1031 exchange to buy mobile home park?

Question

Hi!

I am selling land/lot at $197, 500 within 60 days. Someone told me that Mobile home park is good profit with low investment. I am new to MHP investing.  I have to make decision before I close my deal for 1031 exchange, if I can.

1)  Is this a good investment?

2)  Can I do 1031 exchange to buy MHP?

3)  If I can, I still have to get a loan of about $93K to match 1031.

4)  If I buy HMP at $197,500, what does the cash flow look like?

Thank you for your help!

Aaron Mazzrillo · Answer

I don't think even a mobile home park maverick could answer your questions. Mobile home parks trade on cap rates and those vary from area to area. Also, they can be very cash intensive properties if you the wrong one. If you're even considering investing in MHP, I highly recommend you attend Dave & Franks bootcamp through mobilehomeparkstore.com

Young Fenton · Answer

Hi Everyone -

Thank you very much for your help and advice!!

I don't think I will do this at this time.  I need more study before I jumping in.  I watched YouTube to learn but not enough.  One of my favorite video was @Rachel  H. ... well done!

This is a good group to belong to and I appreciate it.

Brad Johnson · Answer

@Young Fenton

I agree with Bill, you can trade from an apartment into a mobile home park. We are currently exploring this exact scenario with one of our investors and our accountant gave us the thumbs up to move forward. Just make sure the new ownership entity (how the property is held) won't disqualify the trade.

Side note - also make sure you do your due diligence and hire a reputable 1031 exchange intermediary. Unless there has been some recent legislation I'm unaware of, 1031 Qualified Intermediaries hold crazy large sums of cash on behalf of clients without insurance requirements or regulatory oversight. Ask you intermediary if they have Fidelity Bond Insurance and Errors & omissions insurance to cover your funds in case of staff error / embezzlement. Also, make sure you know what investments they intend to place your money into in the interim. Don't worry about maximizing returns over this insignificant period of time, just ensure your money shows up to your 1031 exchange closing! Due diligence on which intermediary you use is arguably more important than the DD you'll conduct before identifying a property to trade into.

On to mobile home parks...

I'm certainly biased as I co-own a mobile home park investment firm, but here is a quick benefits overview vs apartments:

• Low, Low tenant turnover - high switching costs (to move a home)
• Reduced operating expenses: ~30-40% operating margin is typical for a park without a majority of park owned homes
• Minimal Ongoing Capital Expenditures (provided you're on city sewer - otherwise you could get a $100K-$500K capital item surprise if your private system fails). Well water, while not preferred, is less scary (especially if you can tie into city water as a back-up).
• Accelerated depreciation - In the markets we invest in (Midwest, Great Plains, select Southern States) infrastructure is typically allocated the majority of the purchase value via a cost segregation study. Infrastructure (roads, water lines, etc.) is depreciated on a 15 year schedule (as opposed to 27.5 years).
• Significantly higher cash on cash returns vs most other real estate investments.

I could go on. However...

Mobile Home Parks are more difficult to operate than most gurus would lead you to believe. I would strongly advice you @Young Fenton to not purchase a mobile home park that you intend to operate (oversee the park manager) yourself with your 1031 exchange funds. You're under the gun to identify a trade, which makes you highly likely to make a major DD mistake with an asset class you're not that family with.

However, perhaps I'm a bit conservative. I suppose you could always learn on the job.

Good luck!

Belinda Lopez · Answer

Mobile Home Parks are one of the best real estate investments out there.  There are lots of ways to analyze them and a great deal to learn if you're not familiar with how they operate.  Cap Rate is just one tool but you'll also need to decide which model you want to run the park under;  do you want to own and rent the homes?  (tons more mgmnt needed) or do you just want to rent the dirt (best - imho) with much less liability.

I agree that Dave & Frank's Bootcamp is the fastest way to learn about MHP investing.  For the amount you mentioned, $197k, it doesn't sound like a very large park.  Cash flow to get a 10% cap rate would need about $19,700 NOI.

Some basic questions to get started analyzing the park are:

• What type of utilities?  (city or well/septic)
• Park owned homes? or all tenant owned?
• What is lot rent?
• Expenses?

Good luck!

Rachel H. · Answer

Effective management coupled with leverage control will help to overcome many of the hurdles involved in owning and operating a successful mobile home park. I have known many to get out of the business due to mishaps in this area. Hope that helps!

John Vashon · Answer

@Young Fenton,  I recommend you engage with someone who has mobile home park experience prior to investing.  MHPs are a unique type of real estate investment and you'll be working under tight time restrictions with a 1031 exchange.  Good luck!

Bill Exeter · Answer

It will depend on how you structure it.  It will qualify if you acquire it as tenants-in-common, but it will generally not qualify if you acquire it as a partnership.  Joint Ventures can appear to be a partnership - even if they are not - so you must be careful how you structure them and operate them, etc.

Bill Exeter · Answer

Yes, Mobile Home Parks can qualify for 1031 Exchange treatment as long as what you are buying is classified as real estate.

Young Fenton · Answer

@Aaron Mazzrillo , thank you for quick reply!

Young Fenton · Answer

Thank you, I appreciate it!!

1031 exchange to buy mobile home park?

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