The Primer Series #5: Mobile Home Parks

Alternative Investment Primer #5: Mobile Home Parks

 Part 5 in a Series by Denis Shapiro

WHAT IS THE ASSET?

 

A mobile home park is piece of land that has been sectioned into lots with utility hookups that allow for the establishment of a community of manufactured homes.

Close your eyes and think about the following three words: mobile home park. What comes to mind? Do you imagine a family-friendly community or a daunting trailer park? Most likely, your first vision isn’t a positive one, and you’re not alone.

Because mobile home parks are viewed so unfavorably by the majority of counties in this country, there have been very few built during the last two decades.

Despite their vexing negative reputation, the truth is that most parks are safe, welcoming, and affordable living environments. Newer homes often include higher end features like open-concept kitchens with granite countertops and stainless steel appliances, and certain parks even offer Class A amenities, like in-grounds pools, picnic areas, dog parks, and more at a fraction of the price of similar living arrangements. Due to a lack of other comparable and affordable options, residents rarely move out of nice parks; and since most of them own their homes, the high cost of moving incentivizes them to stay put for years or even decades.

The parks that exist today were developed in the 1970s and 80s and have aged accordingly. What were once well-run businesses in their prime have deteriorated into a mere shell of their former condition. The operators, often mom-and-pop business owners, often have retired, and their next of kin want nothing to do with the family business. The result is many neglected parks that have begun rapidly changing hands in the current environment. What was once a dirty phrase in the investment world, mobile home parks have become as desirable as any other asset class in this primer series.

 

Mobile home parks have three distinct business models:

 

Park-owned homes — In this scenario, the park operator owns each of the mobile homes and is therefore responsible for all maintenance and repairs inside the park and homes. Most owners shy away from this model because even though the rent they charge is higher, it is partially offset by the higher operating expenses. However, from a strict revenue perspective, this gives investors the most bang for their investment buck.

 

Tenant-owned homes — This is considered a more attractive model in today’s investing environment. In fact, out of all of the mobile home communities that currently exist in the United States, roughly 71.1% of the homes are tenant-owned.[1] In this scenario, the homes are owned by the tenants, and the owner rents out the land and utility hookups. The tenant pays for the lot rent and any utility expenses that are in their name, and they are responsible for all maintenance and upkeep issues. Usually, the need for property management is minimal, and the economics of the model don’t support it anyway. In some cases, lot rents are only $200–$300 per month, so a 10% management fee only equates to about $20–$30 per month. It’s not easy to attract quality property management at those rates. 

 

Hybrid model — This is a combination of park-owned and tenant-owned homes. Often, the operator’s goal is to convert to a fully tenant-owned model by selling the homes to their tenants. In some cases, an older home may even be given away at no cost if the new owner agrees to make repairs and pay the lot rents. This is one reason why investors don’t often place extensive weight on the sale of homes when considering an investment.

 

While there are no real restrictions on purchasing a mobile home park, investing in a syndication or fund typically requires accredited status.

In addition, at this point, most existing parks are grandfathered in, giving them a solid competitive advantage when compared to other asset classes—especially self-storage. However, there are “sunset provisions” that can be enacted by certain municipalities that remove a park’s grandfathered protection and deem it unlivable. Once this happens, it is very difficult to reverse, so you’ll want to ensure that you do due diligence prior to investing in any deal. If you’re looking to purchase a park on your own, you will want to make sure the park is in good standing with the town in which it’s located.

The second major regulatory concern is any potential negative environmental impact from the existing utility structure underneath a park. If you are dealing with city utilities, you are most likely in the clear. However, private utilities can get expensive and downright nasty to deal with. Make sure the operators you’re investing in have a clear plan when it comes to utilities. Any environmental issues are usually uncovered during what’s called a Phase 1 report. If a Phase 2 report is needed, which is the major conclusion of a Phase 1 report, then you should walk away as a new investor.

When considering the purchase of a new mobile home park, it’s vital to ensure that your operator is comparing apples to apples. They cannot accurately compare the net operating income of a park-owned model to a tenant-owned model. If they do, they won’t be able to convert the park-owned homes in the future without everyone missing their projected numbers. Some sellers try to glorify the numbers associated with park-owned homes, but the numbers need to be adjusted based on the business model. If your plan is to convert to an all tenant-owned model, what will the NOI be strictly based on lot rents, without factoring in any other additional revenue (including the sale of the homes during the conversion from a park-owned to tenant-owned model)? The offer price should be based on this total sum.

 

PRO TIP: When starting out, anticipate that one-third of the deals that are supposed to generate cash flow very well will become larger projects than expected and instead cash flow poorly. This means that if you try to create a portfolio by mixing together cash flow projects with value-add projects, you should skew the projects toward the former; in the long run, you will achieve balance. If you try to balance your portfolio evenly from Day 1, your cash flow will fall short of what you expect. Over time, your ratio will improve with more selective selection of deals and operators.

 

A note about foreclosure in this asset class: If a tenant stops paying rent, the process of retaking the property is surprisingly simple. In most states, mobile homes are considered personal property and may only require a visit to the DMV for the park operator to assume the title. In some cases, the tenant who owns the house will just abandon or sign over the home to the park because the overdue lot rent paired with the expense of moving the home are more costly than just leaving. This process can range from a few weeks to a few months, depending on the county in which the park is located. If the home is dilapidated beyond repair, it can be replaced by a new home relatively inexpensively or through financing programs available directly to the new tenant. Keep in mind that if an operator is dealing with multiple infills—the process of populating a lot with new mobile homes—they may be required to become a licensed dealer, depending on the requirements in their specific state.

 

[1] Sydney Bennett, “Are manufactured homes a solution to the housing affordability crisis?”, Apartment List (June 15, 2018), https://www.apartmentlist.com/research/mobile-homes-affordability-crisis.

 

 

The Pros and Cons of Investing in Mobile Home Parks

 

PROS

  • A better opportunity to purchase “off market” deals
  • Potentially more favorable seller financing terms
  • Most affordable option for home ownership
  • Easier foreclosure process, as some states view the homes as personal property
  • Great tenant retention rates
  • Great value-add opportunities with aging communities

 

CONS

  • Bad PR for rent raises
  • Not viewed favorably by surrounding communities
  • Dealer’s license needed in some cases to infill lots
  • Complicated utility systems when not connected to public utilities
  • Lack of professional property management options

 

[1] Sydney Bennett, “Are manufactured homes a solution to the housing affordability crisis?”, Apartment List (June 15, 2018), https://www.apartmentlist.com/research/mobile-homes-affordability-crisis.

 

 

If you liked this article and wish to continue on your path in learning about alternative investments, please make sure to check out my other educational articles as well as my bookThe Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways

Disclaimer: The information presented in this article is for informational purposes only and does not constitute professional financial or investment advice. The author does not make any guarantees or promises as to the results that may be obtained from it. You should never make any investment decision without first consulting with your own financial advisor and conducting your own research and due diligence. Even though, the author has made reasonable efforts to ensure that the contents of this article were correct at press time. The author disclaims all liability in the event that any information, commentary, analysis, opinions, advice and/or recommendations contained in this article results in any investment or other losses. Your use of the information in this article is at your own risk.

 

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