It seems like the debate between single-family residential and multi-family residential has existed for a long time over which niche is more profitable.
Today, I would like to address this debate from the mobile home side and show why these small mobile home and land properties are a superior investment to mobile home parks in my area.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
As the mobile home park owner, you are responsible for providing the water, sanitation, and gas/electric services (up to a certain point) to your tenants. If you have a park on city water and sewer, then the issues tend to be much smaller as the city does most of the work. Wells and septic systems are common in the parks we encounter but the park that we had under contract a year ago (fell through due to financing) had well water and a LAGOON for sewer services (picture a large rectangular hole in ground that is fenced off but very close to many of the tenants – it’s disgusting!)
We would have to perform monthly tests on the well water (the current owners were paying about $10,000 to test the water – definitely could have been lowered) and deal with the lagoon if any problems popped up. Connecting to city services for water and sewer for this park would have been over $250,000 (100+ unit park). I’m glad things worked out the way they did as we never felt comfortable buying a park with these utilities the more research we did.
If one of the wells on one of our single unit properties goes bad, then we are at most a few thousand dollars in the hole for a new well.
This is a continuation of the concept of not having all of your eggs in one basket. It’s possible that your tenants could file a class action lawsuit for a variety of reasons but let’s go with the well water was contaminated. Owning individual units in separate locations means that each situation is different.
Continuing this negative outlook, a tornado could come through and wipe out all of the mobile homes in your park. Even if the homes are owned by the tenants, you have lost your income stream and must figure out a way to replace the homes. (There is a income replacement insurance but even this has restrictions and will only last you so long.)
3. Simple Economics – Decreasing Supply Leading to Price Increases
In the main county we invest in, town officials have not approved a new park to be built since the late 80’s. Some parks have been bought up by land developers.
So, a lot of park owners think they are sitting on gold mines and are asking unreasonable prices for their parks.
It also doesn’t help that most of the mobile homes in these parks are park-owned. Park owners inflate their park valuations using the rental income of the home (banks will only lend on the lot rental income of the park) and do not account for the large amount of maintenance and turnover that inevitably comes with park-owned mobile homes.
A couple of the parks I have seen on the market are classic cases of buyers overpaying and most importantly overestimating cash flow, which results in them trying to find a bigger fool who will relieve them of their misery.
Currently we are buying these single family homes at about the same or less cost per unit as many of the parks we have looked at.
4. Higher Demand Results in Higher Quality Tenants
If you have read any of Frank Rolfe’s and Dave Reynold’s educational material on mobile home parks, you have probably heard them talk about how an abundance of mobile home with land properties are like kryptonite to mobile home parks.
The reason being is that for a similar cost of rent, a prospective tenant can live in a mobile home park surrounded by people on all sides or can have more space with a land-home property. For us – we add another bonus of providing rent-to-owns for our mobile home with land properties, leading to a larger group of qualified buyers that allows us to choose who we want instead of the other way around.
5. Fewer Inherited Tenants
This was going to be an issue when we were trying to buy that large mobile home park. We require all of our tenant-buyers to pay rent electronically through eRentPayment.com and to convert all 100+ people over at one time who were used to paying by check or even by cash would have been incredibly difficult.
So far of the 15 buy-and-hold deals we have done, we have not inherited one tenant, which I really like because we get tenant-buyers whom we have selected and can set certain expectations that a previous landlord may not have.
I must say that mobile home parks perform much better in the appreciation category.
Especially using our business model, after 11-15 years, we expect our tenant-buyer to own the property, meaning that we no longer have any right to it. The best park owners are simply renting out the land that continues to appreciate over time as supply continues to be restricted by local governments and bought up by land developers.
For us, we are willing to exchange future appreciation for short to mid-term cash flow.
So, which do you prefer?
Photo Credit: kenjonbro