MHP - How do you feel about POHs (Park owned Homes)?

8 Replies

I'm looking at my first MHP deal and hoping for some general advice on POH.   

The park I'm looking at now is fairly dominated by mostly older POH (16/24 occupied pads) . All that I have read says to get rid of POH as they essentially seem to be more trouble than they're worth. With that said, these POH rents are more than double the $350 pad rents and add real money to the NOI.

I realize that POH heavy parks are not the business, but with that said, is there some percentage of POH in a park that's OK?  I would imagine every investor looks at this slightly differently.  Any and all advice or thoughts would be appreciated!

Thanks,

Ben   

All POHs should be off loaded as quickly as possible, preferably not to the tenants presently renting them. . Your NOI after expenses on a POH will be a wash, not worth the effort. They will add nothing to your NOI.

No % of POHs is good but in some states it seems unavoidable to have them. I would accept having  a couple of POHs but no more than I could get rid of in the first year of ownership.

Thomas, in total line with "should be off loaded as quickly as possible." I'm In the process of gutting a mobile home park with dilapidated units, buying high quality, used ones and want to make sure I accurately estimate my capital expenses in line with operational income.

To that end, can you point me in the direction of any rent to own templates, park correspondence. I'm also interested in any examples of pricing tenant comparable,  e.g. if market rent is $400; $550 rent furnished; $4000 down payment,  $650 rent to own where $100 contributes to ownership. Note: just an example - -these aren't actual numbers.

Thank you!

I second Thomas S. - POHs essentially cancel out the benefits of a MHP as being a glorified parking lot with utilities.  Eliminating the POH from your balance sheet won't really have an effect on your bottom line (the minimal profit you might make with rentals aren't worth the hassle).

What we typically do is offer the home at above shell value or market value to the current tenant with minimal down (sometimes $500-$1000 if the tenant can scrounge it) if not we'll add on a couple more months to the RTO agreement. The second they sign that agreement though they're liable for all maintenance & upkeep.

In some cases a tenant, for whatever reason, won't take us up on our offer to RTO. Sometimes they expect their residency in the park is temporary & others understand the benefits of calling the landlord for minor fixes. Ultimately what you're offering is a way for that tenant to acquire their home & have equity in an asset.

@Benjamin Schultz

From a financing perspective POHs can be deal killers. Especially when you're dealing with loan amounts under $1 million. Most lenders don't want to see anything over 39% POHs plus they will not consider rents collected from POHs to go towards DSCR.

In order to qualify on the debt coverage side, you need to be doing so via lot rents.  

Also, if you do have POHs, make SURE you can get a rent roll which has lot rent vs home rent separated from one another.

A lot of times these strategies for how to off load the POHs don't do you any good unless you're buying the property cash or using seller financing.  

@Benjamin Schultz Overall they are typically not worth the time or additional cash flow due to the type of tenant typically occupying and abusing the home leaving you with the repair bill. However in saying that we have several customers who run very successful rental parks and operate more like apartments than MHC. My reccomendation is to outline a realistic business plan in converting the 16 POHs over 12-18 months. Depending upon the demand in your smaller market you may be able to unload them quicker. Just ensure you are finding relatively good buyers as you do not want to have to go through the eviction process every month for non-payments. Overall as Alex stated lenders typically don’t like POHs. However in our ever changing market we work with a few that have programs specifically catering to acquiring communities with any number of POHs. Terms are not as favorable but they are available.

@Loren Smith , @Alex Bekeza , @Erich Hauck , gentlemen, thank you very much for your input and assistance.  We decided to move away from this deal for a couple reasons, one of them being intensive management/learning curve (and lack-luster corresponding returns) due to heavy POH, something that I was reluctant to dive into on deal one in the MHP sector.  Circling back to hunting down Multifamily deals, but keeping an eye on other MHP opportunities that may pop up - seems to be much better yield here than MF these days!  Thanks again for your two cents.

@Benjamin Schultz I'll throw in a bit of a different viewpoint on this issue, which I have shamelessly stolen from Ryan Narus  (Host of the MHP irl Podcast) 

First off, looking at the MHP and the POH rentals as two separate businesses helps answer the questions because the banks/investors will and its eliminate the temptation to say "but the POH add so much to the NOI" if they are separate entities with their own balance sheets and P&Ls.

Generally POH rentals are not the best model due to a few factors, but, from my perspective at least, they are not automatically a bad idea. It depends on the quality of the POH, the overall rental market, the size of the park, and how you choose to manage the property. 

If you have all pre 1976 mobile homes, in a 20 unit rural park which you want to self manage, having POH rentals is a terrible idea. The long term expenses and turnover will eat through any rental profit once you factor in paying the MHP lot rent and for your time.

On the other hand, if you have all 2000 or newer homes that are 1500+sqft, in a 75+ unit park within 30 miles of a growing secondary MSA that has a full time manager, you may want to take a hard look at renting the POHs. 

If a 3/2 stick built house rents for $1,200 a month by this 75+ space park that has a lot rent of $275, then you could rent out a 3/2 POH for $950/month. Assuming 65% expense ratio, including lot rent, if you got the homes for $25k per when you bought the park (because banks won't finance them and the seller wanted to get ride of them), you'd be getting around $340/month, which is a better than a 15% return from cash flow. 

Granted this makes some rosy assumptions and applies to a small sub set of parks, but the point remains. It also could be a pseudo lost leader of sorts;  generating more leads for eventual homes sales instead of spending adverting dollars or provide enough work for justify paying for a more experienced/full time manager, who has knowledge, skills, and abilities to drive value on other areas of operations.

In short, the if the POH rental model was always bad, then ELS, SUN, and UMH wouldn't have rental companies, so don't discount it off the bat. See if they fit into your business plan.