Are Park-Owned Mobile Homes THAT Bad?

[Kenneth Reimer]

Hello! Looking at a small mobile home park in a strong rental location. 100% of the park is POH. I'm an experienced multifamily investor.

How big is the difference in tenant psychology between a tenant in a Park Owned home who I'm told "won't feel ownership over their home," as compared to a regular working class tenant in my apartment buildings that also doesn't feel ownership over their home? Deal I'm looking at has favorable financing and a strong cap rate in today's market, and I'm trying to talk myself out of it but struggling to find ample reasons.

I'm also curious to understand how the taxes work on selling Park Owned Homes to tenants and retaining the land. Is this a viable strategy to buy a park and work through a plan to return initial capital? Any help is appreciated! 

[Account Closed]

Your tenant quality will likely be lower on average in mobile home parks as opposed to apartments. While they may be similar in size and bed/bath layout, there is a profound psychological difference between living in an apartment and living in a mobile home. 

[Frank Rolfe]

The big issue you're going to run into is the fact that a 100% POH park is not really a "park" (which is slang for parking lot) but a "detached apartment complex". Lenders and buyers hate those, so you'll be going a route with little available financing or liquidity. That being said, many people have taken this route and done well with it -- it's just not part of the mainstream industry.

If you go the "detached apartment" model, you'll need to make sure you have properly accounted for the repair and maintenance cost of the homes. Based on the age, you're probably looking at around $200 per month per home, and that's assuming you're going to act as the general contractor and watch over the repairs. You also have to budget for a more active manager who has to keep the units rented. Finally, you need to make sure you don't get in a financing trap whereby the loan comes due and you can't find a replacement lender.

Make sure to run a test ad to make sure the demand is there, as a regular mobile home owner stays around 14 years and a renter stays only about a year, so there is significantly greater turnover.

You will also benefit from comping all the other POH's surrounding you, as you will be competing with those people as much as you will be with single-family and multi-family rates.

[Mario Dattilo]

Your turnover, make ready, labor, insurance, and vacancy costs will be higher than a lot rent model. Everything from others above is spot on. If you decide to convert it to a lot rent community be sure the market will support that business model. 

There is a benefit that many don't think about when buying POH communities with the intent to convert them and that is you will not need to slowly bring lot rent to market. As you sell each home you will bring the new resident in at market which gets your a higher valuation and higher cash flow faster.

The financing is much more challenging for these. The buyer pool is much smaller for POH communities so you're buying something with a limited exit if you keep it a POH community. You're better off buying things there is a strong debt and equity market for.

[Dave Rav]

Many of the others who posted are correct.  I own a hybrid MF property, which includes MHs on it.  It’s a cash flow monster, but the expense ratio is certainly higher.

Attempted to do a CF refinance 6 months ago, and it was virtually impossible.  Even after checking with regional lenders, CUs, local banks, and investor-friendly lenders. The primary hangup were the POHs.  Not only would they not lend on them, they wouldn’t give me credit for the income they produce either.  The POH rental income accounts for 50% of the overall property CF.

Now you may still  have a great deal.  My advice is similar to another comment- have a plan, and run some extra DD and scenarios.

[Carolyn Yates]

The problem is the POH's are not real estate. They are considered personal property.  So, they are not included in the appraised value which is why the income from them would not be included either.  As others have states the expenses would be much greater as well as the management as you would be responsible for the repairs, etc.

[Kenneth Reimer]

@Frank Rolfe I'm looking at a deal that more than satisfies the 1% rule, and would have a full term interest only seller carry.  When budgeting for a manager, more than enough repairs and maintenance, and 3rd party property management, I'm still showing nearly a 7% cap with 20% loss-to-lease. Am I crazy for wanting to buy it?

@Mario Dattilo What is a typical expense ratio for a true mobile home park where you essentially have land leases?

@Dave Rav What expense ratio are you experiencing at your property?

Does anyone have any experience selling the trailers and carrying the note? I'm curious how that would affect taxes.

[Mario Dattilo]

Quote from @Kenneth Reimer:

@Frank Rolfe I'm looking at a deal that more than satisfies the 1% rule, and would have a full term interest only seller carry.  When budgeting for a manager, more than enough repairs and maintenance, and 3rd party property management, I'm still showing nearly a 7% cap with 20% loss-to-lease. Am I crazy for wanting to buy it?

@Mario Dattilo What is a typical expense ratio for a true mobile home park where you essentially have land leases?

@Dave Rav What expense ratio are you experiencing at your property?

Does anyone have any experience selling the trailers and carrying the note? I'm curious how that would affect taxes.

 35-45% depending on size, who pays utilities, rent rates, condition of utilities, etc. buy small parks with low lot rent with the park paying utilities will be on the high end. Larger parks with utilities billed back, with higher lot rents will be closer to the 35%. This includes paying off site property management. Even if it’s your management company and not 3rd party, there will be expense involved. 

[Jay Hinrichs]

Quote from @Kenneth Reimer:

@Frank Rolfe I'm looking at a deal that more than satisfies the 1% rule, and would have a full term interest only seller carry.  When budgeting for a manager, more than enough repairs and maintenance, and 3rd party property management, I'm still showing nearly a 7% cap with 20% loss-to-lease. Am I crazy for wanting to buy it?

@Mario Dattilo What is a typical expense ratio for a true mobile home park where you essentially have land leases?

@Dave Rav What expense ratio are you experiencing at your property?

Does anyone have any experience selling the trailers and carrying the note? I'm curious how that would affect taxes.

In the parks I have owned we end up getting homes given to us when the parents die kids just dont want to pay to move it or want anything to do with it i tried renting them issue is parts are not like houses you dont run to home depo to get parts they are a pain.. I will never own ( at least older single wides) these things again.. I quickly just sold them for what ever cash i could get and just got our space rent I dont want to own any of them.

[Drew Sygit]

Knew an investor that sold the POH's on lease-options to tenants, so they thought they were buying them. This got him out of having to do any repairs.

Over 70% defaulted and he'd just lease-option them out again.

He did pretty well, but labor intensive.

[Dave Rav]

@Kenneth Reimer if you do a seller carry-back, you risk having to foreclose.  Also risk the resident claiming they have equity.  It can get hairy.

My average expense ratio is 28-32%.  My worst month was 41%; 15-month history. The last 3 months were great, at 23%.   I admit that’s low, maybe I was lucky!

[Adam R.]

@Dave Rav do you seller carry homes?  If so, how do you deal with SAFE act issues? Thanks

[Dave Rav]

@Adam R. I do not