Park Owned Homes

8 Replies

I have some low-income apartment rentals and I am interested in getting into mobile home parks. I have a park under contract with a business partner who already owns a small park in our area. The park has 30 park-owned homes and 5 empty lots that need to be cleared. I understand the idea of selling the POH's and getting lot rents, but I am wondering if that is the best option in my area. Almost none of the parks in our area have any tenant owned homes, so finding lot rent comps is difficult. My business partner owns all the trailers in his park and rents them. The argument is that the headache and expenses are too high for the park to own the homes, but my business partner has not had that experience in our area. Even without any marketing, there is always a waiting list on these homes, and it only takes a few hundred to turn one over, while they rent for $400-$550. His experience is that the repairs are so cheap that the expense ratio is lower than other rentals. The few people I can find paying lot rent in my area are paying $100. The numbers seem to make sense to keep the trailers and rent them out, though I know the overwhelming consensus is to convert them to TOH and collect lot rent. Is this simply because of the headache, or does the math actually make sense? If the math makes sense, is it location based, and could it still make sense in our area to keep the trailers? Also, if we sell them, how do we decide lot rents since there are few comps? Thanks!

Parks with 100% Tenant Owned Homes are easier to manage, have a much lower expense ratio, and are a higher quality property because your tenants have pride of ownership of THEIR HOME.

$100 lot rent is dirt cheap and I would not buy a Park with lot rents that low.  Get very comfortable that is the number.  Call all the big MHP's in your metro area and say, "Hey, I am buying a new 3/2 singlewide and want to move it in - what is your lot rent?"

Finally, I have to ask - I hope that your contract with this Park is not based on only the income from these mobile homes?  It is supposed to be based on the lot rent + the value of the mobile homes.  See my post on this here.  If your offer is based on lot rent + home rent then you're over paying and traditional financing can be difficult.

Good luck.

Thank you for your reply! I saw some posts about valuing parks when I was researching this that had an equation to figure value. I'm unsure how to use the formula in this scenario since there are no homes on lot rent and I can't find comps in this area. We discussed charging $195 or $200 for lot rent if we sold the homes, but at those prices the numbers make more sense for us to keep the homes and rent them out.

We did use park income to value the property, but I don't think our valuation is a problem. Just to give you an idea, it is 30 trailers and 5 empty lots. We are under contract for $320k. Total income is around 11k, which we think we can increase because rents are below average for our area. Even at an expense ratio of 50% the cap rate is roughly 17%. If we use the lot rent of $200 and use the formula it's 30 X 70 X 200, which is $420. Even a low valuation of the trailers at $5k each adds another $150,000, for a total value of $570k. Either way, this looks like a good deal. Also, we are purchasing a well that services 26 of these units, and gets another $40 per month, plus a $100 turn on fee. Trash is paid as part of the taxes, so we are thinking of also adding another $10 or so for trash on each unit.

But this park, and my partner's smaller park in the area run on very low expense ratios with 100% park-owned homes. I think that's my confusion. Everyone is saying it is too expensive to own the mobile homes because of upkeep, but it doesn't look like it is in my area. I feel like I'm missing something. These trailers are so cheap to fix, we could gut and redo each one every time we turn them over and still run on a 50% ratio. I think we are confident that this is a great deal, and we aren't worried about financing. We are just trying to figure out how to manage the property and what model to use moving forward.

Hey @Keith Hand did you ever purchase?  How about an update?  Curious about your expense ratios on POH.

@Eliot M. Man, a lot has happened since I originally posted this. We did follow through with this purchase, and we also purchased three more parks. We currently have seven lot rents and about 100 POH. The park that I originally made this post about did very well last year. We had a lot of expenses right after the purchase because of deferred maintenance, but after that was taken care of, the expense ratio was not outrageous. We made about 95% cash-on-cash with that deal. We purchased another park in August of last year, and that one was in very bad condition. We are remodeling many of the homes still, and using the cashflow to do that work, so our expenses are high with that one. We have not made a profit on that park yet, and we have about 5-6 more months of rehab since we are using cashflow to do repairs. We just closed on another park last month, which was in much better condition and had 26 POH and 5 lot rents. I foresee our expense ratio being small with that park. Last month our expense ratio on all of our parks was 50%, including the remodeling expenses for the distressed park we bought. I had a meeting with our in-house manager yesterday and we are confident we can get that down to 35%.

I am convinced the POH vs. TOH debate is regional. In our area, lot rents are scarce. In fact, the last park we bought was owned by a family who has had the park for about 15 years. He told me he never raised the lot rents for the 5 TOH because, and I quote, "Lot rents are a thing of the past." So, they are paying $85 per month for their lot rents. The second park we bought had 2 TOH, one paying $75 and the other paying $100 for lot rent. We have found that to be about the average for the very few lots being rented in our city. The numbers don't seem like they would work for us to convert them unless we could get $300 or more for lot rents. Surrounding areas are getting $235, so I don't think it would work for us.

A previous comment said that financing would be based on lot rent + value of home, but we have not found that to be the case with the local banks that we have used. Their appraisals have used both income and market approach, and they are making the loans based on the rent being collected, just like an apartment building. I think this may be different in larger cities.

@Keith Hand  Thanks for providing an updated. It is always nice to learn how others are doing and to see other's investor's perspective.  Sounds like you are doing good and focusing on MHPs. 

Regarding POHs vs TOHs, I believe a hands on investor can make POHs work well to some degree. I think most MHP investors realize one of the best things about mobile home parks derives from economy of scale. The more lots the better.  That being the case, it is easier to foresee a situation where an individual investor owns (and to some degree manages) 400 lots with TOHs. However owning and having to deal with 400 POHs seems much more difficult. 

Another pro for TOHs is that arguably an investor needs less $ per lot on TOHs than on POHs.  Therefore, in theory it would be financially easier to acquire a large number of lots if an investor was able to purchase TOHs lots only.   Every situation is different though.  For instance, a savvy investor could recover a lot of cash by selling park owned homes. 

Regarding cheap and/or almost non-existing lot rent comparables, I find the rule of lot rents should be about 1/2 of what a 2 bedroom apartment rents for is an appropriate gauge for lot rents, provided there is reasonable demand. 

On the subject of small vs large cities, I own a park in a very small city and there seems to be sufficient interest from people that would prefer to own vs rent. So we are converting a few homes from POHs to TOHs.  In doing so, I hope to recover some of my original investment.  My experience is fairly limited, but it is easy to see how TOH residents are so much easier to deal with and better for the our small community than POH residents.  

Overall, more important than the number of POHs or TOHs in a park is finding the right opportunity.  It sounds like you acquired your first park at a good price and you had an experienced partner.  Hard to beat that!  Sounds like you found a formula that works for you, but I would love to get your take on some of the points raised above, assuming no significant regional differences.  Again, thank you for sharing!

@Keith Hand great info! Thanks for replying and congrats on all the success! So you think a 50% expense ratio seems legit now that you’ve gone and done this and that is an average across all your parks?

I believe you said earlier in the post that you used both valuation methods - the cash flow valuation and the market value for the trailers. 

I would assume 50% ratio seems right because that’s what I’ve seen on my SFRs thus far. And I matter if you’re talking about mobile homes or houses, carpet is carpet, hvac is hvac, etc etc. 

@Jeros C., I totally agree that converting them all to TOH's would be easier to handle from a management standpoint. If the numbers made sense for us we would do it, I would do it in a heartbeat. I still fight with the idea, and probably will until we either sell the parks or try it. But every time I put it in a spreadsheet and try to make sense of it, the numbers just don't work for us in our market. I would think that managing 400 TOH woukd be easier than managing 400 POH, but I don't see how managing 400 POH is any different than 400 apartment units. I can tell you one thing I have learned in this process is that more units is easier to manage than less. We have 100 now, and it much simpler than when we had 30. I'm guessing 400 would be easier than 100. We have built systems and now have an in-house manager and full-time maintenance man. That frees me up to do other stuff. more units would make it easier to build a team, which would mean I'm not as reliant on a single person to do the work. If our maintenance man has an emergency and needs to miss a week, we would have other team members to step in if we had more units and available capital to have a larger team. Our maintenance man had a death in the family recently and had to travel. he missed a full week, but luckily we have built relationships with other landlords around town, and they had their guys work with us. That would have been much easier if we had a crew working for us. I can definitely say that with low end rentals keeping those labor costs to a minimum is a must. I don't think it would work if we had to hire contractors to do our work. Labor is very cheap in our area, and that certainly plays into why the numbers make more sense with POH for us. We also bought a mobile home supply store with one if our parks, so we get some of our materials at a deep discount. @Eliot M. , you are correct that HVAC is HVAC, but it certainly helps that we can buy a $1,500 furnace for $400. All of this plays into why it makes more sense for us to own the homes. It is also why we think we can run these parks at an expense ratio of around 35% once we reposition the distressed park. Another lesson I have learned through this is that I would (most likely) never turn over a distressed property with cash flow again. I will raise the cash and do the work up front. There is a multitude of reasons for this, but it's been really tough to have to fix one unit at a time instead of just cleaning up the entire park at once. It makes it tougher to rent the nicer units, and the money we have lost just in time value has been much more than if we had just put in the cash up front.

@Keith Hand , thanks again for your response.  I find your comment about managing more units being easier very encouraging.  It makes sense that once you have a system things get better.  Thus it is important to establish systems as early as possible.

Please don't feel that you have to respond.  You already answered my questions and I there is no need to beat a dead horse.  I wonder if you used the metric of "lot rent should be about 1/2 of rent paid for a 2 bd appartment" your TOH numbers would make sense.  

Best wishes!

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