How To Purchase a Mobile Home Park

by Dave Reynolds and Frank Rolfe, www.mobilehomeparkstore.com

Anyone out there can buy a mobile home park as there are deals you can buy with no money down as well as those in the millions of dollars. However, many of those that have purchased mobile home parks in the past 5 years are having second thoughts now because they overpaid for the park for one reason or another. Here are the top 5 reasons:

1. Capitalizing park owned home income.
2. Paying too much extra for unoccupied lots thinking they would fill up by themselves.
3. Doing poor due diligence on the seller’s income and expense numbers.
4. Missing large capital expenditures that were looming.
5. Overextended themselves thinking that they could always refinance a few years later and pull all their money back out when the park appraised for more money.

The first four reasons could have easily been avoided had the purchaser educated themselves on the business. The last one was much harder to predict as most economists did not get it right. The goal with mobile home park investing is to make money and there are some rules that you have to follow if you want to be successful with it.

Stick with Affordable Housing

There are several types of mobile home parks out there from the 1 star trailer park to the 5 star manufactured home community. If you were to take a 100 space park of each type (1 to 5 star) and look at the financial performance over the past 5 years you would most likely see that the 1, 2, and 3 star parks outperform the 4 and 5 star parks on cash flow, occupancy, and ease of management.

Why is that? It boils down to affordable housing. In reality the resident in a 1 star park can pay just as much if not more space rent than their counterpart in the 5 star community. Those 1 and 2 star parks have older homes that are paid for and the 4 and 5 star parks have newer homes with homeowners upside down on their mortgages. Many of these nice homes end up going to the bank and if the park owner wants to keep them in the park they have had to buy them to keep them there. Then they end up selling these and carrying the paper. If they don’t buy the homes, then the park down the road buys them and moves them over to their park.

It is rare indeed that the 5 star park is out buying that older 1972 14 x 70 that makes up many of homes in the 2 star park. The bulls-eye in mobile home parks is going after lower income tenants. They don’t have to be downscale and dangerous. But they have to be folks who make from minimum wage to $10 per hour. To this customer base, a mobile home park offers an incredible value, where they can have the security of their own home, and a yard for the kids and dog. And it is the only form of detached housing they can afford.

The more upper-end parks are always in a precarious position. Their lot rent plus home cost often exceeds $750.00 per month and at that price, the customer has many other options. They may buy a mobile home, but will likely grow disenchanted with it a few months later, and find a stick built home they like better at the same monthly rate. So they run off, and your continuity of lot rent is ruined. Even worse, the lender then yanks the foreclosed home out of your park, and you have a vacant lot with little prospect of re-filling it in the current economy.

Understand the True Economics of Mobile Home Parks

Mobile home parks have their own standard costs and ratios. They are not like any other form of real estate. Just because you’ve owned an apartment complex does not mean you have any grasp of this particular niche. A vacant apartment unit is much easier to fill than a vacant mobile home lot. With the difficulty that potential residents have in financing homes in parks, an empty lot is going to stay empty until you as the park owner become proactive in filling it (usually buying the home and moving it in yourself).

In most other multifamily you do not have thousands of feet of utility lines and roads to worry about. You have to adjust your mindset from thinking of the cost to repair toilets and carpet in apartments and single family to that of maintaining roads and utility lines.

If you want to buy and make money with a mobile home park, you have to know the real line items for both revenue and expense, and the range of what those should be.

Do Spectacular Due Diligence

More often than not when I hear someone complain of a terrible park investment they have made, it revolves around their lack of due diligence. Maybe they trusted what the seller said about the property tax, only to find they were off by 300%. Or they just guessed on the water and sewer cost and it turns out they were wrong by 200%. Or maybe the whole operating permit is no good. There’s no excuse for these type of mistakes. If you do great due diligence, you should only buy great deals.

Buy Parks that have the Right Fundamentals for Success

Not all parks are created equal. Some have great futures and some have no futures at all. You have to learn how to spot what makes for a winner and what makes for a loser. And it’s more complicated than just being located in some Top 10 Metro Areas list off the internet. Here are the basics of a good deal:

• Buy at a 10% cap rate or better on actual numbers.
• Parks that are poorly managed and by managing them properly they will provide a much better return on investment.
• Parks with under market rents (assuming you base your price on the current rent). Remember on a 100 space park a $10 per month rent raise effectively increases the value by $10 x 100 x 12 x 10 = $120,000.00
• Parks where expenses can be sub-metered. It will give you the same economics of increasing the space rent.
• Parks in stable and growing markets.

Some of the other items that will point towards a winning deal include location, size, utility system construction, size of lots, road infrastructure, competing apartment rents, etc. If you do not buy based on the right set of criteria, you will have trouble making a deal work.

Execute Your Plan

Many people buy parks with a good strategy on paper, but can’t translate it into reality due to lack of knowledge on how to properly operate a park. Running a mobile home park is unlike any other form of real estate. Part of it is the personality of the customer, and part of it is the unusual set of responsibilities that a park owner has.

If you want your purchase to work, you need the training to know how to operate the property effectively, and how to implement your battle plan.

Conclusion

Many, many people have made themselves millionaires through owning mobile home parks. In the 1990s book “The Millionaire Next Door”, mobile home parks made the list of top tools to amass significant money. However, those folks knew what they were doing and they took the time to learn about the business, to perform proper due diligence, and to operate professionally.

Before you invest your money, you need to invest your time in learning the subject. That’s the secret to making money in the mobile home park business.

Park owners that you can negotiate a reasonable deal with.