All Forum Posts by: Frank Rolfe

Contact Kurt Kelley at Mobile Insurance in the Woodlands, TX. 

$2,100 x .5 x 12 = $12,600. At a $200,000 sales price, that's only a 6.3% cap rate, which is far too low on a small park. On top of that, you have private utilities, which is generally a bad idea on small parks. One problem with your private water and sewer and your whole deal is wiped out financially.

The bottom line is that I'm not sure you should take either offer or the park in general. The only person winning on this deal may be the seller.

The only thing that would change my mind is if the market lot rents are $700 per month and the park is located in downtown Austin.

These are all good questions for Kurt Kelley (who will happily give you the answers for free) but here would be my opinion:

1) You cannot put property coverage on tenant homes. You can put it on such items as your utility lines and power poles, if applicable and you're in an area of severe weather events.

2) I assume the park will have a manager (all of them should) and therefore you definitely will need workmen's comp -- it will also cover any contractors within the limitations that Kurt can discuss with you.

3) EPLI stands for Employment Practices Liability Insurance. That covers such items as the manager you just fired claiming it was not because they didn't show up for work for a week, but because you hate them because they're Methodist or some other false claim. Employees probably file as many suits as residents these days.

Again, Kurt can go over all these concepts. The important point is to find a specialty insurance company and NOT your typical Allstate agent or someone like that. The Allstate agent may be great at insuring your home and car but they have no clue on mobile home parks. I used my regular agent on my first park and then I found out I was paying around twice what Kurt charges and was missing about 90% of the exposure I needed covered.

A properly insured mobile home park would have:

1) Liability coverage with a balloon so that you hit $3 million + (ask your insurance agent to see what you need)

2) Property coverage on all buildings, etc.

3) Workmen's Comp that covers your employees

4) EPLI insurance (employment practices liability insurance) to management issues

5) Loss of Income insurance (this is going to be based on cost, issues and banking requirements)

I would highly urge anyone looking for mobile home park insurance to call Kurt Kelley at Mobile Insurance in the Woodlands, Texas. He insures about 3,000 park owners and is the authority on this in my opinion. Do NOT use normal agents like State Farm, etc. or any group that insures your home and car because they have zero knowledge of mobile home parks and you will end up paying twice as much and have half the coverage (or worse). 

Yes, I have built a mobile home park from scratch.

It is a very scary and risk-prone process. Here are some of my observations:

1) There are no lenders for these projects so you have to do it with cash typically and then refinance. So it's extremely capital intensive and there is no liquidity option.

2) You will have to bring in a home to every vacant lot to fill it in 99.9% of all U.S. markets. If you can get in with 21st Mortgage, then they will advance the capital for that, but otherwise you're looking at $40,000 to $50,000 of additional capital PER SPACE just to get the homes on there.

3) Most of the good markets in the U.S. will not allow new mobile home park construction, so if you can actually build in your market you have to think twice if it's really worth it, as the fact there's no possible supply of new parks is what drives the value in those markets that don't allow it. Kind of the old W.C. Fields quote "I would never want to join a club that would allow me as a member".

4) If you don't have access to city water and sewer, then don't do it. The cost of private utilities is gigantic (like $1 million for a sewage packaging plant) and parks without city utilities are a lot less appealing to future buyers and banks.

5) For these reasons, there are only around 10 parks built in the U.S. PER YEAR. That's an incredibly small number.

6) If you run the numbers, you are typically better off buying an existing park than trying to build a new one. Existing parks have revenues and net incomes already in place and have liquidity from day one.

If, however, despite all these issues you still want to build one, here are a few more things to watch out for:

1) Don't get into a "tap fee" trap. Some cities charge a "tap fee" to connect to their water and sewer systems of between $5,000 and $25,000 PER LOT. They don't tell you about this, of course, until you have finished building your mobile home park.

2) Run as test ad to make sure that the demand for mobile homes in this area is as strong as your think. A good test ad response is about 30 to 40 calls per 10 days.

3) Make sure you understand the cost and difficulty of filling your vacant lots with new homes. Home prices have gone up $10,000 since Covid began and the turn-around delivery time is like over 6 months now.

4) Most of the successful new parks built are situations where people find land in good markets that is already zoned for mobile home park but nobody ever noticed, and with city water and sewer right on the frontage. Be very wary of building parks out in the country in the middle of nowhere -- there is much more to a park than just getting a permit to build one.

5) Some of the parks people want to build would work out better as RV parks than mobile home parks. RV parks have less construction cost and utility needs and you can fill the lots without bringing homes in. 

You will have to get the homeowner's permission to enter their home, so they definitely have to be in the loop. Tell them that you're aware there's a problem and you want to go ahead and get it fixed and then bill it back to them in 12 easy installments -- something like that. If they are hostile to even making the repair, then you definitely need to find out from your state MHA what you're rights are.

The laws on sub-metering hold true regardless of the size of the park, but the realities of economics can change dramatically based on size. Here's how it pretty much works. If your residents are using around $40 per month per lot in water and sewer, then you should probably just raise the rent $40 and leave the water and sewer in the rent. If the bill is more than $40 per month per lot, then you have one of two problems going on: 1) your lines are leaking (that's your fault and not the tenants) or 2) they are wasting water due to individual household leaks. You can determine if there are household leaks by seeing how much water is going down the main sewer line at 10 AM on a weekday when nobody is home. If there's not much water going down the line and the bill is higher than around $40 per lot then it's probably main line leaks.

To fix main line leaks you need to walk on top of your water line and see if there are any marshes or patches of greener and taller grass -- signs of water leaks. The worst possibility is if there are a large number of small pinhole leaks due to corrosion of the pipe. You will have to run the numbers to see if replacing the pipe makes any economic sense as it is very expensive to do and you would need some really serious water bills to warrant it. If it's identifiable, then fix the leak and see what the impact is on your bill.

Before you do anything, you need to understand the laws regarding utility billbacks and your rights as the property owner. To gain those facts, I would contact your state manufactured housing association (MHA). Here's what you need to know:

1) What are my rights to turn off the water in the event of a leak in a home? While you may have no ability, having a festering leak is going to destroy that home and many states have rules that would allow you to take emergency action until the repair is made. If it's a matter of money -- and the tenant has none -- you might make the repair yourself and bill it back to the tenant in monthly installments. You'll come out ahead even if they don't pay for it fully as the loss of water is not cheap.

2) What are the laws regarding sub-metering utilities with a particular focus on:

a) Do you need a license or permit to do so?

b) What type of systems are allowed (meters, RUBs or CAMs)? A RUBs or CAMs system does not require meters.

c) Do you need a licensed plumber to install the meters?

d) Who is allowed to read the meters?

e) What does the billing for the utility look like (some states require certain information on the bill).

3) What type of meters can you afford? The new ones that are read by satellite are not cheap to install or maintain -- but they do a much better job and you don't have to physically read them. For mobile home parks, most people are using METRON.

4) Do you really want to get involved in all this or just raise the rent accordingly? If the answer is "too big a hassle" then you may be correct and should just raise the rent enough to cover the average utility cost.

The most important thing here is to DO NOTHING UNTIL YOU HAVE THE FACTS. The penalties on this issue in most states are crushing.

The pros are:

1) Very low entry price point (you can buy mobile homes in mobile home parks for as low as $1,000 cash).

2) Huge demand for affordable housing.

3) Often used as the stepping stone to buying mobile home parks as it's a skill needed in both.

The cons are:

1) Working around the SAFE Act and Dodd-Frank laws which make it very hard to do mortgages or "rent to owns".

2) Older mobile homes, in particular, can need a huge amount of cap-x to but them back into service.

3) If you are not extremely disciplined on your background checks, you can let in people who will destroy them.

4) Collections is always hard as you are basically dealing with people who have very little money.

Here's what you should do if you're really interested in this form of investing:

1) Focus on communities that have extremely high single-family home prices ($200,000 and up) and apartment rents.

2) Buy only homes from the 1980s or newer that are at least 14' wide so the floorplan is reasonably spacious.

3) Choose homes that you can buy cheap due to cosmetic -- and not structural -- issues.

4) Watch over your home renovation costs closely and cut every corner -- every dollar you spend is a dollar less profit.

The way you need to approach this deal is "what do I have to do to have the best chance at getting a bank loan in 5 years?" Because if you don't get that bank loan in 5 years than you will lose the property when the seller takes it back for term default, and all you down payment and work will be lost.

Lender's like long-term tenants. But most importantly, lenders will demand a certain level of rent and net income, with a track record typically of three years at that amount. That means you have to get enough revenue going on this property within two years so you can stabilize that for another two years and then have one year to find a new loan.

Before you go forward with this deal, you need to model how much money it will have to make to get a loan to replace the seller note. Make sure you truly believe you can hit that level within two years or so. If the answer is any less than "I'm 100% sure I can hit that amount" then don't do the deal. 

More than likely, you need to get the seller to carry for 7 years and not 5 so you have an extra 2 years to hit your goal.

I would not worry about whether the tenants will be long-term or short-term as the market will decide that for you. I'm more concerned about you hitting the raw revenue number fast enough to not hit the rocks when the note comes due.

If you're going to bridge the gap with financing:

1) It would have to be 15+ years term on a 30 year amortization

2) It would have to be 10% or so down-payment to spike the cash-on-cash return.

3) It would have to be 0% interest year one, 1% year two, 2% year three, 3% year four and 4% year five through fifteen

4) It would have to have no pre-payment penalty

And you would HAVE to make sure that you can cover the payments monthly with room to spare based on your assumptions of increasing rent levels.