Mobile home parks are often overlooked by many investors. In some cases, it is because of the stereotype that is associated with low-income housing. The reality is that you can have a very nice, clean mobile home park. It is all about how you want to run your business and the quality of housing you want to provide your tenants.
Mobile home parks are unrivaled in their ability to produce positive cash flow and they have a very low cost per unit. Even though these are very attractive aspects of mobile home parks, there is another characteristic that is even more important.
That characteristic is control.
There are many different “control levers” that you can use to improve the value of the park. The reason that we call them control levers is because these are things you can control with some simple changes. Let’s review these different methods of control that will allow you to almost instantly increase the value of the park.
Here are the levers that will be outlined:
- Raising lot rent
- Increasing income/Decreasing expenses
- Selling homes
Raising Lot Rent
You will find that many parks have had the same lot rent for years. For whatever reason, the owner did not increase the rent. It could have been that they just forgot to do it, were too lazy to do it, were afraid of having the tenant move out, or any other myriad of reasons. Most of these reasons have no basis though.
Laziness or forgetfulness are things that are quite easy to overcome. The lot rents should be monitored and kept up to pace with the other parks in the area. We are not trying to raise the rents and gouge people. We are being competitive with the rest of the market. That is why it is called “fair market rent.”
The fear of having people move out is really unfounded. If you think about it logically, the rent is the same amount as what they would pay down the street at another park. If they do not own the home, are they going to go through the time or expense of moving when they are going to pay the same lot rent elsewhere? It wouldn’t make sense.
Since most mobile home parks have leases that are month to month, raising the lot rent is a control lever that you can use almost instantly to increase the value of the park. How? That leads us to the next control lever.
Increasing Income/Decreasing Expenses
Keep in mind that the value of a mobile home park is measured differently than a single family home. With a single family home, the value will be determined by similar homes that have sold recently in the area. These comparable homes establish the value of the home being sold.
With a mobile home park, value is calculated differently. Generally speaking, there are not a lot of mobile home parks in an area that have recently sold to compare values with. Even if there were, usually the parks are so different that you cannot make a direct comparison.
In the case of mobile home parks, the value of the park is based on the income it produces. This is great news for investors. When you can purchase a park that is under-performing because of poor management, high vacancy rates, or exorbitant expenses, you can make some changes and have instant equity. As you are evaluating parks for purchase, you should identify areas that can be changed or improved for an instant profit.
Utilities are a good example of how some parks are mismanaged. There are some parks out there that the utilities are paid by the park and are not billed to the individual owners/tenants. This is a huge monthly expense that can easily be fixed.
For a small fee, you can purchase individual meters for each unit and have the utilities billed to the individual owners. At first, it may seem unreasonable to pass the utilities on to the tenants. However, in a single family home, the homeowner will pay all of the utilities as part of owning the home. When you consider it like that, passing the utilities back to the owners/tenants makes sense.
Even though it may cost a little more, we suggest that you check with the county as you make this change. In most cases, you can pay to have their contractors install the units and they will also insure the lines since they did the work. Having them insure the lines to the utilities is a valuable thing to do.
The bottom line is that by removing the utilities expense, you have greatly increased the monthly cash flow, which also increases the value of the park. If you find a park where the utilities are paid by the park, this is a lever you can quickly pull to increase the value of the park.
Each mobile home park is different, but there are many of them that have homes that are owned by the park and rented to the tenants that live there. At first glance, this may seem like a good situation because you get to collect the lot rent and the rent from the home. However, there are some issues that come with the park owning the home.
First of all, park owned homes require maintenance. This becomes a tenant/landlord relationship and the landlord is responsible for all repairs on the property. This could mean higher expenses with the maintenance factor. The older the homes are, the more this could be an issue.
The other large issue with park owned homes deals with financing. Lenders will only lend based on the lot rent because that is the amount of income generated by the real estate. Even though a park may generate a lot of income from park owned homes, the lender does not count it during the qualification process. This makes selling a park difficult when there is a large percentage of park owned homes.
One easy way to remedy this is to sell the property back to the tenant using seller financing. The tenant is still making you a monthly payment, but now they own the home instead of renting it. Since the person in the home now owns it, they are responsible for all maintenance. That is one less expense for you to deal with and you are still receiving the income from the seller financing.
As part of the seller financing, you could have the seller pay anywhere from $500-1000 dollars as a down payment and make some very quick capital with no expense for generating it. If you have a 50 unit park and you sell them with $500 as a down payment, you just raised an additional $25,000! Everybody wins in this scenario. The tenant gets the opportunity to own a home, and you are able to be more profitable with your mobile home park.
Ideally, these control levers are points that you should keep in mind as you are evaluating mobile home parks. These are the quick methods that you can use to immediately improve the value of the park and make your investment even more profitable.