Numbers & Digits

“Risk comes from not knowing what you are doing” 

Warren Buffet

Dear Reader,

Now we’ve reached the fun part – the numbers. As with any development undertaking, the project has to be economically feasible. Our goal here is not to provide you with exact figures, as each project will vary drastically depending on geographic location, labor costs, project size. Instead, want to help you figure out what major inputs you need to gather in order to calculate the total capital required & estimate project returns.

Inputs:

  • Land Costs. This is self-explanatory, whatever the cost to purchase the land is

  • Professional Service Fees. This is the team of individuals that will assist you through the Zoning process such as land use attorney, landscape architects, engineer and planner

  • Construction and Excavation Costs. This includes all of the work that needs to be done on your plot of land before bringing in manufactured homes such as soil & erosion control, excavation, site concrete, storm sewer drainage, infiltration system, sanitary sewer system, utility trenching, paving costs and landscaping costs

  • Permitting Fees. This includes all of the permits that must be obtained in order to be compliant with the State such as the Building Department Permits, Highway Operating Permit and National Pollutant Discharge Elimination System Permit

  • Manufactured Homes Fees. This include the all-in costs associated with bringing in a manufactured home, such as your per unit cost from the manufacturer, installation fees, delivery fees and taxes. Depending on what kind of finishes you want, the prices may vary

  • Labor Costs. This includes labor for all of the items that the manufacturer does not handle, such as hardwood floor installation, installing doors and door knobs, painting the walls, connecting the water, sewer and electricity to the home, steps to the door, concrete pathways & safety railings, a car port and so on

  • On-Site Garage Fees. Although optional, this fee includes your on-site garage costs (remember to include permitting costs and labor costs)

Gathering all of these figures will take time. You should get as many quotes as you can in order to get familiar with the range of figures. Once you’ve gathered these, divide this dollar figure by the total number of units in your community.

MHC development is very different than most other real estate projects. In an ideal situation, you want to break even. That means, you want your total input costs to be recaptured via all of your homes sales. Whereas in a typical development project, the developer expects to make an outsized return for the development effort at sale, in a MHC development project the developer’s goal is to own the cash flowing asset free and clear - no debt on the property when it's finished. In order to do so, the total development costs must be recaptured via the total home sales proceeds.

For illustration purposes, if your all-in development costs are $10,000,000 and you are approved for 100 Manufactured Homes, you need to sell your homes for a $100,000 each in order to break even. If you sell your homes for $80,000 each, your MHC will have cost you $2,000,000. Now, if it’s the right deal (i.e. a 1 in a million MHC), the type of deal you want to hold onto forever, that might not be so bad. You can easily get bank debt on this deal for an attractive interest rate and cash flow for perpetuity. However, if you can only sell homes for $50,000 a home, you’re $5,000,000 in trouble – with that kind of money, you could have purchased a Class A MHC without any of the headache or trouble.

If you’ve made it this far, you might be wondering “How do I to price my home?“ Especially since there’s not many comparables for brand new manufactured homes. It’s an excellent question. A good rule of thumb is to see what a 3-bedroom rental goes for in the area. The goal is to beat this number by at least a 10% margin, all while providing a high quality product.

Below are all of the various costs that go into determining the all-in cost of purchase a Manufactured Homes:

  • Mortgage & Interest Costs. Use the figure that you obtained earlier to calculate the mortgage and interest rate per unit. Note that the interest rates and terms are higher and longer, respectively, when compared to conventional loans.

  • Land Lease Fee. This is the figure that you will collect on an ongoing basis. This is perhaps the only figure that you can adjust to make the equation work.

  • Property Taxes. Although not every state charges property taxes for Manufactured Homes (i.e. New Jersey), a lot do. It’s important to speak with a tax assessor regarding how that figure is calculated.

  • Insurance. This is the insurance a resident will pay to insure their homes.

For illustrative purposes, if the average 3-bedroom apartment rents for $1500/mo, then your all-in cost for a Manufactured Home should not exceed $1350/mo.

In the example above, this would be an ideal situation as purchasing a brand-new is more than 10% cheaper than renting. You should have no issues filling the park with quality residents that are looking to buy instead of rent.

If your development cost $10,000,000 and you have 100 homes that you’re able to sell for $100,000 per home, you found yourself a great MHC development to work on! Once you’ve completed the project, you’ll own a free and clear MHC development that appreciates annually and cash flows for life!

Best,

RMR-Development Team

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