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This accumulates year on year, then at a sale event, investors get paid their pref in full before other profits are split between them and the operators. Similar set ups exist in the MHP space, although it’s much easier and more common to not only hit our pref each year, but to exceed that due to the high cash flow. I’m going to touch on “forced appreciation” below, which not only increases equity, it also increases cash flow. Annual Lot Rent Increases – it’s expected in the mobile home park space that lots rents will increase annually. It’s common to see 5%-15% annual lot rent increase and sometimes you’ll need to increase rents up to or exceeding 20% to come close to market rents . If cap rates and occupancy stayed the same, just by merely raising rents each year for 3+ years, park owners can create handsome profits at refinance or sale with little effort.
This loan program is for investors with poor credit or for mobile home parks that are not stabilized . Because of this process, mobile home parks create a solution for consumers looking to find affordable housing during tough economic times. Mobile homes provide those consumers with the opportunity to have access to affordable housing, and possibly even the privilege of homeownership above all.
LOAN RATES
Section 8 is on board to help section 8 tenants purchase mobile homes and there’s a ton of historical data showing the epic track record of this asset class. Proven Track Record – MHP’s used to be generally looked at as “trailer parks” (we all know the stigma that comes with that. Think “trailer park boys”, “slumlords”, “Jerry Springer” or the show “COPS”) or a wild card as an investment . All the while mobile home park investors nationwide were bringing in high cash flow and large equity payouts fixing up and improving mobile home parks (a MHP flip takes roughly 3-7 years).
From an accounting perspective, the majority of a mobile home park's value is comprised of land improvements , which can be depreciated at an accelerated schedule. Mobile home park depreciation schedules typically average 15 years compared to apartments of 27.5 years and commercial properties of 39 years. This unique tax feature often translates to tax free operating cash flows to the mobile home park investment owner. While demand for quality, affordable housing increases, the supply of mobile home parks is diminishing. It is estimated that approximately 1% of mobile home parks are redeveloped every year into higher and "better" uses.
Multifamily Loan Products
Fortunately, the cost of materials is coming down now, but labor is still at an all-time high. To add insult to injury the feds raised prime rate 2.25% between March and July 2022. Supply and Demand– Just as in the housing market, the corona virus created a record low inventory of multifamily properties for sale as buyers and sellers insulated themselves from each other. Once it was safer for people to mingle again, many sellers were reluctant to put their properties on the market, thinking prices would go up even higher. After coming up with the income that the park is currently generating and deducting from that all the anticipated operating expenses including the reserve for capital expenditures you will have what is called the Net Operating Income.
Rents gained more than 1 percent during the second quarter, reaching $578 per month. From individual and private clients, to portfolio and institutional assets, CBRE delivers highly specialized execution of brokerage, debt & structured finance, valuation and appraisal services assignments nationwide. Mobile Home Parks (MHP’s) are arguably one of, if not the hottest investment classes of today. Not every park has all of these expenses and some have additional expenses but this is a good starting point. Amenities – you can also have additional amenities such as a meeting hall, a pool, laundromat, additional RV parking and charge rent for all these additional services. Place & Rent- you can also place a home, fully skirted and with all hookups and rent the home for about 2 or 3 times the monthly pad rent.
DON’T: Apply Cap Rate to Mobile Home Rent
The operating expense ratio can vary significantly from one park to another in the same city even if located adjacent to one another. One of the largest expenses in a park is the water and sewer expense. If the residents of the park are paying this expense then you can expect the operating expense ratio to be as much as 15% less than the average.
If in a well located area the land value alone is always a good investment even if the cash flow from the rental income were to completely stop. This would not be the only reason for buying a park but certainly must be considered. A park located in an area where employment is strong will most certainly guarantee it will most always be fully occupied.
Zell began his career with residential property management, then moved into multifamily, and finally settled into the mobile home park niche. Mobile Home Park investing has helped billionaire Sam Zell become a commercial real estate investing legend. You can cut through much of the management hurdles of owning an RV park by self-managing it. While this is not required, many owners find they really enjoy replacing their day job with a career as their own boss, with a varied schedule and both outdoors and indoor assignments. Only select RV parks that are “destinations” and not “overnighter”.
In some cases, you will be able to fill up the homesites with minimal investment and effort so you may place a value of 25-50% depending on your comfort level. The key then is to reconcile the tax return with the profit and loss statement and then interject reality into the whole process. Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings. Manufactured homes are prefabricated homes built after 1976.
“Are you seriously going to buy this property at a 3.76 cap? High tenant switching costs – it costs $5,000-$10,000 for a homeowner to move and reinstall their home into another community. If the park is on the market for $3 million I will probably pass. If the park is on the market for $1,800,000 or less than I will probably look into it further.
If you are buying stabilized parks (roughly 70% tenant occupancy and above) it’s almost expected to have solid cash flow straight out of the gate. Operators in comparable asset classes (self-storage, multifamily apartments) often offer preferred returns to investors where investors are expected to receive say 6-8% return on investment each year as a “preferred return”. This is not a guarantee to investors, but more of an I owe you and that investors will get paid this before the operators get paid. If the preferred return (often abbreviated as “pref”) is not met in any given year then it rolls over and adds to the next year in a cumulative way. For example, if a specific investment offers a 8% pref and for some reason only 2% of that pref was met that year, then the remaining 6% roll over and adds on to the next years pref.
When purchasing a mobile home park where there are park owned rentals, rent-to-own homes, and mobile home notes it is important to break out the income and expenses from this portion of the business from the lot/space rental portion. Manufactured homes are relatively affordable to buy since they cost so much less to build than traditional homes. As a result, commercial real estate investors can build larger manufactured homes while still keeping costs low, making them a great option for first-time investors especially. Additionally, due to the low cost, sellers are sometimes able to provide direct financing to investors.
This may sound counterintuitive, but while depreciation is a negative for single family homeowners, it’s actually a positive for real estate investors. That’s because depreciation allows the investor to deduct a portion of the real estate asset’s value from the operating profits each year, while your more or less fixed income from the property remains steady. Low Interest Rates – Cap rates have been coming down on apartment buildings pushing values up at a rapid rate since the recovery phase of the great recession in 2010, and even more so during the corona virus recession of 2020. During both recessions the Feds purchased an unprecedented amount of treasury and mortgage-backed security bonds that kept long term interest rates artificially low. These record low rates supported a much higher loan amount which made it feasible for buyers to get financing at a much higher sales price. Dave Reynolds is a household name in the mobile home park business for many reasons.
Mobile home parks typically incur less than 20% of the annual tenant turnover that an apartment complex experiences. After a half a century of combined years in the real estate business, RVParkUniversity.com is the only place that will give you the good, bad and the ugly details on RV Park Investing. In my opinion the sweet spot in MHP’s is buying 2-3 star parks and turning them into 3-4 star parks. We just don’t see that many attractive deals in that sector. Deciding at these crossroads was easy for me, as the thought of continuing schooling was daunting with the illusion of extreme boredom and dissatisfaction for me.
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