Some mobile home park buyers have this erroneous idea that the goal is to buy the best-looking mobile home park they can find. They even rate parks based on physical appearance. The star system is a good example. Most investors think a five-star park is always superior to a one-star park. However, the only real star system they should consider is which park is a superstar on cash flow. At the end of the day, all that really matters when you own a mobile home park is cash flow. Parks that make money are great, no matter how ugly they are, and parks that lose money are dogs, despite how cute their entrance may be. And, as a general rule, the prettier the park, the uglier the cash flow.
- They cost too much to buy. Pretty parks sell at the lowest cap rates: normally one digit, and a low one digit at that. 5%, 6% and 7% cap rates are great for sellers, but complete failures for buyers. Ask yourself if you will be able to make any money buying a mobile home park if it has a low return.
- They have more repossessed homes. With the older parks come the small or non-existent mortgages. These tenants can afford $350.00 per month space rent. With the nice parks come the nicer homes and the bigger mortgages. Add a $400.00 per month mortgage to the space rent of $350.00 and in most markets this is not affordable housing. Look at the market and decide if it can support those prices.
- They are normally at full market rent, so you have no room to push rents. Look at the current rent compared to the full market rent. Pretty parks normally have lot rents that are at the top of the market. So the best a buyer can hope for is to gradually nudge the rents up a tiny bit each year or so.
- They are normally fully occupied, so you have no occupancy upside. You should always be looking for upside in a purchase, and occupancy is usually a good one. Pretty parks have high aesthetic appeal, and the vacancy factor is normally 5% or less. So there is no way to significantly increase operating income through filling lots.
- They cost too much to maintain. The landscaping alone on one of these parks is higher than a one-star park may spend on total management. It requires a constant outlay of cash to keep a park to the highest standard. When you feel you must re-pave instead of patch roads, and plant seasonal color at your entry, you are on the path to lower margins. Be sure you know the cost of maintenance before you buy.
- They have plenty of amenities, and they all cost money to run. Pools, clubhouses, jogging tracks, playgrounds—they all sound great, but cost a lot to maintain and insure. Though they are staples of five-star parks, they are causes of poor cash flow.