Investing In A Mobile Home Park: The Complete Business Plan
Even though we love our rental businesses, managing properties is not a cakewalk. Certainly everyone of us knows the pain of it. But how about a rental business that is truly passive, requiring no to minimal efforts? A recession proof, high demand and constrained supply business. Would you be interested in learning about one such rental business? Investing in a mobile home park is one perfect business opportunity for Real Estate investors.
Investing in a Mobile Home Park allows you to make money from the dirt. Learn to find the right dirt and inject value in it. No need to deal with tenants and toilets anymore. The business has got a potential of returning more than 10% safe returns annually. Just align a few ducks in the row and get your mobile home park up and running.
What is a Mobile Home Park?
A Mobile Home Park, in general, is a community of manufactured homes placed on a plot of land often referred to as pads.
According to a more official definition by the code of ordinances. The mobile home park is a properly planned plot of land subdivided for the use as sleeping/living quarters, or parking spaces. The spaces must be maintained for rent or without rent. And there must be space for three or more mobile homes in order to be considered a mobile home park.
Classification of Mobile Home Parks
The Classification of Mobile Homes are done based on a star rating system. A star rating provides a reference on what quality of living and infrastructure can be expected. Based on the ratings, a mobile home park is classified as a
- 1 Star Mobile Home Park
- 2 Star Mobile Home Park
- 3 Star Mobile Home Park
- 4 Star Mobile Home Park
- 5 Star Mobile Home Park
The 1 Star Park being a decent community park to live in and 5 star being the finest to live in.
Which Mobile Home Park To Invest In?
In order to be successful with mobile park investing, you must understand a few things. Go wrong and you will be ripped off.
- You are targeting a specific niche of real estate that is affordable housing.
- Financing a Mobile Home Park is a bit of a task and lenders are specific about eligible parks.
It is unlikely that you will get financing for a 1 star or a 2 Star mobile home park. So, it becomes important, you know the ratings before investing in one of the mobile home parks.
So which mobile home park to invest in???
Suppose you have invested in a 5 Star Mobile Home Park. Do you think you will be able to cater to a large audience? The community who will live in your 5 star Park will mostly belong to the affluent ones. Their mobile homes are either a second home or a vacation home. Will such affluent individuals be your consistent tenants? Don`t you feel they will have more than enough resources to move every now and then.
You need consistent renters. Those who stay for long and don’t move every now and then. Once the mobile home is parked, the person or the family must stay there for many years to come. But how can you ensure this?
“Successful Investing in Mobile Home Park is about catering to a group of people who are looking for affordable housing.”
As per the Wage Analysis report, half of the US workforce earned less than $35,000 a year which comes to roughly $2900 monthly. The average median rent in the US is about $1097 according to a data prepared in 2019. Going forward with these numbers and the 30% rule, a person with $2900 monthly income can afford a maximum $870 for housing costs plus utilities.
This represents a perfect opportunity for investors who can provide affordable housing. And in order to be affordable and yet profitable, you must target a 3 star or max a 4 star Mobile Home Park. Because anything below this will attract low quality renters and financing will also be an issue.
Business Plan For Investing in a Mobile Home Park
1. Stick To Existing Mobile Home Parks
The first and foremost thing about the mobile home park business is to stay away from starting a park from scratch. Buy the existing ones and pump value in it. Setting up a new park from scratch is not a viable option due to
- Restrictive Zoning and Prohibition of New Mobile Home Communities in many cities. This means you have to go far away to build a new mobile home.
- Along with land, you are also required to set up electricity, water and sewerage. And setting up these utilities in far away locations can cost anywhere from $500,000-$750,000.
2. Cap Rates
A Mobile Home Park Business can easily yield a 10% cap rate. So, if we stick to a minimum cap rate. You should find a mobile home park that at least provides a 10% cap rate and has a further potential of generating a higher rate.
In order to understand the Cap Rate for a mobile home park. You must have these numbers on hand for a quick back of the envelope calculation.
- No of Individual Pads on the Park
- Lot Rent
- Park Owned Mobile Homes
- Tenant Owned Mobile Homes
- Upfront Repairs
- Vacancy Rates
Cap Rates= (Net Operating Income/ Purchase Price of Property) x 100
Gross Income= {(No. of Individual Pads x 12 x Lot Rent) + (12 x Rent of Park Owned Homes x No. of Park Owned Homes)}
Net Operating Income= Gross Income – {(Gross Income x Vacancy Rate) + (Maintenance Costs)}
Purchase Price= Cost Paid to Acquire Property (Excluding Financing Costs) + Upfront Repairs Costs
Let’s quickly evaluate the cap rate of a Mobile Home Park by putting some numbers
- Cost of Property: $350,000
- Upfront Repairs: $50,000
- No. of Lots: 15
- Park Owned Home: 3
- Lot Rent: $300
- Park owned Home Rent: $350
- Vacancy Rate: 20%
- Annual Maintenance Costs: 30% of Gross Income (General for Mobile Home Parks)
Gross Income= {(15x12x$300)+(12x$350×3)} = $66,600
Net Operating Income= $66,600- {($66,600 x 0.20) + (0.30 x $66,600)} = $33,300
Purchase Price= $350,000 + $50,000 = $400,000
Cap Rate= ($33,300/ $400,000) x 100= 8.325
This is a low cap rate for a mobile home park deal. In order to get to 10% cap rate, you have to consider negotiating the purchase price to $283,000.
Read: How To Do Complete Cash Flow Analysis on Rental Deals?
3. Evaluating The Mobile Home Park Deals
When you are hunting for the MHP deals, it is important to evaluate the right price. Paying more for a deal can eat up your profits and can even set you up for a negative cash flow.
Going through the MHP deals, you most often occur to three types of mobile home parks.
- A Mobile Home Park that has a mix of both tenant owned homes (TOH) and park owned homes (POH) placed on the lots.
- Mobile Home Park with only lots. No tenant owned homes, no park owned homes.
- The Mobile Home Parks which has lots with only tenant owned homes. No Park owned Home.
The first piece of advice when evaluating a mobile home park deal is to avoid those parks that have park owned homes. The park owned homes may seem to be an asset to an average investor Joe. Rather these are liabilities.
Most of the parks that have park owned homes are old mobile homes from the 70s or 80s and those were certainly not built to last. Betting on these falling apart structures may take up your fortune to get them to rent ready condition. Hunt for deals where there are no park owned homes.
Not able to find any mobile home park without the park owned homes?
Not to worry. You can still invest in that MHP with park owned homes. The key here is not to overpay for a mobile home park. Simply, do not take in account the value of POH and neither any income from these homes when evaluating a deal. And if you have to account for its value for some reason, only bet half of the value that you can get by selling the mobile home in the market.
“A Wise MHP investor will never own the mobile home, but only the land. The idea is to make money from dirt.”
4. Location
Like any other real estate, buying a mobile home park at the right location is very important. The major criteria in choosing the location is that your mobile home park should appeal to the right audience.
Well, who`s the right audience?
- Baby Boomers
- Millennials between age group of 25 and 32
- Retirees who are looking to Downsize
A location where the median income is less than $50,000 will be a perfect state for you to invest in your motor home park. Refer to this table depicting the median US Household incomes by the state. More than $50,000 median income households can afford renting a regular home.
As per the design standards, the compliance goes that no more than 4 mobile homes per acre in a mobile park where public water and septic tank is used. And no more than 10 mobile homes per acre where public water and sewer is used. Though you must check the regulations first with the local authority of that state.
Further, it is important to ensure you are getting enough lot rent for the price that you paid for that one lot. Some locations are expensive compared to others due to high land prices. Before investing, refer to the Lot Rent throughout the US and compare the deal accordingly.
Also, stay within county limits where there are all sorts of daily essential stores nearby your mobile home park. Avoid buying a MHP at far away remote locations and locations which are in the hurricane, flood or in environmental hazard zones.
5. Checking the Infrastructure
One of the most expensive mistakes a mobile home investor can make is by not checking the infrastructure of the park properly. You don’t own the mobile homes but still are responsible for maintaining the infrastructure of the park. Roads, water and sewerage are among the few responsibilities of a MHP owner.
Expect to lose about tens and thousands of dollars if you get to repair any of these. So, it is better you perform all the due diligence within time to avoid such pricey unexpected costs. Furthermore, always stay away from those MHP that have private utilities and extra amenities. Maintaining the private utilities like wastewater systems or drinking water plants is not at all an affordable job and will significantly increase your Cap Ex.
6. Financing
Financing a Mobile Home Park often seems to be the hardest part for investors. On the contrary, it is not. It’s just different. Lenders do recognize this asset class and the potential of MHPs to generate positive cash flow. There are many lenders who specialize in financing this asset class.
You have financing options available for
- Purchasing Existing Mobile Home Park
- Renovating the Mobile Home Park
- Buying a Land and develop it into Mobile Home Park
However, we are sticking towards only purchasing an existing MHP. The benefit, your lender can run through the existing financials increasing your chance to secure financing faster.
When buying an existing MHP, it is important that you take all the previous financial reports and tax returns of the previous owner. This way you can both analyse the profitability and secure financing.
The Types of Mortgage Available for Mobile Home Parks
- Freddie Mae and Fannie Mac Loans
- Conduit Financing or Commercial Mortgage Backed Security Loans (CMBS)
- USDA Loan (SBA 504)
- Seller Financing
- Private Money Lenders
- Hard Money Lenders
Shop around and see which lender offers you the best rate and terms. Lenders have specific requirements for originating loans for mobile home parks. Every lender has a different requirement.
Apart from basic loan requirements, the lenders most often go about
- Type of Park
- Type and Age of Mobile Homes (Single Wide or Double Wide)
- No. of Minimum Pads
- Infrastructure of Park (Paved Roads)
- Minimum to No Park Owned Homes
- Existing Occupancy Rate in the Park
- Location of the Park (Metro, Non-metro, Rural)
- Private or Public Utilities
- Previous Financials
Lenders specialize in mobile home park financing offer loans up to 80% LTV, fixed interest rates from 5-30 years and for credit scores as low as 670.
Should You Invest in a Mobile Home Park?
Why not invest in a mobile home park when you can get a stable cash flow, potential of higher returns and that too with minimum botheration? Do you know any other real estate asset class which is this stable and likely to be always in demand?
Interested to know more advantages of investing in a mobile home park?
Recession Proof Investment
During economic meltdowns or recessions, many tenants have to leave their pricey apartments and search for more affordable accommodations. Do you think there are any more cheaper renting options for a tenant than living in a mobile home other than moving to a friend’s place or having sleepless nights in a car or a tent?
In all, you are tapping into an asset class which already has a demand (affordable category of housing) and will stay in demand even if the recession hits.
Entry Barrier
It is always better to own a business that has an entry barrier. Otherwise every man on the street will be in this business. The entry barrier, though, is not due to the capital needed for the business but because of the artificially controlled supply. The government zoning plans restrict the construction of new mobile home parks if not completely banned. The sole reason why more old parks have been redeveloped than more new parks.
More and more new players are entering into this asset class and the big players already own a big chunk of this pie. But don`t worry as there are still a considerable amount of mobile home park deals available in the market today. Seek for the mom and pop sellers who are motivated to part ways from their mobile parks
Accelerated Depreciation
Tax Breaks is one of the most unfair advantages that comes with real estate investing. And when you can reduce your taxable income by depreciating the value of your asset, it is icing on cake.
With mobile home parks, the IRS allows accelerated or bonus depreciation which isn`t available with other forms of rental property investments. A mobile home park owner can deduct a huge portion of their investment within the first year.
Investing in a Mobile Home Park Vs Other REIs?
The mobile home parks have certain distinct advantages compared to other forms of Rental Investments like apartments, SFRs or MFRs.
Low Tenant Turnover
Frequent tenant turnovers bite deep into your profits. We all want stable tenants. And this is where investing in a mobile home park provides an edge. You don’t own a home in your park, just the land. The home is owned by the tenant.
In order to move out, the tenant has to take the mobile home along and this comes at a considerable cost. Moving a mobile home can cost anywhere between $5000-$8000. It is not at all a viable option for tenants to move out every now and then. Expect your tenants to stay for many years to come at your park.
Maintenance and Repairs
The most cumbersome aspect of the rental business is to maintain the property and do the repairs. On average, a rental owner shells about 50% of their gross income in maintenance and repairs. Not just spending money, a rental owner is also legally liable to get the repairs and act on maintenance requests in time.
God save a rental owner who doesn’t have a property management company to take care of things. And if you see, when you own a mobile home park, you save a good chunk of money and your time. As a park owner you are only responsible for park infrastructure and not the homes. A Mobile Park owner on average spends only about 30% of their gross income on maintenance and repairs.
Higher Return Potential
When you own a mobile home park, your acquisition cost significantly reduces. You acquire more units and still pay less because you are just going to own the land. On the contrary, buying a single family rental or a multi family property, you pay significantly more but still acquire less units. When you have more units, you have a potential of getting higher returns.
Imagine what kind of effect can forced appreciation provide you if you can increase rent by just 5% on all your units? Calculate yourself how much return will increase on SFR or when you own a mobile home park.
Is there any Risk Investing in Mobile Home Parks?
There is always a risk involved with an investment. The only thing is identifying the risk and whether it can be managed or not? Investing in Mobile Home Parks is no different. But more than risk, consider these as downsides.
It Takes Time To Get Complete Returns
When you start a mobile home park, it can take up to 5 years to reap the full returns. When you buy an existing park, it is hard to find a fully occupied park. Getting these empty lots occupied can take time for a variety of reasons.
- a) Bigger institutions and investors are already having their hands on a good chunk of mobile home parks that are at good locations. Your chance of buying at a prime location is thin. And when you buy a little off from the main locations, it can take more time to fill vacancies. Your marketing should be very effective in this case.
- b) A person who is considering to live in an affordable mobile home community is likely to be making a bare minimum on the salary front. His ability to afford a decent mobile home will be limited. Now, he can either rent a park owned home or finance the mobile home. Financing a mobile home is not that easy. This can set you back some more time to get your vacant lots filled. And for good, you are only renting to those who own their mobile homes.
Do check out the 21st Mortgage Cash Program. It will certainly be in your interest. With this program, a park owner can quickly get a tenant to finance their mobile home.
Community Rules
Mobile Home Parks are a shared community. There are certain rules and regulations of living in a community. And being the owner, it becomes your responsibility that every person inside the community adheres to the community rules.
To get your tenants to comply with rules will take your efforts, time and money. And if you choose to ignore this, your business can suffer.
Crimes and Quality of Tenants
When you provide the cheapest form of housing on the market. You tend to attract renters from all kinds of groups. Occurring to cases of crime, drug dealing, police sirens in your mobile home community can be a common sight. Mobile Home Communities got a bad reputation just for the sole reason. Though there have been studies that have proved this only as a stereotype or generalization of MHPs.
But still, you need to be very careful whom you rent to. Your business can be at risk if you don’t do a thorough background check before letting to renters in your community.
Occurring to Liabilities
Working with lots of tenants, you are more prone to liabilities. And when you are a mobile home park owner, there can be a lot of things that can go wrong. You must carry adequate liability protection otherwise you and your business will be at risk.
The Bottom Line
Mobile Home Parks are a good investment haven considering the economic downturns and its ability to provide a stable cash flow. Consider MHPs as a way to diversify the risk. But always remember to analyse all the pros and cons before jumping into anything. And if you are a first time or a small investor with limited rental experience, you should proceed with caution with Mobile Home Park Investment Strategy.
Have anything to share related to Mobile Home Parks or are you considering to invest in MHPs anytime soon? Do write us your comments in the box below.
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