Valuing Income Streams, & Balancing Home Price, Availability & Site Rent
Valuing the Income Stream of Your Landlease Community
The Higher the Site Rent, the Less Home Buyers Can Buy
No More on Radical Change for Now; Maybe Next Week!
Two Ways to Estimate the Value of Your LLCommunity’s Income Stream
There’s a longhand way to estimate the capitalized annual net rental income value of any traditional landlease (nee manufactured home) community; and, there’s a shorthand approach for average quality properties alone. Both are income capitalization income valuation methodologies. And for the record, remember; there are two additional traditional income – producing property valuation methodologies: replacement value and market value; neither of which will be dealt with in the following few paragraphs.
Given an ‘average’ LLCommunity with 200 fully developed, rentable, occupied home sites; charging $200/month site rent; experiencing 80% physical occupancy; 40% overall Operating Expense Ratio or OER; and worthy of a 10 cap (i.e. 10% income capitalization rate, ideally based on like property sales in the same local housing market, recently sold); what is the approximate value of that property’s net rental income stream – not considering the sale and or rental of homes, if any, on – site?
The classic longhand method would be to estimate the property’s maximum net rental income stream value first, if viewing as a potential buyer or investor; then ‘run the numbers’ reflecting present physical occupancy level; then, to be even more precise, considering economic occupancy. Here’re three representative sets of numbers:
• 200 sites X $200/mth rent X 12 months X .60 (reciprocal of 40% OER), divided by .10 cap rate, = $2,880,000.00 estimated net rental income stream value of LLCommunity with every site occupied and paying rent.
• 200 sites X .80 (physical occupancy) X $200 X 12 months X .60, divided by .10 cap rate = $2,304,000.00 estimated net rental income stream under present conditions, or $576,000.00 less value than if/when fully occupied.
• 200 sites X .75 (economic occupancy, i.e. # renters actually paying rent) X $200 X 12 months X .60, divided by .10 cap rate = $2,160,000 estimated net rental income stream under present ‘collection conditions’, or $720,000 less value.
Keep in mind; with exceptions of first, the 200 rental homesite count (though that could change), and then 12 months/year (Always best to annualize these calculations), all other factors are ‘variables’ requiring research and documentation before using in the afore – described longhand valuation formula. Two examples: the 40% OER, while widely accepted as the Industry Standard for landlease communities*1, must be ascertained for the subject property; and the ‘cap rate’, while calculated different ways, is often a function of a property’s net operating income (‘NOI’) divided by its’ value (e.g. NOI & sale price at ‘closing’, in the case of a ‘comp’ or nearby comparable property recently sold)*2.
Then there’s a shorthand approach to the afore – described three applications of the net rental income stream valuation formula. Widely known as the New Rule of 72, this methodology is simple, direct, and applies ONLY to average quality landlease communities. Same ‘givens’ as used in previous examples: 200 rental home sites & 200/month site rent, 80% physical occupancy = 160 sites (& 75% economic occupancy = 150 sites), 40% Industry Standard OER, and 10% ‘cap rate’ for an average quality LLCommunity.
• 200 sites X $200 X 72 = $2,880,000.00 estimated net rental income stream value
• 180 sites X $200 X 72 = $2,304,000.00 estimated net rental income stream value
• 175 sites X $200 X 72 = $2,160,000.00 estimated net rental income stream value
It doesn’t get much simpler than that. What is the value of your landlease community’s net rental income stream today? What should it be? What are YOU doing to get it there? For a FREE wallet card containing the long and shorthand valuation methodologies just demonstrated, phone the MHIndustry HOTLINE provided in end note # 1.
Has this question crossed your mind: ‘If this is the New Rule of 72, what’s the Old Rule of 72?’ Fair enough. It’s a simple, longstanding formula used to calculate ‘How long it takes to double the value of an investment at a set ROI (i.e. return on investment).’ For example, the whole number ‘72’ divided by an ROI percentage, e.g. of ‘20%’, equals 3.6 years. Now you know, both the Old & New Rules of 72!
The Higher the Site Rent, the Less Home Buyers Can Buy!
The following paragraphs are quoted from the January 2012 issue of the Allen Letter professional journal. This information is so important and timely, we don’t want to wait even two weeks to get the updated information and figures into your hands and head.
Longtime blog floggers (readers) and Allen Letter subscribers are already familiar with the game changer ‘Ah Ha! & Uh Oh! Worksheet’ created four years ago. What’s it do? “Estimate(s) maximum recommended ‘affordable’ & ‘risky’ purchase prices for new & resale, privately – owned homes of any type, sited on realty owned fee simple with home, or leased – as in a landlease community!” Quoted from form’s heading. In other words, given a prospective homebuyer or household’s Annual Gross Income (‘AGI’); or, the Area Median Income (‘AMI’) for any zip coded local housing market in the U.S., this single piece of paper, with its’ step – by – step center description column and four columnar ‘$ examples’, i.e. home – & – realty ‘affordable’ & ‘risky’ purchase; and, home – in – LLCommunity ‘affordable’ & ‘ risky’ purchase, clearly demonstrates the ‘most home a consumer should buy’, given their annual gross (or market’s median) income, from both ‘affordable’ & ‘risky’ perspectives! No other tool in today’s housing market and realty profession comes close to what this form does for homebuyers and rental homesite lessees, as well as those marketing, selling and financing new and resale homes!
The original ‘Ah Ha! & Uh Oh! Worksheet’ used as a formula starting point, $36,000 AGI and AMI. While this was characteristic of many Midwest local housing markets four years ago, it really was too low for widespread application, even though users are encouraged to use appropriate AGI, when a prospective homebuyer ‘walks in the home sales center door’, or AMI, when considering a new local housing market for opening a new home sales center. In any event, a new, slightly revised edition of the ‘Ah Ha! & Uh Oh! Worksheet ‘begins’ with an AGI/AMI of $51,229, the approximate national AMI for years 2010 & 2011. How does this new and higher figure ‘pencil out’ when running the numbers through this multipurpose form? For the purposes of this week’s blog posting, we’ll deal only with the ‘affordable’ & ‘risky’ perspectives of home buying and rental homesite leasing in typical landlease (nee manufactured home) communities.
“ ‘As Rental Homesite Rates Rise, the Price/Value of Homeowner/site lessees’ Home Goes Down!’ No real surprise there. That’s a well recognized logical truism around the MHBusiness. Here are the numbers! Given the above – referenced starting point of $51,229 AMI or AGI, and three rental homesite rates at $133/month, #333/month, and $533/month; and using said ‘Ah Ha! & Uh Oh! Worksheet’, here’re the corresponding maximum ‘affordable home prices/values for those three site rent rates consecutively: $98,649 max, slipping down to $75,000., then down further to only $50,968. In other words, for every $200 in rent increase (between $133 & $333 & 533), the maximum ‘affordable’ home price/value plummets by about $24,000! Bottom line? Given that $51,229 is the approximate national AMI, and average national rental homesite rate is near $333/month, then a $75,000 price/value new or resale manufactured home is affordable and ‘doable’ in the average landlease community! However, if site rent is increased to $533/month in a market where AMI is anywhere near $51,229, that homeowner/site lessee who could have bought a $75,000 home, I now only able to purchase one for $50,968 – assuming he/she does to in an ‘affordable’ fashion, and NOT as a ‘risky’ deal characteristic of the late 1990s. FYI. The ‘risky’ home price/value figures here, for $333/month & $533/month site rents are $101,666 and $80,210 respectively. Impressive yes, but remember: The ‘risky’ route is no picnic, as the utility bills included in the ‘affordable’ PITI (i.e. principal, interest, taxes, insurance) monthly house payment, still have to be paid each month, but now ‘in addition to’ the home loan payment of just PITI alone.” Quoted from the Allen Letter professional journal (1/2012)
Want a FREE copy of the aforementioned and slightly revised ‘Ah Ha! & Uh Oh! Worksheet’? Simply phone the MHIndustry HOTLINE listed in end note # 1.
No More on Radical Change for Now; Maybe Next Week!
Will tell you this much though. Email and telephone responses to last week’s blog posting: ‘More Than One Way to Implement Radical Change…’ was near immediate, pouring into my laptop and our offices within one half hour after I completed the posting process. And so far, with one exception (A reader/writer misunderstood, thinking I was ‘looking for a job’ – Which I Am Not!), many of YOU out there, are fed up with the perennial inter association politicking, bickering and marginalized industry advocacy in our nation’s capitol (Think S.A.F.E. Act & Dodd – Frank regulatory ‘surprises’ in 2010 & 2011); and on the landlease community side of the house, apparent inactivity, lack of direction, and paucity of communication with direct dues – paying members. Hence, widespread but tacit support for Radical Change of some sort….
Again, I am not looking for a job! Rather, I’m seeking a practical and lasting means to continue producing, preserving, and carrying forward the sort of practical knowledge contained in parts I & II of this week’s blog posting.
1. For a FREE copy of the Industry Standard Chart of (Operating Expense) Accounts, along with appropriate line item OERs, phone the MHIndustry HOTLINE: (877) MFD-HSNG or 633-4764, and request it.
2. Capitalization rate. Also referred to as cap rate or income yield. The lower the cap rate (e.g. 8% cap rate is lower than 12% cap rate), the higher the risk to the investor (i.e. To realize his/her ROI, or return on & of, a higher priced investment), hence a higher asking price. From Dictionary of Real Estate.
George Allen, CPM®Emeritus, MHM®Master
Consultant to the Factory – built Housing Industry &
The Landlease Community Real Estate Asset Class
Box # 47024, Indianapolis, IN. 46247
(317) 346-7156 & email@example.com