The Truth About Why Most People Only Buy One Mobile Home Park

Lays potato chips used to have a slogan: “bet you can’t eat just one.” Mobile home parks don’t seem to have that in common with potato chips. In …

21 0
21 0

Lays potato chips used to have a slogan: “bet you can’t eat just one.” Mobile home parks don’t seem to have that in common with potato chips. In fact, most mobile home park owners only own one park. If mobile home parks are so successful, then why do most owners not venture beyond that first property? The answer is because mobile home parks are sometimes too successful for their own good.

A good mobile home park has no equal in real estate

We buy mobile home parks all the time at 10% cap rates. When you put a 70% loan-to-value debt instrument on that park, the cash-on-cash return will typically come out in the high teens. That sounds great, right? But that’s only half the story. The other half is that mobile home park acquisitions normally have some built in profit drivers that allow you to significantly boost the income day from one. The most common of these are raising rents and cutting costs – and they cost almost nothing to put into play. Due to the large scale of mobile home parks – with sometimes 50 to 250 income units – small improvements in operation can pay huge dividends.

Raising rent

It is surprising how many mobile home parks are significantly under market with their rents. The reason is that the mostly mom & pop owners lose interest in the business over time, and just leave rents at the level where they lost interest.  How far down can they be? I bought a park in Grapevine, Texas that had $100 lot rent when every other park in the market was at $325. That’s 325% more. You never see those type of situations in other real estate asset classes. Equally importantly, it costs $3,000 to $5,000 to move a mobile home (if they structurally can be moved at all) so the customer can do nothing but accept the rent increase. In the case of Grapevine, I increased the rent after closing on the deal, to $275 – and I did not lose a single customer.

If you found a park that was only $50 per month under market in lot rent (which is pretty common) and the park had 100 lots (which is also pretty common) then the increase in cash flow from that simple change would be $60,000 per year. And it only costs 50 cents per lot to raise rents; basically, the cost of a stamp to send the notice.

Cutting Costs

The number one way to increase the net income in most parks is to replace the manager. Why? Because at the same time that mom & pop lost interest in raising the rent, they also lost interest in watching over what they were paying the manager. Although the going-in salary was probably fair (maybe $18,000 per year) when you give 10% annual raises and later add on free health insurance, it’s not unusual to find managers making $50,000 to $100,000 per year. You can find a million manager candidates out there for $20,000 per year or less. So this one step normally nets the new park owner $30,000 to $80,000 per year in additional cash flow. And it’s free – you just fire the existing manager.

Putting it all together

So if you bought a park at a 10% cap rate and had a high teen cash-on-cash return, that would mean that you have cash flow after debt payment. That’s good. But then you add on $100,000+ per year in additional cash flow in rent raising and cost cutting, and that’s phenomenal. And the giant cash flow seen from the first mobile home park is what causes many owners to settle, as they don’t see the need to add additional time, effort or risk to their portfolio.

Conclusion

Lays potato chips taste great, and I’m more than happy to eat an entire bag if you open one up. But mobile home parks aren’t like Lay’s potato chips. Most people who buy a mobile home park for financial security end up with more than they had hoped for, choosing then to sit around and eat Lays rather than buying more parks. And I might, too, if you add in French onion dip.

Share This:

In this article

Join the Conversation