Business Plan

Everything looked promising, but before making a commitment, we needed to develop a business model. Madison Woods as it was currently operating, at less than ½ full, was financially at breakeven at best. The key to making the project a success was increasing occupancy by fixing up the existing homes and bringing in newer ones. But would the numbers support this strategy?

First we needed to determine the total monthly payment the market would support. Since there were no other mobile home communities nearby, competition would come from the apartment rental market. For the pro forma, we conservatively targeted the note + lot rent at 75% of the price of townhouse rentals: 75% of $650 = $500.

Since the allocation between note and lot rent is a bit arbitrary, and the income from lot rent ultimately determines the value of a land lease community, we weighted towards that bias. While the current lot rent of $165/mo would be maintained for existing residents, lot rent for future residents would be $200. With total monthly payment of $500, this left $300 to support a note.

The next step was to determine the maximum loan amount, which would be added to a typical down payment to arrive at a home price. Using a target term of 4 years, the industry interest rate of 13%, and plugging the numbers into a calculator, yields a PV of ~$11,000. Adding in a $1000 down payment, if vacant park owned homes could retail for $12,000, it meant we could spend $4000-6000 fixing up these homes and earn an ROI of 50-100%. Bringing in newer homes with 3 BR would be more expensive and therefore require extending the length of the note and increasing the monthly payment. A note payment of $375/mo over 5 years would support a note of ~$16,500, adding a down payment of $1500 leads to a sale price $18,000. If we could buy and setup repos for $12,000, the profit margin wouldn’t be spectacular but would be sufficient. It seemed like our business plan was sound, the next step was implementation.

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