I have a question for experienced MHP investors. Many parks I'm finding are majority, if not all, POHs. If I were to buy one of these MHPs and transition it to mostly TOHs, my NOI drops significantly, therefore when I plan to refinance or sell in 3-5 years, my property value is significantly lower and I have less equity. Am I looking at this correctly? What am I missing? Here is a simple example:

10 POH x $1k/month home & lot rent = $120k/year x .75 Op Ex = $90k NOI / 8% Cap = $1,125,000 property value

vs.

10 TOH x $500/month lot rent = $60k/year x .75 Op Ex = $45k NOI / 8% Cap = $562k property value

So that is a very logical way of looking at it. The issue is that it was never valued based on the home portion of the rent anyway. To protect yourself from big losses you should value the park based on the portion of rent that can be allocated to lot rent and if you have to value the homes then value those based on shell value or what you can comfortably sell them for. 

Typically lenders, appraisers, and sophisticated mhp investors do not value the home rent cash flow. So if you’re financing it going in your business plan to the bank will show your sell off plan. 

Lenders lending on MHPs want to real estate as collateral and MH’s are not real estate they are chattel similar to a car or other personal property. 

If you’re seeing a lot of parks with all park owned homes it’s likely the geographic area you are looking. Parts of the southeast have high concentrations of POH communities. Before buying one with the plan to convert it to TEnant owned homes make sure the market will support the lot rent model as many don’t. The 2 main reasons for POH communities is the market or the owner doesn’t understand and just wants the higher rents. They miss the points stated above about value and the fact that it is much less marketable as a POH community. It’s also a lot more management intense and your expense ratio is higher, similar to an apartment building. In that case you would rather own an apartment building. 

@Diana Walcott  Here's one thing you are missing in your example:  you are keeping your Op Ex the same amount in both the all POH and the all TOH scenarios.  That's not how it will play out over time.  Over time, since you own all the POH your operation expense ratio will be much closer to 50% not 25%.  It is very reasonable to assume a 25% operation expense on just the land - septic tanks or clogged sewer pipes, road repair, landscaping and tree damages...etc.  But when you have to fix toilets, repair or replace leaking windows and roofs, repair or replace the floor damage from the aforementioned leaking windows and roofs, tenants destroying appliances,..etc. on top of all the land expenses your Op Ex will increase significantly.

Thank you for your replies. So much valuable information. This is great. 

@Diana Walcott when you evaluate a park for acquisition, separate the POH rental income from the lot rent. With your example you would pay 562k for the park, and then you could also pay the seller a set amount for each POH.  When you sell the POHs to the existing tenants (or new ones) you will recover the price you paid for them and you still have the same value remaining in the park. 

The difference is now you have resident OWNERs, not renters.  That is what creates the stability of cash flow in a MHP, which is also the reason why lenders like to see 90% of the homes owned by the residents.  

Super helpful explanation. Thanks, Jack.

Additionally, parks that are primarily comprised of tenant-owned homes will typically trade at cap rates roughly 200 bps lower than those that are primarily park-owned. While you'll see a significant dip in NOI by transitioning to tenant-owned homes you'll be able to justify a lower terminal cap rate and ideally higher exit valuation.