How to Evaluate Mobile Home Park Investments for Profitability Blog
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We appreciate you reporting your income and expense information. Each park has its own Rules and Regulations which each tenant signs and agrees to adhere to upon being accepted as a tenant. The manager is to enforce these rules in order to maintain order and cleanliness within the park. If rules are not adhered to the Rules & Regulations will clearly spell out the various remedies available to the Landlord. Amenities – you can also have additional amenities such as a meeting hall, a pool, laundromat, additional RV parking and charge rent for all these additional services. There are a number of things you can do now to lower your bills and save you some extra spending money down the road.
If you lay a foundation for the home and fix it on the land, then it will be considered real property instead of personal property. In this case, you will pay property taxes like you own an on-site built home. When you own a mobile home, the only person responsible for maintenance and repairs is you. Meaning that you have to set some money aside for any unexpected repairs and maintenance like mowing the lawn, for example. It’s probably hard enough just paying the monthly principal and the interest rate on your mortgage. But if you’re going to set a budget, you also need to include the expenses to maintain and update your mobile home.
So how do I determine what a specific mobile home park is worth?
Current lending rates are at an all-time low so it is an ideal time to borrow funds to invest in this type of opportunity that offers returns of 5% to 9%. Lenders are now seeing this as one of the more secure lending opportunities due to the steady cash flow and debt serviceability. These are considered land improvements and are typically depreciated over a period of 15 years. This increased depreciation over the first 15 years is a major tax benefit for many investors. Since the value of mobile home parks is tied to their income, it is significant that lot rents have been growing a pace far higher than inflation for the last decade. It is important to note that mobile home park lot rents are insanely cheap at a U.S. average of $280 per month, and could double and still be cheap.
When you rent, you won’t have to pay property taxes every year because the owner of the home will do it. Frank Rolfe has been an investor in mobile home parks for almost 30 years, and has owned and operated hundreds of mobile home parks during that time. He is currently ranked, with his partner Dave Reynolds, as the 5th largest mobile home park owner in the U.S., with around 20,000 lots spread out over 25 states. Some mobile home parks are on the tax assessor’s rolls for a fraction of current value – and after closing that value is going to up. In some states like Missouri (where rates are only 1%) it’s not a huge deal, but in some like Cook County, Illinois (where tax rates can approach 10%) it can derail the deal.
Testing demand for affordable housing
The rent increases not only increases your net income but also adds value and will serve you well when it comes time to sell. It reflects on the cap rate which in turn determines the value of the park. A mobile home park in Laguna Beach, California recently sold for a reported $80 million.
One of our clients has a 100-space mobile home park located on a US highway and has sold 30 spaces to a developer for retail uses for $2.2 m and will be selling the remaining 74 spaces for $1.85 m. Furthermore, new mobile homes continue to be built – statistics show that just over 81,000 mobile homes were built in 2016. You did a great job of explaining what should I know if ever I invest in mobile home parks. My uncle has been thinking of investing in mobile home parks, and how it can help us in the long run. I like how this article explained that there are a lot of mobile home parks in the US, and the need also increases because it has cheaper rent than the average apartment rent. It would seem logical that you could design and set up your own mobile home park on land that you have or acquire.
Are Mobile Home Parks a Good Investment?
Apart from that, mobile home parks sell for cap rates between 8% and 10%, which can be around 10 times the yearly income. When renting a mobile home, the first thing you will obviously have to pay each month is the house rent. If the contract includes paying a fee for late rent, then keep that in mind as well.
To be safe, you need to internally calculate a property tax rate based on what you are paying, not what is on the tax roles currently. You can get offsite professional management but most often parks are managed by an individual or a couple living in the park who can oversee most all aspects of management. In exchange for management their pay is usually free pad rent and depending on the size of the park they may also receive an additional monthly salary. I have learned that it is more cost effective and much quicker to purchase an existing park than constructing a new one. Firstly, to obtain land that will be granted zoning for this purpose will be most challenging. The cost of developing every new pad is somewhere in the range of $25,000 to $40,000 per pad, consequently a 50 pad park would require at least $1,750,000 in development costs, excluding the land cost.
WAYS TO LOWER BILLS AND SAVE MONEY
If you want a 10 cap on a property priced at a 7 cap, it does not necessarily mean you should pass on the deal. For instance, what if the park has rents that are $50 under market and through your inspections and due diligence you know you could raise the rent to market rates in 2 months. In most cases when you review a sales package for a mobile home park for sale it will not mention any reserve for capital expenditures. This really should be addressed in your evaluation of the park and in the due diligence phase.
A home is being rented for $425 per month and the lot rent is $200 per month. I will approach the current renter and tell them if they continue paying rent for 3 more years, then I will assign the title over to them and the home will be theirs. In the rent-to-own agreement, I specify that the lot rent is $225 per month(not $200) and after 36 monthly payments of $200 plus lot rent, the home title will be transferred to them. While sellers can be wonderful people, their financials are not to be trusted without extensive verification. There are many expenses that can be missing – and these can have a huge impact on your net income and property valuation.
We use this information to ensure our commercial property appraisals are fair and accurate. The next time you are driving around and see a mobile home park, consider the fact that even those small mobile home park owners are millionaires. It may give you a new respect for something that you never thought twice about before. Due to the flaws in the first two methods I put all my efforts into valuing a mobile home park using the Income or Market Capitalization method. Under this method I take the Net Operating Income divided by the Capitalization Rate to come up with the Value. While this might sound like a simple process, it can be quite complex coming up with the true Net Operating Income and decided what cap rate to use in the formula.
Items like replacing all the water lines or sewer lines for older parks, resurfacing the roads, topping all the trees, are large expenses that can occur in the future and they should be budgeted for. While they are not expensed for income tax purposes they are capitalized and depreciated over 15 years or so, and are therefore real costs. I would include at least 2-3% of gross income as a Reserve for Capital Improvements in your numbers when determining the value. At least 25% of the population can afford no more than $500 per month for housing costs.
Since they do not obviously send a bill to themselves or get on the park’s payroll, their labor cost falls off the radar screen and they conveniently forget that it needs to be reflected in the park’s operating numbers. Of course, others remember but leave it off because it makes the park look more profitable that way. If we look at the ratio of housing costs to total income of say 28% — these families can afford less than $467 per month. The median price of homes in Sarasota, FL at the time of this blog post was $273,200 according to Zillow.Certainly beyond the means of folks requiring affordable housing whose housing budget is around $467 per month.
Hopefully this has given you some insight and interest in the mobile home park space. I’d love to hear about your experience in this asset class or other questions you might have. The economic impact of moving a home ranges in the $4,000 - $6,000 price range. Although individuals have been known to attempt moving them on their own with the largest vehicle they can find, in most cases this is not only illegal but extremely dangerous. Even if the home is sturdy enough to withstand the road trip, significant damage can be done to the home or through accidents caused by inexperienced movers as to render this a completely bad idea.
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