Do you know anyone interested in living near a mobile home park? The odds are slim, which could mean a boom for mobile home park investments.
As cities expand, more and more parks are being converted from "eyesores" into subdivisions that appeal to mainstream buyers. With a dwindling supply comes increased competition for the mobile home parks that remain. When parks are turned into more profitable developments, former park residents must find new places to live and they often look first to nearby parks, competing for spaces there.
Most local governments are not friendly to mobile home parks and have made it difficult to get new properties zoned for that purpose. So while the supply of parks is dwindling, there is not a sufficient number of new parks being created to meet this demand. For the savvy investor that could spell an extended bull market for mobile home park investments.
Investors are attracted by the steady cash flow, low maintenance and strong appreciation mobile home parks offer. Parks on the outskirts of cities experience particularly significant appreciation as the city grows and the land becomes more desirable for other purposes.
Mobile home parks can produce income in a variety of ways, including lot rentals; park-owned home rentals, lease options or sales; and laundry, vending and water/sewer services. Some may even have other structures onsite that can be rented out, such as storage facilities, small apartments and single family homes.
Mobile home parks are not a get-rich-quick investment, "but it's good steady growth with cash flow," John Foley of Keystone Investment Realty Services Inc., said.
The maintenance involved is "very different" from apartment maintenance, Foley said. "I don't buy a lot of water heaters, and I don't carpet a lot of homes. I'll paint some, but I typically get the tenant to pay me back."
In contrast with regular upkeep of units, mobile home parks involve more infrastructure maintenance, he said. "Are your roads in good condition...are you keeping after your tenants making sure their lawns are cut well and are you making your tenants improve their homes or maintain their homes?" Nicer parks are more attractive to tenants, so owners can charge higher rents. Well-maintained parks sell for higher prices, and buyers will have less difficulty in finding financing for them.
Parks containing park-owned homes will require more maintenance because the tenants are renting the actual home from the owner rather than just the land and water/sewer connections, Dave Reynolds, mobile home park investor and owner of mobilehomeparkstore.com, said.
Many parks offer competitively affordable housing in comparison with single family home or apartment rentals in an area. Affordable housing opens up the market to a large potential tenant base of low-income tenants, and the restricted supply ensures demand, as residents from other closing parks seek space.
The land-lease community property asset class "is a perennially stable real estate investment, as evidenced during 2006, by its improving 91.3 percent national average occupancy rate and attractive 41.1 percent average operating expense ratio," according to the Allen Report, a survey that analyzed 26.5 percent of the "known universe of approximately 500 portfolio owners and operators of land-lease communities in the U.S. and Canada."
Turnover in mobile home parks is low; many residents are retirees who plan to stay throughout their retirement. The annual turnover of residents in community parks is estimated to be just 5 percent, compared with 60 percent for apartment rentals, according to a report prepared by the NAHB Research Center for the U.S. Department of Housing and Urban Development in October 1998.
It is also much more difficult for a mobile home park resident to move out and find new accommodations than it is for a renter of an apartment or single family home. The cost of pulling up a home and moving out can be prohibitive for this low-income population; moving costs can run from $3,000 to $8,000 for a double-wide, Reynolds said.
Although he finds parks through the Pennsylvania Manufactured Housing Association and through websites such as mobilehomeparkstore.com and mhvillage.com, Foley said experience and talking to people in the industry opens up opportunities not available through normal media outlets.
Breaking into the mobile home park industry as an investor is not as easy as investing in many other types of real estate. "In the Mid-Atlantic region, it's a relatively closed industry," Foley said.
As founder and owner of mobilehomeparkstore.com, Reynolds said he has "an inside scoop" on finding new parks, but he has also looked at other websites such as loopnet.com and has used direct mail and cold calling, as well as specialty brokers, local MLS listings and referrals from people in the industry.
When evaluating a park, Reynolds said he compares vacancy levels and rents to nearby parks and compares rents to apartments in the area. If a typical two-bedroom apartment in that market is $200 or $300 per month, then the park will probably not be competitive, but if the apartment rent is $550 to $600 or more, then a $200 per month lot rent and a $250 to $300 mobile home payment can be a competitive option, he said.
A large population base in the market, large lots and paved streets are good features to look for, Reynolds said. Although most lenders like to see newer homes in a park, Reynolds said he prefers homes from the 1970s, 1980s and 1990s because those homes are more affordable for their residents and are less likely to be repossessed.
Due diligence also includes income and expenses, zoning, environmental resources, and whether the park is up-to-date, Foley said. "If it's a run-down park that was built in the '60s and '70s, chances are you're going to be replacing infrastructure."
Investors should consider how friendly the local government is toward mobile home parks, Foley said. Some states may restrict the creation of new parks, while others may place restrictions on the process of selling a park.
Landlord/tenant rules also differ by state, and many lawyers who handle rental evictions don't know the specific laws for mobile home parks, Richard Stephens, a mobile home park investor who got his start by managing parks, said.
Likelihood of natural disasters is another factor to consider; Reynolds said a park he owned in San Antonio was hit by a tornado one year and then by a wind and hailstorm the next, both of which caused substantial damage and required expensive clean-up projects. Reynolds actually moved there for a year to help the park recover, after which he sold the park as soon as he could and resolved to avoid that area in the future, he said.
Many park owners and managers make the mistakes of failing to keep rental rates up to market value and allowing tenants to get behind on rents, Stephens said. This decreases profits and lowers the park's overall value, creating an opportunity for an investor to come in and tighten up the management, increasing income and overall value.
Many park investors seek parks with just such opportunities; "our desire is typically to find a park that has a problem, and we fix it," Foley said.
Reynolds, for example, said he looks for mismanaged parks with low rents that he can raise to increase cash flow and improve the park's value. After turning around bad management, increasing income, cutting expenses and creating equity, Reynolds said he typically turns around and sells the park for a profit.
Parks with well and septic systems create another potentially profitable opportunity for investors who are not afraid of risk. Public water and sewer connections are simpler and easier to deal with, but "some of the best deals...include parks with well and septic," Stephens said.
Even though parks with well and septic offer more attractive cap rates, many investors pass them up because they don't want the headache, Foley said. "Well, I didn't want the headache either, but I wanted the money, I wanted that return. And I have a couple of [well/septic parks] and while I've had some risk and I've written some big checks to fix some problems, I've gotten paid very well for taking that risk."
Investors who own the water and sewer system and don't meter it are overlooking another potential profit center, Foley said. "When you watch your consumption of water, your operating expense for the sewer treatment plant drops, typically by a third."
This creates an opportunity for investors to come in and meter the water and sewer in un-metered parks and see immediate profits. "Oftentimes I go into a park and sub-meter the water and sewer, and it's just like a rent raise," Reynolds said.
Mobile home park financing is "dramatically different" from single family home financing; "it's much more like we do apartments or any other type of commercial financing, it has more to do with the property than it does the borrower," Steve Murden, president of mobile home lender Star Capital Corporation, said.
The net operating income drives the value of the park, Murden said. Of course, the borrower matters to some degree; a credit score of 680 or better is typical, with assets to cover the down payment and some reserves in the bank after closing, he said. "The more assets they have, the more likely we are to go to a higher loan to value."
Terms are not quite as good as on single family home rentals or apartment complexes, "but they're pretty comparable," with a slightly larger down payment and slightly higher rates than an apartment complex would have, Reynolds said.
Borrowers usually opt for rates that are fixed for seven or 10 years because the holding time for parks typically isn't longer than that, Murden said. The "most typical situation is a 20 percent down, 30-year amortization, fixed for 10 years, probably around 7 percent on the rate," he said. "We do loans as high as 90 percent loan to value if the numbers work really well on it...and you may be paying an interest rate close to 10 percent."
Most borrowers create limited liability companies specifically for owning the mobile home park, so that the individual owner(s) will not be in danger if something goes wrong, and lenders sometimes require this structure for large transactions, Murden said.
Larger parks are generally considered better risks by lenders, so investors purchasing small parks may have to go to a local bank, get seller financing or obtain nontraditional loans, Reynolds said. Murden said his company will lend on $100,000 loans, but the rates are higher than on larger loans of $500,000 or more.
Newer parks, paved streets, homes with shingle rather than tin roofs and 70 percent occupancy or higher are attractive conditions for lenders, Reynolds said.
Although the debt service ratio will typically require that the net operating income be at least 20 percent above the debt service, Murden said his company also offers programs allowing 1.0 debt service coverage, meaning the net operating income can be equal to the debt service.
Income considered in the debt coverage ratio will be the pad rentals and "anything that's taxed as real estate that's generating income," Murden said. In most states and municipalities, park-owned homes are considered personal property rather than real estate, so that income is not usually considered income, he said.
Because there is very little financing available for buyers of mobile homes, many park owners buy mobile homes, put them in the park and rent them out or lease option or sell them on terms to tenants, Murden said.
Problems can arise when a seller wants to include a higher value for park-owned homes than the lender will acknowledge. "What the seller's asking for a property versus what we're going to value at can be dramatically different," Murden said.
One of the biggest mistakes investors make is "overpaying for park-owned homes; sellers always want more than what they're worth," Reynolds said.
Lenders don't normally look at the borrower's personal debt-to-income ratio and park-owned home rental income, but they may do so in cases where parks won't cover themselves based on net income, Murden said.
Appraisals cost approximately $3,000 and take three to four weeks to complete, so a typical transaction takes about 45 days to close, Murden said.
Choosing a manager
"Property managers are an essential piece to your financial pie and locating a great one should be a top priority," Stephens said. "I have taken over many properties which would have been in much better shape if the previous owner had taken more care in the type of person which they had let manage their investment."
Reynolds said he would always hire an onsite property manager rather than a national property management firm. This creates a more direct chain from residents to manager to owner, so "things don't get lost in the shuffle like they would with a...national property management company," he said.
Park residents are good candidates as managers, particularly retired couples or hard-working people with other jobs in addition to running the park and who have a nice home and yard, don't have high car payments and are stable, Reynolds said.
"The best way to hire a manager is to meet them in person and preferably in their home. This gives the investor a closer look on what type of person they would be trusting with their investment. You can usually expect to receive what you perceive," Stephens said.
"One of the biggest problems I have seen with an onsite property manager is that many tend to make friends with residents who may take advantage of their friendship," Stephens said. "An easy fix for this problem is to simply supply...a detailed outline of what they must do for people who have not paid their rent by a certain date."
After deciding to invest in out-of-state parks, Reynolds said he concentrated on hiring a good manager and putting in a good management system. This makes it possible for him to own parks that he doesn't visit more than once a year, and "there's some parks I buy and I don't go visit until I sell them," he said.
"Investing in mobile home parks nationwide is just as easy as investing locally. The key is to have a good system in place for whatever may happen, and an experienced manager who has what it takes to get things done," Stephens said.