?

    Thanks, Scott

    • Mike Johnson says:

      Hi Scott,
      I grew up in the Twin Cities so am somewhat familiar with the area. There are plenty of mobile home parks in the area and the state. $100K is typically plenty of money to qualify to buy a good park. You’ll need the seller to carry a second mortgage but most will do so because they are getting a good 70% of their money at closing from a bank. Or if you get lucky and encounter one of the 30% of all sellers who own their parks free and clear, perhaps you’ll find a seller who will carry the entire mortgage.

      Minneapolis and Minnesota have some pretty strict regulations that heavily favor tenants. For example, you may not be able to evict no-payers during winter months. So I’d get with the governments there and review their rules before jumping in there. Most other states are much easier to operate in as a landlord.

      I’d start by reading the how-to and success stories relating to mobile home parks right on this website. You’ll learn a ton in a few hours of reading. I’ve written and posted articles here that teach where to find the parks, how to buy them without banks, why they are a great investment and how one good property can create an early retirement within 12 months. Many others have shared their experiences and expertise too. I learned enough from this website (and Lonnie Scruggs’s book “Making Money With Mobile Homes” which this site offers for sale) to buy my first park. So I say start with your self-education and the next steps become apparent. I also answer email questions within a reasonable time frame as my way of giving back.
      Good luck!
      MJ

    • Mike Johnson says:

      Hi Scott,
      I grew up in the Twin Cities so am somewhat familiar with the area. There are plenty of mobile home parks in the area and the state. $100K is typically plenty of money to qualify to buy a good park. You’ll need the seller to carry a second mortgage but most will do so because they are getting a good 70% of their money at closing from a bank. Or if you get lucky and encounter one of the 30% of all sellers who own their parks free and clear, perhaps you’ll find a seller who will carry the entire mortgage.

      Minneapolis and Minnesota have some pretty strict regulations that heavily favor tenants. For example, you may not be able to evict no-payers during winter months. So I’d get with the governments there and review their rules before jumping in there. Most other states are much easier to operate in as a landlord.

      I’d start by reading the how-to and success stories relating to mobile home parks right on this website. You’ll learn a ton in a few hours of reading. I’ve written and posted articles here that teach where to find the parks, how to buy them without banks, why they are a great investment and how one good property can create an early retirement within 12 months. Many others have shared their experiences and expertise too. I learned enough from this website (and Lonnie Scruggs’s book “Making Money With Mobile Homes” which this site offers for sale) to buy my first park. So I say start with your self-education and the next steps become apparent. I also answer email questions within a reasonable time frame as my way of giving back.

      Good luck!
      MJ

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