Mobile Home Investing Guidance

[Steve Frye]

Looking at bringing in a partner on a mobile home park in the Middle TN (Tullahoma) market. 16 units that generate $200k at around $1.5M. All park owned trailers. Those numbers are better than most of the ones I see out there.  Any suggestions, recommendations for whether that deal sounds solid? 

[Robert Ruschak]

What’s the upside potential & any room for expansion?

Is it on public or private utilities?

[Jack Martin]

@Steve Frye there are major differences between the POH and TOH strategies and I will share a little here for context. 

A park where all the homes are owned by the tenants (these are called "tenant owned homes" or "TOHs") results in the park owner simply owning the land, the roads, the common amenities (like a clubhouse, laundry, pool, etc.) and the lot improvements. The residents are responsible for the maintenance of their home and the upkeep of the lot where their home sits. They pay lot rent and utilities.

A park where all the homes are owned by the park (these are called "park owned homes" or "POH"s) results in the responsibility for home maintenance falling on the park owner, so while the rental amount is greater, the expenses go up as well. So does your tenant turnover, since POH tenants do not have any ownership, or vested interest in staying long-term.

What makes mobile home parks such a great investment is the low turnover and stable cash flow that is created by having residents own their own homes as mentioned in the TOH model. For this reason, you will find almost all professional park owners focusing on the first model. As soon as you shift to the POH model, you lose that key strength and essentially now you have created an apartment style investment, but with mobile homes. 

With that background, when valuing a park it is common to ONLY give value to the lot rent, similar to how an appraiser or lender would approach it. Therefore, the value of the park is determined by the market lot rent, not the income from home rentals. 

In this example: 16 lots x $300 (assuming that is market lot rent for Tullahoma) = $4,800 x 12 months = gross income of $57,600. That's a long way off from the $200k gross income you mentioned from home rentals. Apply a generic expense ratio of 40% and your NOI is $34,560. At a 7% cap rate (assuming that is market cap rate for Tullahoma) the value of the property is just under $500k.

That same deal using the rental income might look like this: 16 lots x $1041 (seems kind of high, but that's how it pencils out) = $16,666 x 12 months = gross income of $200,000. Apply a generic expense ratio of 50% and your NOI is $100,000. At a 7% cap rate the value of the property is over $1.4M.

That's a HUGE difference in value, so make sure to understand the way professional park owners, brokers, lenders, and appraisers will approach valuation. Otherwise you will likely end up overpaying. 

Also, keep in mind that the management side of the business is dramatically different with rental homes than it is with all TOHs. With all POHs your expenses will be much higher, your tenant turnover will be much higher, the cost of unit turns will be an additional expense, and your management headaches will probably triple. 

All the best,

Jack