On this episode of The Mobile Home Park Lawyer Podcast, Ferd talks about underwriting assumptions for your profit and loss and your day 1 budget. Ferd explains step-by-step how you can budget effectively and why it’s so important to get an accurate read on your budget.
“Today, we’re going to cover underwriting and assumptions when putting together the economics and putting in an offer on a mobile home park purchase.”
0:00 – Intro
1:55 – The first main area to consider is profit and loss
3:24 – The biggest problem with a construction budget is not a misprice, but a missed price.
5:26 – The industry standard is a 30% expense ratio if the tenants pay the water sewer, and about 40% if the landlord pays it.
5:57 – Ferd likes to refine his numbers to put together the best offer possible
7:52 – Ferd explains the basic profit and loss formula
8:58 – Renters typically stay about 2 years compared to mobile home owners who stay for around 8 years
9:28 – Ferd takes us through big misses on operating expenses
23:16 – The day one budget can be done from photos and videos or your initial visit to the site
23:30 – Ferd takes us through the key items for use of funds
Welcome back mobile home park nation. Here again today with another episode for you. If you’re listening to this podcast, I think you probably already get it or you’re well on your way to getting it and by getting it, I mean, you understand the seven reasons why you, like me, should be investing in mobile home parks. In addition to that, you understand the 11 steps, or you’re in the process of learning the 11 steps that are necessary for evaluating a mobile home park purchase. You understand your deal criteria. You kind of have an idea for where you want to invest, how you want to invest, what your operations are going to look like. While you don’t have the experience of operations yet, you’re getting ready to jump in the game and you’re getting ready to make an offer.
So before you make an offer, how do you do it? What goes into your underwriting? What assumptions should you make? What kind of financial ratios or scenarios did you consider? And to each of us, there may be some different deal criteria, your investment criteria, your tax situation, your work-life balance situation. It’s going to be different than mine or the next guy, but there are still going to be some key areas and some key things you need to consider that I think are relevant for all of us. And that’s what we’re going to cover today. Today, we’re going to cover underwriting and assumptions when putting together the economics, putting in an offer on a mobile home park purchase.
There’s really two main areas to consider when you’re doing this. The first one I think is most important is to look at the profit and loss, and you can look at a profit and loss or income statement it may be called by your accountant, and you can look at what is it showing me on a historical basis, meaning the seller’s financials. Then also, what’s it going to look like in the future sometimes called a proforma P & L or proforma income statement. And based on that, you can kind of come up with an anticipated net operating income. And then when you get a net operating income, that’s typically how you will get to the valuation by later applying a market capitalization rate. And real briefly, the way that works is you get your rent on line and you divide it by the market cap rate, and that’s the price you should pay. So if the park has a $100,000 net operating income and the market’s 10 cap, well you should pay $1 million, but the person’s asking $2 million and you derive that there’s only $100,000 net operating income. Well, it’s $100,000 net operating income divided by price or value of $2 million. Well, it’s going to be a 5% capitalization rate. So obviously you can tell by this simple math, the lower the cap, the higher the price. So clearly when you sell, you want to sell it like the four, five, six, when you buy, you want to buy at seven, eight, nine, ten, but that’s just in general. That’s not really wisdom for you, that’s common sense.
So today we’re going to get into the minutia of what items should be including your analysis. Because I heard this from a big general contractor here in Kansas City. One time he said the biggest problems with construction budgets is not a misprice, but it is a missed price. By that missed price, he means something that was not taken into consideration.
Real quick, one story, I just was working with an investor out of Florida. He owned some parks in the south and I looked through his budget and I said, this is for a park in Illinois, northern Illinois. I said, what’s your snowplow budget? He goes, Oh, I’ve never paid for snowplowing. You live in the Midwest, you live in the north, snowplowing is part of life. I’ve got a shovel in my truck right? I’ve got a friend from Dallas, he’s like, I’ve never seen snow. I think in high school, once he saw like a quarter of inch of snow and he’s like, it was unbelievable. People couldn’t drive, it was like, oh my gosh the city was closed down. So different experiences, different life experiences will help us to shape our budgets, our profit and loss in a different manner.
So I’m going to help you walk through just kind of some general stuff and then kind of get in the weeds on some P & L items. And then also on a kind of a day one budget or a cap-X budget, and really sources and uses is another term. What are the sources of capital, typically equity and debt? Sometimes there’s alternative sources, not as common in mobile home park world for like things like tax incentives or tax credits. Typically you’re looking at things like equity, perhaps private money, or some sort of senior debt, some junior debt, maybe some bridge debt. That’s important for today’s discussion, sources. The use is more important in my opinion, what are you going to spend the money on? You’re going to spend it on the purchase price, spend on park-owned homes, spend it on infrastructure. Cap extra and spend it on developer fees, legal fees, those sort of closing costs, all kinds of stuff related to that.
So I’m going to jump into the P & L before we get into the specific line item categories, I want to just talk macro level, what kind of expense ratio you should expect in a mobile home park. And this is going to be variable based on a number of factors, but the industry standard is right about 30% expense ratio if the tenants pay the water and sewer, and about 40% expense ratio if the landlord pays a water and sewer. Clearly this is an estimate. It’s not 10% water all the time. The water is one of the biggest expenses in any profit and loss. So that’s one of the reasons why sub-metering the water is a great way to cut expenses, increase NOI, increase value in a mobile home park. 30% to 40%, that’s the general realm that I like to get into the weeds and get bids and get specific line items to kind of sharpen my saw and refine my numbers so I can put forth the best effort and the best offer. I was working with some guys yesterday actually and they were very conservative. They had like a 50% to 60% expense ratio. Like we want to be conservative. I was like, I’m all about not buying a bad deal and not being overly aggressive. But I said guys, you’re going to underbid this deal by $1 million. And you’re going to be a low ball, and you’re not going to get the deal when you could have paid more. If you just sharpen your saw, sharpen your numbers. So that’s what we’re going to try to do here today.
In general, if a park is bigger, 50, 100, 200 lots, there’s probably some efficiencies or economies of scale. So you may be able to. One manager can handle 60 lots and one manager handle 40 lots. So the bigger the park, you have made some efficiencies there, maybe some efficiencies on maintenance, legal cost for eviction. You may have more evictions, but you can maybe get some bulk pricing. Accounting, it’s almost the same level of accounting costs to do a tax return for partnership, which would be an LLC taxes partnership. And they issue K1 when you’ve got 3 investors or 30 investors, and whether the deal is worth $1 million or $5 million. So some of that from a ratio perspective, those professional services costs, the permit costs, some of those things get absorbed easier into a larger park. Now there are other variable expenses where that’s not really the case. I mean, property taxes are probably, if you’ve got a park worth $10 million, it’s probably going to be taxed higher than a park worth $1 million. And the same thing with even plowing the snow and mowing the grass, you’ve probably got more streets to push the snow on on a larger park. You probably have more office supplies, things like that. Because you’re printing more invoices and notices and all that kind of stuff. So it’s important to look at those and kind of see what makes the general percentages right or wrong in your situation. So part of the profit and loss, the basic formula is income minus expenses equals net operating income.
So how do you get income? Well, it’s revenue. The first revenue is really your potential gross income, your potential gross, lot rent. And that’s simply number of lots times, lot rent per month, times 12 months, that’s your potential gross rent. You do the same thing for potential home rent. Number of home rentals, times amount of home total rent, times 12 months. You have to subtract from your potential rent any vacancy, any uncollectible or bad debt. And that gives you your effective net rent or your effective net income. And you could look at the vacancy in a number of ways. You can look at it based on your current vacancy, market vacancy, some level of turnover that can be subjective. It’s going to depend on a park-by-park basis also. I mean, I think it’s pretty obvious that if you have park-owned homes, you’re going to have more turnover and more vacancy, just like an apartment than you would if you had all tenant-owned homes. I mean, the stats will show that renters generally stay eight months to two years. Home owners that rent your land, they stay typically, I think the stats are like eight to ten years a pop, and I’ve got some that have been there for 50 years. So that’s part of the benefit of this industry, right? Is sticky tenants. And you get sticky tenants when you have tenant-owned homes as opposed to park-owned homes.
So that’s kind of the metrics that go into effective net rent. Everybody gets that. I think that’s not that complex. What people make big misses on a lot of times, I think are operating expenses. I looked at a deal yesterday where there were like five different expense categories, like tax, maintenance, miscellaneous, and insurance. Like, okay, those are all good, but here’s some expenses and I would at a minimum include these.
Advertising. Now, advertising expense I don’t like to do a lot anymore. I used to do Facebook boosting, but now Facebook marketplace is pretty much good enough. I may do an initial ad once I pay for, or maybe I’ll buy some of those like flag signs that say “for sale”, “for rent” that you put out by your street. And I call that an annual expense as opposed to a one-time expense because those flags get torn up in the wind. So you pretty much have to buy a new flag every year. And I don’t count my signage by the way. We’ll get into that on my day one budget.
The next is insurance. You typically don’t need liability insurance at a minimum for the park operations. If you have Park owned homes or any other structures, you’re going to need casualty insurance, sometimes you need life insurance. Like I’ve got some deals where my lender requires me to have life insurance with them as the beneficiary. So if I get hit by a bus, at least there’s money to pay off the loan. So it’s good to get life insurance and you can get cheap, cheap 10 or 20 year term life insurance. The younger you are, the cheaper it is typically. So even when I pay off this loan, I’m going to keep that life insurance policy in place. Cause I am already qualified. And I was like 32 or something when I qualified for it, so it was cheaper than what it would be today. And what I’ll do is I’ll just reassign the beneficiary to my spouse or to the next lender. So that’s the benefit of life insurance and the deal can pay for that. The deal pays for that, my investors own a piece of that deal, they pay for a portion of that premium, it is pretty cheap. It’s like $42 a month.
Next, operating expenses, legal. This is typically legal for evictions. Sometimes you have legal for other issues. I mean, sometimes there’s been, if the city comes in, they’re trying to get condemnation or you’re getting a code violation, but I don’t, I am my own lawyer, so I don’t typically have to pay for legal. I use my legal brain, I guess, on a regular basis, probably daily in operations. But if you’re not a lawyer and you need one, you may need to budget more legal than me. And I usually budget, evictions should cost anywhere from, $500 to $1,500 a pop, depending on the unique case. It depends on size the park. Like I’m looking at a performance for me right now. It’s a 54 lot park and I budgeted two to three evictions a year. So I budgeted $1500. I found a local lawyer to do it for $400 a pop plus court fees.
Accounting fees, this is going to depend on the number of investors. We’re probably talking $2,000 to $4,000 to file the partnership return and issue k1s. That’s going to be, if you’re doing your own books and something like rent manager app fully, or building a professional bookkeeping software, and then you send the accountant your financial statements. If you have to hire an accountant or accounting firm to actually do your books, then that’s way more expensive. I do have in-house, I have a secretary that does this as a bookkeeper and then I just ship them off to a tax CPA firm, and they do the tax returns.
The next expense is licenses and permits. These vary a lot. Sometimes it’s zero, most times it’s like $50. I’ve got one park, the one I’m looking at right now, it’s $25 per lot, so that’s pretty steep. I think this is 54 lot parks. It’s $1,350 per year. And then in addition to the city permit, sometimes you have state permits or state EPA permits. You really need to get into that and look at that and make sure you don’t miss anything. We cover all those permits and stuff in a different podcast.
The next is your park greeter. Sometimes you have a manager or sometimes a greeter. This park here is small enough with only 54 lots. I’ve got a park greeter. His compensation is free lot rent and he gets $15 an hour if he does labor on like renovating houses and stuff like that. But just a lot rent is a pretty basic fee. Industry standard in the last several years has been kind of free lot rent plus $10 per lot per month. So on this park, 54 lots be $540 a month plus free lot rent of $395. He probably makes more than that because I give him bonuses. He sold 25 houses this year. So we give him a bonus for one of those houses. We bought him a trailer for his truck and put in a driveway for him and stuff. Because this guy has been just crushing it. We’ve added over a million dollars of value in like nine months of ownership because of this park greeter. So I’m not going to be chintzy with him and I’m going to make sure we take care of him. But I didn’t budget that cause I didn’t budget this level of production, but I would want to take care of him.
And next is annual road repair. This is going to be variable in large part, based on the condition of the roads. If you buy a park thats right out the gate in your budget, you do major cap X and repave the roads. Well, you’re going to have less annual road repair at least in the first several years, but you’re going to have road repair or fixing potholes, at least doing cold patch, something like that on a regular basis if you’ve got asphalt roads, not that expensive. I mean this park I’ve got budgeted 1500 a year, so not a lot. But the roads are in good shape. If you’ve got city streets, your budget is zero, you got concrete streets, man those things last forever. I bought a park in Illinois and the concrete roads were like 15 years old and they look like they’re six months old. I mean, concrete is the best. I’ve never put in concrete for roads. Cause it’s super expensive. I put in concrete for like driveways and stuff or sidewalks, but the repave park and concrete roads cost hundreds of thousands of dollars.
Next up trash (unreimbursed trash). In a lot of states you’re required to provide trash and not pass it through the tenants or not with tenants do it on their own. I don’t recommend letting tenants do it on their own because what if they don’t, now you’ve got a huge nightmare. So I typically budget for just regular weekly trash service. I think the Polycart trash service is a way better than bringing in the big dumpsters. Because you bring the big dumpsters and they come in once a week, those trucks weigh a ton, probably more than a ton and they beat the hell out your roads. So it is not worth it. We do bring the occasional roll-off dumpster, but those are not as heavy duty and not as regular. And those are more like a day one, or we bring them in with a renovation. It’s not a typical operating expense. Maybe you bring one or two in for your spring cleanup day, that kind of thing. But you’ve got to have trash in there.
And then I put in park maintenance and repair. This is anywhere from $50 to like a $200 a lot. And it’s going to depend on the park, but I typically do lower on this like $50 a lot because I break out more expenses. Some brokers will just say, Oh, it’s $150 a lot. Like what does it include? Just repair and maintenance? Okay, great. You got that, but in real life I’ve already got things like I’ve already set out road repair. I’ve already set up snow removal. I’ve set out tree removal, set out mowing, some of these items as a cart line items. So I can put a, I put in a bucket category of less. And then I also throw in, I’ll jump to this bottom. I throw in a miscellaneous, in this park I put in $5,000. That’s pretty generous for what I’m doing here, but it depends on the park. You can put in $25,000 for miscellaneous, but as important to have a park, just a general park maintenance repair category. I mentioned snow removal, tree removal. Obviously this can depend on the geographic location and then the physical location. If you have no trees, you have no tree removal. You’ve got a ton of trees. You’ve got a budget for that. You can get bids for that, do your due diligence and that’ll help you. And you definitely want to get at least three bids for both those items.
I have in here gas for site visits and this is one where my dad lives about four hours away. So I’m getting here one site visit per month for manager and it’s 12 months, times two for a round trip, times 57.5 cents. That’s the IRS rate times 209, he’s 209 miles away. And I’m billing that to the partnership. In this deal, dad and I are the only two partners. There’s no investors in this deal, but it wouldn’t be fair for him to just pay for his own mileage and wear and tear in his vehicle when he’s benefiting the both of us. So he gets reimbursed for his trips and that’s a real business expense on this project. And obviously he’s paying himself with his own money for a portion of this, but I’m paying, I’m covering my share too.
Okay. Next is property taxes. I’ve got a whole other podcast on how to project the property taxes and how to appeal the property taxes. So check that out, but don’t just take the number that the seller gave you.
I’ve got electric for an office, a shed or a storm shelter. This part didn’t have any, this is something you want to look at the prior guy’s bills and see what his electric bill is. This park is zero. Cause there are no, there are no ancillary buildings. It’s a really dense 54 unit park.
Next is mowing. I’ve gotten this on only $250 a month, $250 a year because I’ve got almost no common area and all the lots are full with houses. And sometimes the mowing included in the park greeters fee as well, which was kind of already baked in.
Next is office supplies, miscellaneous. This is like paper. We have our own check printer that our bookkeeper uses. Like we have, it’s got this Micker ink that’s really inexpensive. So we have Micker ink special printers, special stock paper, all your regular office supplies. I put like computers or scanner printers for like the manager if I paid for those, which I do sometimes that’ll be like a day one cost per like cap X, essentially as opposed to an annual expense.
Internet and phone, I’ve got in here 75 bucks a month. And that’s just to add another account to our rent manager account. You can add another user for like $75 a month. So that’s 900 a year.
Security cameras, this park does not have them.
Personal property taxes. In this park we have no permanent homes that we’re paying personal property taxes on and that doesn’t really happen. It’s probably Texas and Illinois, Missouri where they do have it. So you got to check your state, check your region and then plug that number.
Electric for street lights. This is oftentimes a fixed number. Instead of like in my house, the electric is based on my usage. They don’t come out and read the meters and the street lights a lot of times. It’s just per pole. So in this park I’ve got budgeted $86.40 a month. Because that’s what the bill is based on the number of light poles. And actually recently we added some light poles. It’s often advantageous to add light poles and to convert them to led, just to make the park brighter, safer, happier, and people will notice that you’re watching them and notice that you’re putting money in there.
I think it’s called the Hawthorne effect. If I remember from grad school where there was a case study, interesting sidebar, but it’s my podcast. So I guess I’ll go for it right? And this case study was a factory and they, let’s say the level of on a one to ten, the level of lighting was a seven. Well, they wanted to test to see if the productivity increased with a brighter atmosphere. So they increased the light to an eight and productivity increased, then a nine, then a ten and it kept increasing. So they came up with the theory that people will work harder, better, faster in a brighter lit environment. But then the beauty of the study was they then dropped the lights down to nine to eight to seven, to six to five. And they continued to increase productivity, made no sense. So clearly the level of light was not the reason for productivity. The reason for productivity was there was a change, and the workers indirectly, maybe even subconsciously, recognize they’re being watched. Maybe not just in a watch like, oh big brother’s watching, but like somebody who’s paying attention, so my work matters. So I would never in a mobile home park decrease the light. So I’m not going to really do the Hawthorne effect, but I definitely will increase the light and light poles. And we’ll talk to the utility company to do that. And there’s some strategies I probably won’t cover another podcast on it, but maybe shoot me an email. I can give you some strategies on how to do that as well.
Next is water. This is a big expense, as I mentioned, it could be 10% of your expenses of your entire revenue loads, huge portion of your expenses. In this part, I put in parentheses, water unreimbursed. We had this park sub-metered so when sub-metered, you pass the water and sewer billing onto the tenants, you got to make sure that you’re allowed to do that, obviously legally and all that, and you do it right? But so you’re going to have some leakage, typically some leakage and stuff that’s coming through the common meters. That’s not going through the individual homes sub-meters, or you may have like, a sprinkler system or something. I have in this one some, I budgeted some money for what I called the eat and had to eat some water at the beginning because I had to implement my new leases. My new sub-meters, find some leaks, patch the leaks. So I have some unreimbursed, some of that was cap X like, excavation and sub-metering. But as far as unreimbursed water, I’m going to have some amount. I hear people say, if you get 90% collection, you’re doing amazing. Frankly I don’t think that’s amazing. I try to get better than on every park. And we seem to get there. I’m going to have to spend $5,000 or $10,000 digging up the earth and changing some fittings and stuff. But water is so painful. You’ve got to always do a cost benefit analysis. Like everything. I’m not going to spend a hundred thousand dollars to fix a water problem that’s going to cost me a thousand dollars a year. Somewhere out there I’m sure there’s a tree hugger that’s offended by that. That I’m wasting water, but sorry, not sorry. It’s my money. Not your money.
The next operating expense we’re going to talk about is going to be management fee and dad and me owning in the park. We’re not going to have a management fee, but industry standard is going to be at least 5%. So you might as well put 5% of your budget. Maybe you pay it t0 yourself, maybe pay it to your third party management company. Like I own a third party management company where some employees work out of it and that’s an LLC. That’s taxed as an S Corp for certain tax reasons. And that’s the LLC that pays the laborers, that issues 10-99s. It has workers comp insurance, all that kind of stuff. But when you get a loan, the appraiser or the lender, they’re going to impute some sort of management fee, generally 5% to 8%. So you might as well include that in your budget.
So basically those are the typical operating expenses for a mobile home park. And you’ve got park-owned homes, you’ve got some operating expenses for mobile homes, park-owned homes, but that’s going to be very dependent on the quality condition of the home, your turnover, your market. So I’m not only budgeting that in this P & L. So that’s pretty much it from a P & L perspective.
Now we’ll jump into quickly here, the day one budget. And the day-one budget. This is really going to be most beneficial to complete. You can do it originally, but you really just need to do a site visit or have a good feel of, from photos or videos of the park to figure out what you need to put in there into the deal.
So for use of funds, I referenced it earlier. Here’s the key items for use of funds, roll off dumpsters. How many homes are you going to throw away? How much junk you have laying around. You’re going to bring these in right out of the gate. So the tenants can then begin to play by your rules. We have a no play, no stay policy. And we require your yards to be cleaned up. You can’t have weight benches and 17 bicycles and three lawnmowers, that kind of stuff. So the dumpster is going to help people get rid of this stuff.
Second is home or trash removal. I’ll look during due diligence, like how many, you only throw away five houses, I’m going to do bids. I mean, typically cost from $2,000 to $4,000 to get rid of a mobile home and throw it away. And it can either be thrown away onsite in a dumpster, or it can be hauled away to the dump.
Marketing is a day-one expense. I’ve got zero on this part, but sometimes I’ll have marketing. That’s less of today, I will typically put in new signage and billboard and then I’ll put in things like general decor, picket fences, rose bushes, things like that.
I’ll put in road repairs in my day-one budget and sometimes seal coat. And this is something you want to get a bid for and to get at least three bids, and they’ll tell you how you’re supposed to do it. And you can really figure, you could easily spend $10,000, $20,000, $200,000 on roadwork.
And the first especially day-one, but really all of these are in the first turnaround period, the first six months, so maybe the first three months. I get bids for that. I put in title work, title work is, it’s generally $1500 to $3,000, depending on the endorsements, depending on the size of your loan. Part of that is going to be, if you get endorsements and you have an owner’s policy or a lender’s policy you have to pay for, that’s going to go up, but you got to budget title work and you’ll get used to it. And you’ll know how to do it based on the size of your deal at looking at, just look at your prior closing statements and you can get a good idea.
I budget for painting existing homes and sheds. We typically paint all the homes, including the standard homes. And we try to do that through a painting program where we said, hey, we’ll paint your house for 200 bucks. You can even pay 50 bucks a month or four months if you have to. But that way they got some skin in the game and they pay 200 bucks, cost us about $500 in labor and paint. And it just makes a world of difference. I’m looking at this budget and we’ve added about nine months and we’ve painted probably 30 houses. And we have 15 or 20 left and it’s just, these are all 1970, 75, 80 houses, so they needed some love. And then we also paint, we’ll seal coat the roofs. There’s a special kind of paint you can use for that as well. It’s typically white, it reflects the heat away and all that kind of stuff. But we have these painting programs. We budget that.
I have in the budget, water or sewer inspections or repairs. This is depending on the waterlines and based on the due diligence of the seller records, you may have to budget some money for those repairs, places like leak detection to come and look for and fix leaks.
I budget travel. And for me, I live in Kansas City. This park is like seven hours away. So if I’m going to go look at it, which I’m going to do during my due diligence period, there’s an expense to that. I get reimbursed if we close basically, and day-one cost, I get reimbursed for my travel.
I get bids for trimming the trees. This is going to need to be an on-site bid with numerous tree bidders. The range, I mean, I did a park a couple of years ago, I think I paid $30,000. I had bids from like $30,000 to $50,000 to $80,000. And I personally walked around with all three tree guys. So it was the exact same scope of work, just crazy. You got to get lots of bids.
Next you’ve got to pay for any inspections, depending on the lender, you may have to pay for a property condition assessment. You generally have to pay for a phase one environmental, sometimes a survey or a supplement to the seller survey. So we had a budget for those. Typically those are about three, a piece. The survey could get as high as $15,000, depending on what you include on your table A.
And the next is the appraisal. Appraisal is typically $3,500, $4,000.
And then if you’re going to sub meter the water and you need a budget, how much the water meter is going to cost you and that whole process. And I’ll go over that at a later date. But I mean, I typically buy the meters from Metron for $180. And I pay my own crew to put them together and install them. And it ends up being like $300 a house, which is a lot cheaper than if you have Metron installed. But Metron, if you install they have this kind of little cell phone in them like a Verizon chip and radio, so to speak. And those are better in the sense that you can read them remotely 24/7, but they are a lot more expensive to install and a lot more expensive to operate. I mean, for me to operate mine, I have to pay somebody. Actually my park greeter does it for free. I don’t have to pay somebody $15 an hour to walk around for two hours and read the meters. You just got to make sure they’re doing it right. I keep control of the spreadsheet internally that we put together for doing water billings once a month. But you got a budget for your sub-metering.
Budget for any day-one evictions or legal issues. Sometimes, you know you’re going to evict people right out of the gate. It’s not an operating expense. It’s like I got five out of the gate and then I got to do one or two a year. And then sending to the accounting or legal entity set-up may have extra accounting you need advice for or extra entity preparation, especially if you have something like a private place memorandum. That’s going to cost a lot more than just a regular operating agreement. A lot more complicated.
Next up I put in the eat for water pre-metering. I think I mentioned earlier in my operating expense that I had water, but that’s really more of the regular leakage or uncollectible water. But I also, if I transition from landlord paid water to tenant paid water, there’s going to be several months where we’re going to eat the entire water bill. So you look at the prior water bills and budget your timeline, and some of these are statutory requirements before you can put it on the new lease, all that kind of stuff.
Next, if you’re getting park-owned home repairs, you get budgets and renovate the park-owned homes. I mentioned picket fences, and then I have a miscellaneous contingency. That’s going to be obviously dependent on the park.
And then on this one I’ve got a developer fee. This is in my template. I didn’t charge a developer fee on this one, because it was just dad and me. But if you’re raising capital or you have private place memorandum, you’re going to likely charge an acquisition fee or developer fee. And maybe there’s a seller-broker deal and you’re splitting the commission, but typically your investors and your team is paying that fee to you.
So that’s kind of the high and low of my use of funds. We talked about sorts of funds, use of funds, they need to match up, right? Or you’ll have a gap. If I have a million dollar source of funds, but I got a million dollar need or use the fund, I got a problem, right? So all together hopefully this will help you properly underwrite deals by making sure you don’t have any missed prices in your operating expenses, or any missed prices on your day-one budget. So you know how much money you need to raise in order to complete or do and implement your plan.
If you would like this list. I mean, hopefully you took some notes, right? But if you didn’t, if you want to go get it, you can get a copy of this checklist from me. Just go to a www.mobilehomeowner.com and someone from my team will make sure you get a copy.