The Benefits of Investing In Mobile Home Parks
While researching different real estate investing strategies I came across the benefits of investing in mobile home parks. I always figured that this is a category of real estate that required millions of dollars to be in and was pretty much reserved for large corporations. This preconceived notion turns out to be far from the truth. Since mobile home park owners rarely own the mobile homes themselves the cost of the parks is quite low for the total number of units and many owners are “ma and pa” operations that often will provide owner financing with low down payments. There are several other benefits to investing in mobile home parks as well. In addition to lower cost single family homes I am seriously looking into investing in a mobile home park in the future.
My History With Mobile Home Parks:
I lived in a mobile home park from the time I was a baby until I was 6 years old. We owned our own home and I remember my dad and mom spending a lot of time on projects to improve OUR home. They tarred the roof, built a new front porch, replaced paneling, and built one of the largest sheds in the park. I vaguely remember getting to help on that project. We planted a shade tree in the backyard which is still there today. My sister was 3 years older than me and I recall us being fairly free range with the neighbor kids. There was a small field between many of the houses that was a common area that we played in a lot. The park also had a small playground and a fishing pond. I remember going down there to feed the ducks.
My dad told me that they paid around $13,000 (in 1987) for a new trailer and around $500 for the delivery and hook up of it. Our trailer was a 3 bedroom with washer and dryer and all new kitchen appliances. He said that getting the loan was similar to getting a car loan. It was extremely easy to get a low down payment loan with hardly any credit history and just a short period of time at his job at the time.
When Mrs. C. and I were getting ready to buy our first home my dad suggested we buy a mobile home instead of a stand alone single family house. I was 100% against the idea because I really didn’t want to pay lot rent when I could get a bigger loan for a single family house. In retrospect I would have had far less maintenance costs, lived in a nicer area, and had a lower cost of ownership overall had I bought a mobile home instead.
Mrs. C. and I through our rental investments want to work on the home affordability problems in our area, especially for larger families. Currently we are focusing on larger homes that we can rent through the Section 8 program, however mobile home park investing could also offer another avenue to provide low cost housing while also giving us monthly cash flow superior to stock market index funds.
Benefits of Investing In Mobile Home Parks:
Low Maintenance: Typically when you own a mobile home park you own the lots and other people own the mobile homes, which happen to be on your lots. This means ALL of the maintenance on the houses is their responsibility, not yours.
Lower Cost Per Unit: With an apartment building or single family homes you are easily going to spend $40,000 a unit, whereas when investing in mobile home parks you can often get them for under $10,000 a unit (for each lot).
Faster Depreciation: Since you are depreciating roads, fences, etc rather than stick built permanent buildings the depreciation is done over 15 years, not 27.5 years. This faster depreciation means that you will save a lot of money on your taxes, at least for the first 15 years. From a tax perspective It is ideal to make improvements during this time to be able to sell at a profit and 1031 exchange to a larger park after 15 years. Since taxes are not the only factor in deciding whether or not to keep an asset don’t automatically plan to sell at 15 years. For example, a park that costs $600,000 with improvements valued at $400,000 would allow for $26,667 of depreciation per year. In the 25% tax bracket this saves $6,667 per year in taxes. After 15 years this savings goes away. If during that time you have increased lot rent, maximized capacity and reduced expenses, you could have an asset that nets over $150,000 a year, I wouldn’t feel rushed to sell such an asset, even if I lost $6,667 of tax savings.
Providing Low Cost Housing: Low cost housing is a major problem in our country. Mobile home parks offer a way for people to pay a lot less overall for their housing than renting apartments or even buying single family homes. Lot rent, at least in my area is currently around $300 a month. People often argue that it’s a bad deal for the mobile home owner because even when the house is paid off they still have to pay lot rent. Well, if you owned your mobile home on a piece of land, you would also have to pay property taxes every year as well as a bill for water and sewer which are often included in the lot rent. Over the long term it would be less expensive, but the cost certainly isn’t zero. The actual home is also paid off much sooner than a traditional home, because a mobile home is much much less expensive. You can buy a brand new single wide 3 bedroom home for under $30,000 and a decent used one for half that. Mobile homes overall are an excellent value for the home owner and are a big part of the solution for our home affordability crisis in this country.
Mrs. C. and I are currently focusing on providing rentals for section 8 tenants with large families in Benton Harbor, MI, but the Section 8 voucher program is only a small part of the housing affordability problem in this country. The number of section 8 vouchers are extremely limited and there are not enough resources to help all of those who struggle with housing affordability. The benefits go to a very select few and the waiting list is currently closed. Benton Harbor, MI has 3,973 households with 49.2% having incomes below the poverty line; that is 1,955 households. There are only 173 total section 8 vouchers in Benton Harbor. There are also project based rental housing units as well, but once again these are wait-listed and there are not enough of these units to help everyone. Mobile homes are the most advantageous form of low cost housing because they provide the household with the ability to own their own home.
Owner Financing: Owner financing is often available, and with lower down payments than a bank would expect. I’ve read of some people even getting a mobile home park with no money down through owner financing.
Length of Stay: Mobile homes are not very mobile. They cost upwards of $3,000 to move, so it is rare that the owners will move. Likely they will sell the mobile home to someone else rather than moving it, and guess what? You get to approve or disapprove of a potential buyer. This system ensures that you have low turnover.
Ability To Buy And Sell Mobile Homes: The primary income stream is the lot rent for sure, but there is certainly money to be made in flipping units. Since transporting mobile homes is difficult when people want to leave they need to sell. As a mobile home owner you can choose to create a constant market by offering to purchase trailers immediately, rather than them needing to find a buyer. You then flip the trailer to a new buyer. This is often done on a land contract basis where you charge them a set amount for the lot rent and trailer combo.
As an example, let’s say the true market value of the trailer is $15,000. The original owner sells it to you for $11,000 to get out without having to wait to find a buyer. You then publish 2 listings: The first to sell the home for $15,000 outright with your standard $300 a month lot rent. Since you don’t need to move you aren’t in a hurry to sell like the trailer owner would be. The other listing would be to move in with a land contract deal to own it in 10 years. You are listing the property as the opportunity to own your own home for under $500 a month. The lot rent is $300, you are selling the property at $17,500 at a 6% interest rate on a 10 year note. Their total payment is $494, you are ensuring your lot is full, you make a $6,500 profit on the trailer, AND earn $5,800 in interest over the life of the loan in addition to keeping the lot fully rented. You are providing credit to someone who would possibly have a difficult time getting the loan from the bank as well.
Lack Of Competition: Local municipalities have taken a lot of effort to ban new mobile home parks from being built. At the same time more and more people need affordable housing. We have 2/3 of baby boomers reaching retirement age with literally no money in savings. Mix these together and the demand for an existing mobile home parks is high.
Ma and Pa Operations: The vast majority of mobile home parks are not professionally managed. They are operating as part of family businesses that often are not actually run like businesses, leaving a lot of room for improved efficiency in operation and ROI.
Clear Ways To Increase Cash Flow Investing In Mobile Home Parks:
Investing in mobile home parks gives you control that you don’t have in most investment situations. This control allows you to take action to substantially increase your ROI.
Reduce Vacancies: You can see the amount of vacant pads in the listings and make a plan to fill those vacancies. The lots already aren’t making you any money so it costs nothing to give away a free 6 months or even a year of lot rent for someone to move there. Better yet, since you aren’t struggling for cash, pay the $3,000 to move someone’s trailer to your empty lot. Make relationships with trailer moving companies and handle every aspect of the move so all the trailer owner has to do is say “yes”. Another option is to buy used mobile homes, rehab them, and then sell them, similar to the plan written about above. When investing in mobile home parks reducing vacancies should be your primary concern.
Rent VRBO: As the mobile home park owner you can choose to have a few houses that you rent out to vacationers in peak season. In my area we have a strong summer tourist season and we also have the Senior PGA golf championship hosted here during the shoulder season every other year. Another short term rental opportunity is to nuclear contractors working refueling outages at the two nearby power plants. Renting out a mobile home on a lot that was vacant anyways for $70 a night with a 1 week minimum could prove to be very profitable. A mobile home is much more functional for a family on vacation or a contract worker on a 2 month job than a hotel room and the rent is much higher than you would get from a standard tenant. Rather than making $6,000 per year from a land contract mobile home you could make twice that if you kept a vacation rental full for half the year. If you want to go this route it is important to check with local ordinances on short term rentals to stay legal.
Laundry and Storage: Many park owners add laundry mats and storage units. You have a captive audience for whom it is much more convenient for them to use your laundry mat and storage units than a competitors. This of course works better for larger parks. If you have a 20 unit park, building out 30 storage units doesn’t make sense. If you have a 300 unit park, you may be able to fill 100 units. Mobile homes are relatively small and have no basements so they are more inclined to need a storage unit than people who live in single family homes. From the laundry perspective I came across this post on Bigger Pockets by someone who had an apartment complex with 10 coin op washers and dryers, not apples to apples, but useful none the less. “For 120 units I would take 3600 to 4000 a month to the bank in quarters.. HEAVY..” I don’t know about you, but I like my money to be heavy! Ideally you would also have an on site change machine and rotate quarters and bills through the change machine which should greatly cut down on the weight of money going to the bank.
Vending: Although not as profitable as storage units and laundry mats, vending machines are another great avenue. When I was kid living in the trailer park my dad would often give me a handful of quarters to go pick up some pops from the vending machine. I can’t recall if there was a candy vending machine or not in my park, but trailer parks often have a lot of kids, so adding pop and candy vending machine is a great place for an owner to make a few extra bucks. Keeping these in the same area as the laundry facility also provides the benefit of being able to put laundry soap and dryer sheets in the machines. A soda vending machine costs around $1,000 and typically cans cost around 30 cents to buy and sell for $1. At this rate the first 1,400 cans would pay for the machine. The machine holds around 500 cans. After the first 3 fill ups the machine would generate around $350 per fill up.
An apartment complex in Texas recently installed an “automatic store” which is basically a supersized vending machine with standard groceries and household items as well. They are reporting $2,500 a week in revenue from their 800 unit complex. Scaled down to 25% of that for a 200 unit trailer park the revenue would be $625 a week. The downside? the machine they are using costs $125,000. If the size and cost of the machine would scale down as well to 25% of the cost then at 50% margins the machines would pay for themselves in under 2 years, and then generate $16,250 of additional profit per year. This would increase the value of the park by $162,500.
Lot Rent Increases: You can increase lot rent over time, especially if it is undervalued. This needs to be done slowly and kept in line with the market, just like with rental houses. If there have been no increases for 10 years and you jack up rents by $100 a month you will have a park filled with angry people who will be struggling to make ends meet. Increasing by $10 to $20 a year and ensuring that your park is still competitive with comparable alternatives is a much better route. A $10 a month increase across 100 units is $12,000 a year with no extra expenses against it. At 10X net income valuations this increases your park value by over $100,000. If you never increase rents your park loses money through inflation.
Reduce Water And Sewer Bills: I came across an article detailing how to greatly reduce the water and sewer bills at your park. There are 3 things that can cause excessive water use: Main line leaks, mobile home leaks, and people who use excessive water. There is a company called American Leak Detection, that can use a form of sonar to identify where the leaks are in system, allowing you to then repair them. These leaks often go unknown for years. The next step is to look at the individual units. Wait til around 10 o clock when most residents are at work, then go around with a plumber and open the clean out outside of each home. If no one is home and you have water going through, they have a constant run somewhere. Make a list of these homes and then have your plumber come through after your tenants get back from work and offer to identify and fix their leak for free. This is WAY cheaper to the owner than continuing to pay for extra water forever.
After fixing leaks the next step would require sub-metering. Install high tech meters on all the water pipes by a company called Metron. These meters update every 20 minutes and provide the owner with tons of detail. You then bill back water and sewer at their usage rate. To keep tenants happy you could even include a credit based on what you were paying before. Let’s say after fixing all leaks you were effectively paying $70 per unit per month. Give all of the units a $50 credit per month for water and sewer. This will then not feel like they are being jacked up in rent and many will work hard to reduce their net water bills to $0 or even less. This method would fix your costs at $50 a month per unit and would allow the home owners to potentially reduce their total costs from what they were paying before. If they only use $20 of water they would net $30 from the water credit.
Negotiate Property Taxes: Property taxes are based on the value of the land and the improvements, not on the cash flow it produces. Always, always, always, challenge property tax assessments, you may be surprised at how much you can get the assessors to give. This is true of vacant land, single family residents, commercial property, and yes, even investing in mobile home parks. As an example, a mobile home park near me with 159 spaces on 47 acres has an assessed value of $1.15 million. In Michigan the assessed value is supposed to be half the true market value of the property. Another property in a more desirable township and school district with nicer homes and 389 lots on 80 acres is assessed at $1.09 million. This is the difference negotiating your property taxes can make. The assessed value per lot is $7,232 per lot for the first park and $2,802 per lot for the second park. Even though total taxes are higher overall in the second park due to its municipality having a higher tax rate the taxes per lot are $151 compared to $295 per lot in the first park. This is a stark difference. $144 per lot across a 159 lot park is over $22,000 of potential profit a year.
Expansions: Although it is almost impossible to get regulatory approval to build a new park, adding new pads to the existing park on your land is generally not as difficult. On average a new pad with utilities ready to set a trailer on costs around $10,000. If you are generating $3,600 per year per pad in gross revenue and $2,000 per pad in net revenue then each additional pad is a 20% ROI.
Value: When investing in mobile home parks the value is generally a multiple of its net income, just like apartment complexes. Will all of the above changes you can have a serious impact on the total value of the property when you go to sell. If a mobile home park in your neck of the woods typically sells for 10X net income and you increased income by $5,000 a month and decreased expenses by $3,000 a month, then you increased yearly net income by $96,000 and it’s total value by $960,000!
Disadvantages Of Investing In Mobile Home Parks:
Maintaining Roads, Street Lights, and Utility Pipes: These are all expenses that a single family home owner or an apartment building owner would often not have. Keeping these up to date and maintained is vital to protecting the value of the park. There is also the added cost of snowplowing and lawn mowing of common areas that needs to be contracted out.
Huge Water Bills: I actually used this as a positive above because there are strategies to get this under control. If the huge water bills exist when you purchase the property this is a major opportunity to increase your ROI.
Dealing With Many Tenants: For a similar total dollar investment you may only have a half dozen single family rentals, rather than 60 lots. This means 60 people who may need to talk to you or have the possibility to be behind on rent. On the plus side, you have 60 people paying you rather than 6 so if 1 doesn’t pay on time it is a relatively small hit.
Eviction Costs Are High: To evict someone you would have to move their home off your lot, which could cost you a few thousand dollars in addition to the legal costs. Thankfully mobile home owners really don’t want to lose their homes, so it is not often that lot rent gets skipped on.
Investing In Mobile Home Parks Example:
Here’s an example of a mobile home park in my area that recently sold for $650,000.
59 sites with 44 occupied at $265 per month. Well and lagoon sewer. Seller financing available.
- Income last year: $140,433
- Total Expenses: $74,181
- Net Income: $66,252
- $650,000 price (9.8X net income)
- -$162,500 Down payment (25%)
- -$3,353 per month mortgage (487,500 20 year mortgage at 5.5%)
This would result in a $26,000 in net income in the first year. Reinvesting all of this money into getting the park full would result in having 59 units full in year 2, along with a $20 increase in rents year 2 would increase total revenue to $201,780, with very little additional ongoing expenses.
What do you think about investing in mobile home parks? Would you ever consider it? I’m pretty much sold, now to convince my wife ;).
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