Things have changed a little in the mobile home park investing space in the last few years, with cap rates lowering and consequently driving up purchase price and lowering spread. There are also more mobile home park buyers, which means more competition.
Many of the new buyers are such novices that they don’t fully get how to evaluate a mobile home park properly. As such, we are seeing a lot of buyers paying outrageous prices. I don’t want that to be you.
If you don’t buy right, then your deal may not work out in the long run. You can compensate for a few errors if things go wrong, but you lose your wiggle room if you paid too much. In that case, you may have put in a bunch of hard work only to break even—or worse, lose money—for you and your investors.
Here are a few ways you can make sure that your mobile home park takeover works out.
1. Maximize Profits With an Effective Business Plan
So, cap rates have compressed. Competition is higher than ever. How do you maximize profits given these circumstances?
Remember “forced appreciation” from my previous article on BiggerPockets? Well, that’s where we can really add some value to our parks.
If your park is 100% occupied, tenants are paying utilities, and you’re already at market rents, then there is not much else you can do but increase rents annually, decrease expenses, and hope for cap rates to drop over time. Alternatively, if there are vacant lots, spaces to add on extra lots, vacant homes, utilities that the park currently pays, lower-than-market lot rents, or higher-than-needed expenses, then there’s tons of room to increase profits.
In the mobile home park (MHP) space, we call this “value-add.” Therefore, the best and easiest way to maximize profits is to increase the amount of value that can be added to this park during your ownership. You may technically be able to do everything at once, but you are better off increasing value steadily over time. Not only does it not work out logistically, but it’s also unethical to raise tenants’ expenses too quickly or in too large of a chunk.
When taking over a park, immediately eliminate unnecessary expenses, as this will drive up your NOI. Next, take a close look at rents. If there is significant room to raise rents, it’s more likely the previous owner was in some kind of time bubble and for one reason or another either forgot to, chose not to, or was scared to raise rents. In this case, most tenants don’t realize that they were paying under-market rents for whatever the time period was.
As a new owner, you will need to raise rents to what they should have been. But if you’re way under market, it may take a few years to catch up. Of course, tenants never like having rents raised or utilities billed back, but it’s the nature of the economy to keep up with inflation. It’s not just the tenant’s expenses that are increasing, it’s the expenses of the nation, as we are all affected by inflation. So, we need to raise rents each year to keep with the times.
In addition, over time, bill back any utilities that the park is paying so tenants ultimately pay 100% of utility costs. That might take a few years, and you may need to wait until rents have been raised to market before you can effectively do that. Alternatively, you can bill back utilities earlier and raise rents later.
For example, if you raise rents by $30 and bill back an extra $35 in utilities on day one, the tenants will go from $300 a month to $365 a month. That’s too much of an increase at once, so you’ll need to spread it out so tenants can afford the increase each year.
On top of the ethical reasons not to increase tenants’ expenses too much or too quickly, if you over-increase you’ll be evicting everyone for not being able to pay and left with an empty park. That’s not good for anyone involved.
2. Find Opportunities in Lower-Occupancy Parks
After we have implemented the above improvements to our park’s economy, we can look at remodeling and filling all vacant homes. Then, fill all vacant lots with new or used homes.
These can astronomically increase the value of your park. For example, if each lot is evaluated at $31,500 per lot, increasing occupied lot count by 20 lots gains you $630,000 in increased value. Sure, there are costs associated with that but still tons of value increase as a result. Raise rents on those 20 additional lots, and you further increase profits.
Given that MHPs currently have compressed cap rates, if you are already at market rents, a lot-filling/value-add strategy can be a highly valuable way to increase profits. Due to this, it may be worth considering taking on parks with lower occupancy and higher room for value-add.
If you do go that route, be sure to take financing options into consideration. If you are less than 70% occupied, financing terms become less attractive.
Another thing to take into consideration is whether your market can handle such an increase in occupancy. If your park’s in a 30,000-person town and you want to increase your occupancy by 100 lots in 24 months, then good luck to you. You will likely only fill one or two lots a month in a market like that, so take it into consideration before getting too excited. (Actually, save your excitement for extracurricular activities, not mobile home park investing.)
Many MHPs have already been improved. I believe that opportunities exist in the parks that have not yet been maximized—the parks that have been left behind, if you will. Mainly, I’m referring to parks that have significant upside due to low occupancy.
We still need to stick to our criteria and not veer from our numbers, but we can take on parks that others have left behind. It means more work and more capital and consequently more upside.
3. Increase the Length of Your Business Plan
If you are bringing investors in on this mix and you are trying to figure out how they can make sufficient returns, you may need to turn a three-year plan into a five-year plan (or even seven-year plan) to make the numbers jive.
More time equals more rent raises and more time to decrease expenses and increase occupancy. This may help bridge the gap between profitable returns for you and profitable returns for your investors to make the deal work.
4. Don’t Be Scared of Park-Owned Homes
As with private utilities in MHPs, it’s up to each park owner whether to take on a significant amount of park-owned homes as part of their business plan. A park-owned home (POH) is a mobile home that is owned by the park—therefore, the park is responsible for significant repairs. Whereas a tenant-owned home is owned by the tenant, so tenants are responsible for repairs.
The latter is preferable for me, as the tenants have pride of ownership in a home that they own. This organically drives up the park’s aesthetics. Tenant-owned homes typically mean less turnover, which is also something to take into consideration.
I’m not opposed to POHs, but they need to be given the correct evaluation so we can weigh the management and capital that is put into maintenance with the turnover of POHs. It’s likely that there will at least be a few POHs that come with any given park purchase. Even if there aren’t, once you get into years two and three of operations, it’s highly likely you’ll end up with at least a few POHs to handle due to tenant turnover.
Some MHP investors love the higher cash flow that high POH-count MHPs can produce. This may be true, and overall having POHs can add additional income and prove to be profitable. There is nothing wrong with that approach. It’s simply up to the appetite of each specific investor and what they are willing to take on.
POHs come with high maintenance and management, which, for me, does not make keeping POHs long-term worthwhile. We can buy a park with whatever number of POHs it has, with the intention to convert the homes to tenant-owned homes at a rate of about three to five years per home. We can achieve this by selling the home in full (immediate) or carrying the note if they need financing.
You need to be licensed to sell, broker, or finance mobile homes, so take that into consideration. Alternatively, you can use rent-to-own or rent-credit style programs. As time goes on, the more tenants pay rent, the closer to homeownership they get, until they are ultimately in the position where they own their home.
If you are taking the latter route, be sure to check with local authorities and have an attorney approve the program or documents you are using to make sure you are compliant with all laws. After the 2008 financial crises, laws and acts were put in place to restrict chattel loans (mobile homes fall under this category), so additional steps need to be taken to ensure you are compliant.
If you are taking on park-owned homes, you will need to evaluate the cost of repairs needed on each home. Then, take into account that you will have turnover in park-owned homes. Do your research on the anticipated turnover for your market and apply that rate to the number of homes you have so you can holistically evaluate the management, maintenance cost, and efforts you will be taking on.
When calculating for turnover, keep in mind you’ll likely need to do a light to medium remodel each time a home turns over due to wear and tear (or intentional tenant abuse), so apply those costs to your overall calculation.
Once you have evaluated the overall costs to achieve turning POHs into tenant-owned homes, you can then go back to your purchase price and adjust as necessary. Each evaluation will be park- and market-specific, so make sure you fully evaluate and are comfortable with the cost and effort involved.
You may think the park you want to buy won’t pencil out, but once you apply these four best practices, then you may come to find that your deal works after all. For a more in-depth look at how to evaluate mobile home park investments for profitability, I strongly encourage you to go back and read this article.
Have you done a mobile home park takeover? How did it go?
Tell us what you’ve learned in the comments below.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.