Written by Frank Rolfe, REIClub.com
When you write about mobile home park returns you always run the risk of being branded a liar, as nobody believes that you can make 20% plus returns on anything anymore. With a stock market that makes 2% a year, and CDs that make 1%, and single family homes that lose money, investors are just conditioned to expect a low single-digit return – and if you suggest more, they just discard that thinking as a bunch of hype that they’ve heard before in the days of the dot com and housing bubbles.But the truth is that you can make high double-digit yields in MHP, if you know what you are doing. Here’s how.
You can still buy mobile home parks at a 10% cap rate or better.
Mobile home parks still have one of the highest yields of any type of real estate. A quick glance of the listings online will support this. Why are MHP so much higher yielding than the other forms of real estate? One of the key reasons is simple supply and demand – most buyers are scared of them and avoid them, event though their fears are unfounded. While many investors think of Jeff Foxworthy-type “trailer trash” as the customer base of most parks, the truth is that 1 in 10 Americans live in a mobile homes, and there are parks in which everyone drives a car like a Honda Accord and went to college.
You can still obtain seller financing at low interest rates to push your yield even higher.
While a 10% cap rate is impressive, if you pay all cash that’s all you get. But the availability of seller financing makes the yields even higher. For example, if you buy a mobile home park at a 10% cap rate, and the seller carries back 80% of that amount in a note at 6% interest, then your cash-on-cash return is around 26%. That’s an incredible rate of return. But how come park owners can seller finance? It’s because most owners are “moms and pops” who own their parks free and clear, and who are more interested in the monthly income that a seller-financed note can provide.
You can still find a bunch of ways to increase the yield on mobile home parks.
It costs $3,000 to move a mobile home from one park to another. As a result, tenants cannot leave when you raise their rents. Besides the ability to raise rents – even in a recession – you also have the ability to cut costs such as sub-metering water and sewer usage. There are probably 10 major ways to boost the income on every park, and every dollar saved or revenue created results in an even higher yield. I’ve had parks that have had – I know this sounds impossible – in excess of 100% cash-on-cash returns per year, after years of grooming the operations and maximizing rent levels.
If you want to hit high yields on your investments, then you need to be investing in mobile home parks. If you want to earn low single-digits – and have no capital accumulation to pay for your retirement or your kid’s college education – then stick with traditional investments such as stocks and bonds.