All Forum Posts by: Jack Martin

@Frank Rolfe hits the nail on the head with respect to replacing homes.  It's all about location, which ultimately points to DEMAND.  If the location of the park is not in an area with really high demand, that strategy is probably not a good fit for the park. Without high demand, keeping the existing homes and selling them to the existing tenants or new tenants will make more sense, even if that means making renovations to some of the homes.   

@Monica Ponton while most professional owners prefer the TOH (tenant owned home) strategy over the POH (park owned home) strategy, it's always good to understand why. 

The TOH strategy is where all the homes are owned by the residents, and the park owner simply owns the land, the roads, the common amenities (like a clubhouse, laundry, pool, etc.) and the lot improvements. The residents are responsible for the maintenance and upkeep of their home. They pay only lot rent, plus utilities.

The POH strategy is where the homes are owned by the park owner and the tenant pays rent for the home. POH rental amounts are greater than lot rent, but now the responsibility for maintenance falls on the park owner, so the expenses go up as well. So does your tenant turnover, since POH tenants do not have any vested interest in staying, as they are simply renters and do not have any homeownership. 

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 first model. For this reason, you will find almost all professional park owners focusing on the TOH strategy. As soon as you shift to the POH strategy, you lose that key strength and essentially now you have created an apartment style investment, but with mobile homes.

With a park that has all POHs, it is common that a seller will capitalize POH rental income, so if your strategy is to focus on the TOH strategy, make sure to discount that portion of the income so you are only assuming lot rent, as mentioned above by @Mario Dattilo 

In other words, when you underwrite a park that has POHs, make sure only to include the lot rent amount for each of those POHs as if you already sold those homes to the tenant. That way you won't be going backwards on your pro forma in the future when you sell those homes.  

With that said, keep in mind you will be selling the POHs so there will be income from the sale of homes that will contribute to the total value of the deal. Depending on the age and condition of the homes, it is possible that the discount to the price from omitting POH rental income can be made by the value of those homes. 

All the best,

Jack

@Neshia Wright the first thing that jumps out is the monthly rent, which looks to include rental income, not just lot rent. The correct way to value a MHP is to use the lot rent only, so if we assume the lot rent is $350 for that market, your gross rental income would be 13 X $350 X 12 months = $54,600. Then you remove expenses, which for this purpose we will use 40%, giving you NOI of $32,760. If you divide the NOI by the asking price, that is a 5% cap rate.

Now obviously, there is rental income there as well, so the real NOI may be greater, but keep in mind the park will not be as stable (no tenant owners) so you will have tenant turnover and vacancy. Also, you will be responsible for all the repairs to the homes, so there will be much higher expenses than we calculated above and more management headaches.

The way professional park owners like to operate parks is to have 100% of the homes owned by the tenants. That is also the way lenders like the parks they lend on to be set up. This is all aimed at stable income that exists when the tenants own the homes.  

The best lender for a small park like this one is seller financing or a local or regional bank. Call all the banks in the area where the park is located and ask if they have loaned on mobile home parks in the past. If that is the case, then they will be worth your time.  If not, move on. You will likely find that the bank will underwrite to lot rent only, just like we did above.  Also, most lenders will not have an appetite to lend on a park with all park owned homes, so keep that in mind. 

All the best, 

Jack

@Margaret Curtis mobile home parks tend to be more tax efficient than most other real estate. The primary reason for this is due to the fact that a large portion of a mobile home park’s value gets allocated to land improvements, allowing more of the property’s value to be depreciated at an accelerated rate. 

Land improvements are things like roads, underground pipes, electrical lines, pads, and pedestals, which have a shorter useful life and are depreciated at a faster pace, generally over a period of 15 years if you choose straight line depreciation.

However, the benefits of depreciation became even more attractive when the Tax Cuts and Jobs Act of 2017 increased first-year bonus depreciation to 100%. Applied to a mobile home park, this means the land improvements can be expensed 100% in the first year of ownership, instead of over a 15-year period.

This can be immensely attractive for investors seeking tax losses to offset passive investment gains they have received in that same calendar year. The use of bonus depreciation can be an alternative strategy for investors who are not able to successfully execute a 1031 exchange, for example. T

Depreciation and bonus depreciation defer taxes until the property is sold. In other words, investors pay less tax on the income while they’re invested and are able to offset passive investment income from other sources. 

Investors in higher tax brackets will realize a lower tax rate when the property is sold than they would have if depreciation was not utilized. This “tax arbitrage” strategy lowers their overall tax bill and is an additional benefit beyond the time value of money.

In summary, the accelerated depreciation afforded to mobile home parks makes them one of the most tax-efficient real estate investments. With bonus depreciation, investors get to enjoy “tax-free” income from a predictable strategy while they are invested, and offset qualified passive income from other sources.

Mobile home parks are already known for their recession resistance and ability to deliver consistent cash flow, but their tax efficiency is yet another reason they are one of the most attractive investments in real estate.

All the best, 

Jack

@Clinton Ide That would likely be a deal worth pursuing in this market, as long as the location is good.  I will demonstrate the math, using $350 for lot rent. 

How to use the "back of the napkin" formula to determine the cap rate at the asking price:  

350 x 9lots x 12months = 37,800 x .6 (taking out 40% for expenses) = 22,680 (NOI) / 194,500 (asking price) = 11.66% cap rate

If the market cap rate for that area is 7%, then the real value of the property would be 324,000:

$350 for lot rent >> 350 x 9lots x 12months = 37,800 x .6 (taking out 40% for expenses) = 22,680 (NOI) / .07 (cap rate) = 324,000

@Clinton Ide There is a quick "back of the napkin" formula to evaluate a park that will usually tell you if the deal is worth a closer look. The goal is to arrive at what the NOI is likely to be without having all the information from the seller, and then apply that against the market cap rate. All you need to know is the number of occupied spaces, the monthly lot rent amount at the park, and the cap rate.

Calculate the NOI by multiplying the number of occupied spaces by the monthly lot rent (lot rent ONLY) and then multiply by 12 months to arrive at the gross annual income.  

From there, subtract the expenses (they can range from 30-50%, so you'll want to use 40% for this quick evaluation). That will give you the net operating income. (NOI)

Once you have the NOI, divide the NOI by the market cap rate. So if the park is in a 7% cap market, you would divide the NOI by .07 and that would give you the ball park value of the park.

That evaluation is extremely generic and will only tell you if the price expectation from the seller is in range or not. If it is close, then it deserves a closer look. If it is way off, you will need to understand why.

There are cases where other income from utilities, laundry, a C-store, a restaurant, or something like that deserves additional evaluation, so make sure not to punt before you understand additional income.

Also, there are cases where the expenses will be higher, particularly in a park that has a large amenity package (like pools, clubhouses, sport courts, game rooms, etc), or a high degree of expense related to landscaping and maintenance.

Once you discover you are in the ball park, then it will be smart to determine where there is potential for upside. Is there an opportunity to improve the income, lower expenses, expand the number of spaces, etc.  

All the best,

Jack

@Alan Tripp the type of lender depends on the deal and your qualifications as the buyer. Generally, outside of seller financing, the common types of debt available for MHPs are as follows. 

Local & Regional Banks - You can find out which banks have an appetite for mobile home parks by asking the MH/RV brokers in your area, networking through other owners of parks in your area, or simply obtain list of the smaller banks in your area/region and call them to see if they have lent on parks in the past. If they have not, don't waste your time. Also, is important to note that a $200k loan takes the same amount of work as a $20MM loan, so you may come across some banks who like MHP's yet they may not show serious interest in really small deals.

Life Companies - Life co debt will typically have better terms than banks, but will come with tougher qualification criteria. You can access life co debt through a commercial loan broker, but take the time to find the broker who specializes in MHP debt. If the broker doesn't have a deep level of experience placing debt on mobile home parks, you could be in for a lot of brain damage and promises that are not met. Network through MHP attorneys and MH/RV park brokers or owners to find the right commercial loan broker.

Agency (Freddie/Fannie) - If the park and the buyer qualify, this will be the best debt, but the qualifications are even more restrictive. Just like Life co's, you can access agency debt through a commercial loan broker, so take the time to find the most experienced MHP broker.

Conduit (CMBS) - Conduit went away for a bit during the COVID onset, but they are back lending again. They can be a little more flexible than agency or life co, particularly with respect to the park and terms. Again, you can access conduit loans through a commercial broker.

(In addition to those sources, there are a few others that are less common, such as HUD and SBA)

Your track record of experience with the asset class will have significant impact on whether a loan is considered, and whether you can negotiate the terms of the loan, so be prepared to demonstrate your experience, or the team you have built around you who has the experience.

Typically smaller deals under 50 spaces will be best suited for banks. Once you find the right banks, there will be more flexibility with respect to qualification of the deal and you as the buyer, particularly if you lack a track record.

Larger deals will open the door to agency, conduit, and life companies, all of which tend to come with better or more flexible terms, but with a higher degree of buyer experience and park requirements. For example, some lenders will require you already own and operate a similar asset in the same market wherein you are buying the subject property. Some will have a minimum number of spaces and pavement requirements in the park. Some will have restrictions as to total occupancy and percentage of POHs, while others are more flexible. Many of these loans can be non-recourse or limited recourse, but there will likely be liquidity and net worth requirements of the borrower. Some loans will come with defeasance or yield maintenance, while others will have step down prepayment penalties.

A good loan broker who specializes in MHP debt can guide you with respect to the right choice for you as the buyer, which type of lender will be best suited for the park, where the terms will be the most favorable, and where the hurdles will likely be. Having that relationship will help you get the best terms for the deal and avoid wasting time on a loan that is low probability.

All the best,

Jack

@Matt Duda the type of lender depends on the deal and your qualifications as the buyer. Generally, outside of seller financing, the common types of debt available for MHPs are:

Local & Regional Banks - You can find out which banks have an appetite for mobile home parks by asking the MH/RV brokers in your area, networking through other owners of parks in your area, or simply obtain list of the smaller banks in your area/region and call them to see if they have lent on parks in the past. If they have not, don't waste your time. Also, is important to note that a $200k loan takes the same amount of work as a $20MM loan, so you may come across some banks who like MHP's yet they may not show serious interest in really small deals.

Life Companies - Life co debt will typically have better terms than banks, but will come with tougher qualification criteria. You can access life co debt through a commercial loan broker, but take the time to find the broker who specializes in MHP debt. If the broker doesn't have a deep level of experience placing debt on mobile home parks, you could be in for a lot of brain damage and promises that are not met. Network through MHP attorneys and MH/RV park brokers or owners to find the right commercial loan broker.

Agency (Freddie/Fannie) - If the park and the buyer qualify, this will be the best debt, but the qualifications are even more restrictive. Just like Life co's, you can access agency debt through a commercial loan broker, so take the time to find the most experienced MHP broker.

Conduit (CMBS) - Conduit went away for a bit during the COVID onset, but they are back lending again. They can be a little more flexible than agency or life co, particularly with respect to the park and terms. Again, you can access conduit loans through a commercial broker.

(In addition to those sources, there are a few others that are less common, such as HUD and SBA)

Your track record of experience with the asset class will have significant impact on whether a loan is considered, and whether you can negotiate the terms of the loan, so be prepared to demonstrate your experience, or the team you have built around you who has the experience.

Typically smaller deals under 50 spaces will be best suited for banks. Once you find the right banks, there will be more flexibility with respect to qualification of the deal and you as the buyer, particularly if you lack a track record.

Larger deals will open the door to agency, conduit, and life companies, all of which tend to come with better or more flexible terms, but with a higher degree of buyer experience and park requirements. For example, some lenders will require you already own and operate a similar asset in the same market wherein you are buying the subject property. Some will have a minimum number of spaces and pavement requirements in the park. Some will have restrictions as to total occupancy and percentage of POHs, while others are more flexible. Many of these loans can be non-recourse or limited recourse, but there will likely be liquidity and net worth requirements of the borrower. Some loans will come with defeasance or yield maintenance, while others will have step down prepayment penalties.

A good loan broker who specialized in MHP debt can guide you with respect to the right choice for you as the buyer, which type of lender will be best suited for the park, where the terms will be the most favorable, and where the hurdles will likely be. Having that relationship will help you get the best terms for the deal and avoid wasting time on a loan that is low probability.

All the best,

Jack

@Andre Garbo There’s a brokerage team that’s very active in Washington state known as the Cross group. Google the Cross group, and you will find them. They are well-connected in the Northwest. 

@Derick Davis generally, outside of seller financing, the sources that would be worth pursuing for a park like you described above would be local and regional banks. 

You can find out which banks have an appetite for mobile home parks by asking the MH/RV brokers in your area, networking through other owners of parks in your area, or simply obtain list of the smaller banks in your area/region and call them to see if they have lent on parks in the past. If they have not done a loan on a park before, don't waste your time. 

You can also work through a commercial loan broker, but take the time to find the broker who specializes in MHP debt. If the broker doesn't have a deep level of experience placing debt on mobile home parks, you could be in for a lot of brain damage and promises that are not met. Network through MHP attorneys and MH/RV park brokers or owners to find the right commercial loan broker. Even if the deal is too small for the broker, they should be able to point you in the right direction.

All the best,

Jack