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$2,500 Monthly Cash Flow on a $5,000 Investment

by Ryan Needler   

After attending Tony Colella's mobile home boot camp in September 2005 we started looking for properties to expand our Lonnie Deal portfolio.

We'd purchased an older, single-wide mobile home that needed a lot of work but was located in our "pet" mobile home park about a year before. The park owner approached us about purchasing two small parks that he no longer wanted because he didn't have the time to run them properly.

The first park consisted of five older, park-owned mobile homes, a small efficiency apartment, and a small retail store. The second park consisted of six pads: two park-owned homes, three "lot rent only" (one is for sale), and a vacant pad. The seller was asking $175,000 with $15,000 down and would carry the balance at 5% for 240 months.

We ran the numbers using Tony's income approach and the numbers where almost there, but it just didn't work. We presented the numbers from the income sheet along with a the repairs that needed to be made right off. He looked over the numbers and agreed that his price was a little high from the looks of our analysis of the parks.

Long story made short I tried to use Lonnie Scruggs' negotiation techniques that have worked so well for us with mobile home sellers, and the seller looked at me and said something along the lines of, "It's not going to work; make me an offer and if it's reasonable, we'll make it happen." Oh well; it normally works!

We offered the price off the income approach which was $150,000 and explained that we also needed the money and time to turn the first park around.

He agreed to take $5,000 down, defer interest & payments for three months, and carry the balance at 5% payable $923.44 per month for 240 months with a $5,000 balloon due in nine months to cover what he had put down on one of the parks about 10 months ago.

The mobile home park's combined gross income at the time of purchase was just shy of $3,000 per month, and lost rent and expenses were running around $1,100 per month, so after the mortgage payments we were cash flowing right at $1000 per month from the get go on a $5,000 investment with the parks paying for all the expenses and upgrades from this cash flow.

The units where not pretty--trash was piled everywhere; cops had been called 72 times in the last year (mainly arguments between tenants); and the units were renting $100 or more under market because of the deferred maintenance and the general environment.

Our plan was to pump the deferred payments and cash flow for the first few months into park repairs, improvements, and to remove a couple of problem tenants, so that we could increase the rents to market rate.

We put this plan into action on the day we took over the parks by requiring the tenants to sign estoppel letters, explaining our rules and expectations and by terminating the verbal leases with tenants who had failed to make any rent payments in months.

We hired out the clean up of the trash and junk appliances that were piled up everywhere in the park which cost us $300 and improved the appearance of the parks dramatically by our third day of ownership.

The tenants decided we were "for real" so to speak, since our actions followed true with what we had told them. We had repaired all of the major safety issues, removed two folks that had been causing problems (which cost us $200 to buy one of them out), and collected all but one rent payment by the 5th of the first month.

We have our painter scheduled to paint the outside and "Kool Seal" all of park-owned units to further increase the street appeal of the parks while we increase the rents. We expect the total gross rental income to come up to around $4,500 as we cycle the tenants, and we will use the cash flow to make all of the repairs, so they won't come out of pocket.

Granted our initial expenses will increase somewhat to cover the repairs that were not being made and we've got the balloon payment, but our net cash flow will be around $2,500 per month in roughly six to twelve months controlled by a $5,000 investment.

We went into this deal knowing that we will face quite a few problems in the turnaround process, but by being in the path of opportunity and having the knowledge and courage to make the deal happen, we'll be making more off this one deal than my full-time JOB paid working 50 hours a week.

 
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