The topic of mobile home park investing is coming up more and more as I talk to investors looking to find properties with better projected returns than what they can find on other multi-family housing like duplexes, quads, or apartments. As those investors look to find another asset class which might perform better, I also sense some hesitation as the asset class as a whole suffers from a lot of stigma associated with what many hold as the stereotype of a mobile home park resident as well as an overall poor understanding of the general considerations involved in acquiring and operating mobile home parks. Although certainly not an expert in the area, I have spent quite a bit of time educating myself on the space and would like to share 10 data points about mobile home parks to give you some things to think about if you are actively looking into this asset class but unsure of how to evaluate it.
1. Number of mobile home parks in the U.S.
There are a little over 44,000 mobile home parks in operation in the U.S. The vast majority of these are owned free and clear by mom and pop owners that bought them in the 60’s, 70’s, and 80’s and are currently looking to retire from managing the park or parks that they own. There is currently little but increasing consolidation in regards to who owns mobile home parks, but this pattern is changing as large institutional owners have been buying mobile home parks from these original owners. It is anticipated that once more consolidation occurs in this asset class the prices of mobile home parks will be much higher.
2. Average lot rent of U.S. mobile home parks and why that is relevant
At least 25% of the population can afford no more than $500 per month for housing costs. With the average apartment rent at $1,000 or more, mobile home lot rents in the range of $200-$400/month are quite attractive to a large number of households, especially considering this might be their only chance to own a detached, single family residence. Beyond the appeal of being a home owner instead of renter in this price range, the opportunity to have 2 or 3 bedrooms, a private yard, privacy, no shared walls, and a community atmosphere are all attractive features to people.
3. Valuation of mobile home parks
As with other commercial multi-family properties, mobile home parks are valued by capitalization of their net operating income (NOI). The difference though between mobile home parks and apartments is that only the amount of rent attributed to rental of the lot – as opposed to rental of a home – is capitalized in the calculation. The value of any park-owned mobile homes is separated out from the NOI and added separately to the value calculated with the capitalization of lot rents. For example, say a park has 50 lots at a lot rent of $300/month and 10 of those are park owned homes that rent for an additional $200/month. The calculation would look something like this with the following assumptions - expense ratio of 40%, value attributed to each park-owned home of $5,000, regional going CAP rate of 8%:
• Annual lot rent income: 50 X 300 X 12 = $180,000
• Net operating income (NOI): $180,000 X 0.6 = $108,000
• Valuation of lot rent: $108,000/0.08 = $1,350,000
• Valuation of lot rent plus homes: $1,350,000 + ($5,000 X 10) = $1,400,000
Obviously there are other factors to be taken into consideration in regards to the value of a park, but this is the general basis for determining what a park is worth. From there you can adjust value as other factors dictate.
4. Is it best to own the mobile homes themselves or just the land?
Although some investors develop a successful model where they own and rent out mobile homes as well as the land, the more commonly held belief is that owning and renting the land (lots) only is the best approach. By having primarily tenant-owned and occupied homes, you develop a tenant base that has a vested interest in maintaining their own home and lot as they have something of their own to take pride of ownership in. In this way, they are easier to engage in maintaining the park as a clean, safe, nice place to live and also tend to stay longer as they have a financial interest in their home which is difficult to move (see point #5).
In addition, it is easier to have a more predictable and lower expense ratio for the park, generally in the order of 30-40% for most parks.
5. How “mobile” are mobile homes?
Although mobile homes have the word “mobile” in their name, they actually do not end up being very mobile once they are manufactured and end up on a lot in a park. Sure, they CAN be moved, but the practicality of moving them – both physically and economically – precludes most of them from being moved much if ever during their useful life.
The economic impact of moving a home ranges in the $4,000 - $6,000 price range. Although individuals have been known to attempt moving them on their own with the largest vehicle they can find, in most cases this is not only illegal but extremely dangerous. Even if the home is sturdy enough to withstand the road trip, significant damage can be done to the home or through accidents caused by inexperienced movers as to render this a completely bad idea. This task should be left to the licensed and insured professionals and is worth paying to have done properly.
The physical act of moving a mobile home requires disconnection of utilities, removing all accessories and tie-downs attached or associated with the home, planning the logistics of navigating the home in or out of the current lot, physical transport of the home, negotiating the proper placement at the new site, proper blocking and tie-downs, reconnection of utilities and stairs or deck, replacement of skirting around the home. All of these things combined make for an expense that prohibits most mobile home owners from moving their home and make it more likely for residents to sell off their home in place if they ever decide to move from a park.
6. If mobile home parks are so great, can’t I just build my own?
It would seem logical that you could design and set up your own mobile home park on land that you have or acquire. However, zoning restrictions typically prevent new mobile home parks from being built in most cities. What favor cities perhaps used to have for land zoned for mobile home parks in the past has mostly been forgotten as the economic impact for the city generally favors them to restrict any newly built parks. Typically, there is a lot more revenue generation for cities on other commercial or residential land use, so cities will generally not be that interested in working toward having more of this housing type in their mix.
7. What are the best ways to find mobile home parks for sale?
The most common ways are through a real estate broker or through on-line listing sites like www.mobilehomeparkstore.com or www.loopnet.com. By working with a broker you not only have access to mobile home parks listed on public list sites but also have the opportunity to become aware of any private or pocket listings that they might be aware of. Often times these pocket listings can come with favorable terms in regards to price or purchase terms, so having the opportunity to evaluate them before others can be of great value. Other on-line sites that might contain random listings are Craigslist, Ebay, and even Youtube.
Other options are to contact park owners themselves through cold calling or direct mail campaigns. If you develop a skill for doing this it can be highly rewarding as many owners that haven’t thought about selling or perhaps have thought about it but haven’t gotten around to listing a property might jump at the opportunity to sell if you just happen to call them or get their attention with a mailer. The biggest factor in the success of these direct approaches is your ability to make a connection with the seller and be someone knowledgeable, respectful, and likable enough that they would appreciate doing business with you. If you can create a win-win transaction scenario and be easy to work with they just might sell you their park.
8. Public versus private utilities
In almost all cases it is much more desirable to have a mobile home park connected to city utilities (water, sewer) versus having private infrastructure to service these needs of the park. The main consideration in this regard is the economic impact to the park owner in maintaining and/or replacing private water (well water) or sewer systems (septic, packaging plant, lagoons) throughout their life cycle. Also of concern, the liability is greater for the park owner with private utilities as they are responsible for the quality of the water delivered or any sewage contamination issues that might arise. It doesn’t mean you should completely ignore parks that have private utilities, but you should definitely become knowledgeable about those systems if you are seriously considering taking on ownership of these parks.
9. High profile individuals in the mobile home and mobile home park industry
Outside of real estate circles, most people probably don’t realize the extensive involvement in the mobile home industry by several high profile individuals within the financial world.
Berkshire Hathaway, managed by Warren Buffett, one of the world’s most successful investors and businessmen, is the parent company for the largest lending entity in the mobile home space (21st Century Mortgage) as well as the largest manufacturer of mobile homes, Clayton Homes. Obviously Warren Buffett believes strongly in the industry as a whole and recognizes the demand and need in this sector of affordable housing.
Sam Zell, another well known billionaire investor, heads up Equity Lifestyle Properties (ELS), one of the largest real estate investment trusts that owns and operates mobile home and RV parks throughout North America. ELS continues to grow and curate their holdings within the mobile home park space as a strong believer in the need and potential of this asset class.
10. Financing of mobile home parks
One of the greatest opportunities in mobile home parks is the frequent occurrence of being able to negotiate a seller-financed deal on the purchase of a park. Since there are so many mom and pop owners of parks, many of which are original owners with no debt on the property, these owners have the option to finance many of these parks on terms that are highly flexible to benefit both buyer and seller. Often times these owners are older and potentially looking to retire from the business or divest themselves of their investments in order to have fewer responsibilities or to have the opportunity to focus on other activities during retirement. However, one goal they frequently want to accomplish is having a steady income stream off of which to live. You should be prepared to show them that by carrying the loan for the property they will not only get this income stream they are looking for (AND much better income than parking that money in the bank at a 1% interest rate!) but also not be hit with a huge capital gains tax bill immediately upon the sale of the property. By seller financing, they would pay the capital gains tax on the down payment amount that they receive initially but then only pay taxes on the income as they receive it over time from the loan payments. This ends up truly being a win-win situation for both buyer and seller!
Hopefully this has given you some insight and interest in the mobile home park space. I’d love to hear about your experience in this asset class or other questions you might have.