Any idiot can buy a mobile home park. And many do. But if your goal is to make money with it, then there are some simple rules that you must consider before taking that step. If you follow these guidelines, your chance for success is 1,000% greater, and your chance for failure is virtually eliminated.
Stick with affordable housing
There are two different types of mobile home parks out there. Fancy ones and simple ones. And the fancy ones, contrary to popular belief, do not make any money. The bullseye in mobile home parks is going after lower income tenants. They don't have to be downscale and dangerous. But they have to be folks who make from minimum wage to $10 per hour. To this customer based, a mobile home park offers an incredible value, where they can have the security of their own home, and a yard for the kids and dog. And it is the only form of detached housing they can ever afford.
The more upper-end parks are always in a precarious position. Their lot rent plus home cost often exceeds $1,000 per month and at that price, they have many options. They may buy a mobile home, but will likely grow disenchanted with it a few months later, and find a stick build home they like better at the same monthly rate. So they run off, and your continuity of lot rent is ruined. Even worse, the lender then yanks the foreclosed home out of your park, and you have a vacant lot with little prospect of re-filling it in the current economy.
Understand the true economics of mobile home parks
Mobile home parks have their own standard costs and ratios. They are not like any other form of real estate. Just because you've owned an apartment complex does not mean you have any grasp of this particular niche. And don't expect the seller's numbers to shine any light on the subject 9 out of 10 times they have "cooked" the books better than Julia Childs.
If you want to buy a mobile home park, you've got to know the real line items for both revenue and expense, and the range of what those should be.
Do spectacular due diligence
Every time somebody calls our website to complain of a terrible park investment they have made, it always revolves around their lack of due diligence. Maybe they trusted what the seller said about the property tax, only to find they were off by 300%. Or they just guessed on the water and sewer cost and it turns out they were wrong by 200%. Or maybe the whole operating permit is no good. There's no excuse for these type of problems. If you do great due diligence, you only buy great deals.
Buy parks that have the right fundamentals for success
Not all parks are created equal. Some have great futures and some have no future. You have to learn how to spot what makes for a winner and what makes for a loser. And it's more complicated than just being located in some "Top 10 Metro Areas" list off the internet.
Some of the items that will point towards a winning deal include location, size, utility system construction, size of lots, road infrastructure, competing apartment rents, etc. If you do not buy based on the right set of criteria, you will have trouble making a deal work.
Execute on your plan
Many people buy parks with a good strategy on paper, but can't translate it into reality due to lack of knowledge on how to properly operate a park. Running a mobile home park is unlike any other form of real estate. Part of it is the personality of the customer, and part of it is the unusual set of responsibilities that a park owner has.
If you want your purchase to work, you need the training to know how to operate the property effectively, and how to implement your battle plan.
Conclusion
Many, many people have made themselves millionaires through owning mobile home parks. In the 1990s book "The Millionaire Next Door", mobile home parks made the list of top tools to amass significant money. However, those folks knew what they were doing they took the time to learn about the business, to perform proper due diligence, and to operate professionally.
Before you invest your money, you need to invest your time in learning the subject. That's the secret to making money in the mobile home park business.
Go to www.mobilehomeparkstore.com or call (800) 950-1364 and learn all about mobile home park investing, and our specialty products for investors.
Thursday, September 30, 2010
Wednesday, September 29, 2010
HOW TO GET ZERO DOWN FINANCING ON A MOBILE HOME PARK
With single-family homes, a legitimate zero down deal is about as likely as sleet in San Diego. However, with mobile home parks, they are as common as rain. of the 25 mobile home parks I've bought, about five of them � or 20% -- were zero down.
So how do you get a zero down mobile home park deal?
Just watch the listings
Many mobile home parks are listed for sale with seller carry at low amounts down. A 5% or 10% down payment can easily be converted to 0% with a little negotiating. You'll find many such listings on the large internet park listing services, such as Mobilehomeparkstore.com.
The most common negotiating strategy is to identify capital improvements that would cost as much as the proposed down payment, and then tell the seller that you need to reserve the down payment money to make those repairs. After closing, you either skip the repairs, or find a lower cost alternative.
Wrap the existing note
It is often possible to wrap an existing mortgage when buying a mobile home park. What this means is that you do not have to get a new loan, and the seller subordinates his note to the existing first. Here's an example. A seller has a mortgage of $400,000, and he wants to sell his mobile home park for $500,000. Rather than put up a $100,000 down payment and obtain a new loan, you assume the loan of $400,000, and place a second of $100,000 in favor of the seller. You do not put anything down.
Why would a seller do this? Often, it's for speed. It takes a long time to get a new mortgage on a mobile home park. Many times a seller, especially someone who does not have a very large profit coming their way, are interested in getting the park into someone else's hands as quickly as possible, and move on to the next deal.
Lease/purchase the park
This is another fairly common construction on purchasing a mobile home park for zero down. Instead of an outright purchase, you lease the park at a set monthly amount, with the option to buy it at a pre-set price in the future. This allows you to make the necessary changes to increase the net income prior to closing.
This construction is especially attractive on parks that are not making sufficient net income to support a mortgage of the amount necessary to buy it.
Conclusion
Zero down deals are still alive and well in mobile home parks. They don't require that you buy bad properties or deals with no income or some other difficult blemish. They are just a standard construction of the affordable housing industry.
Go to www.mobilehomeparkstore.com or call (800) 950-1364 and learn all about mobile home park investing, and our specialty products for investors.
So how do you get a zero down mobile home park deal?
Just watch the listings
Many mobile home parks are listed for sale with seller carry at low amounts down. A 5% or 10% down payment can easily be converted to 0% with a little negotiating. You'll find many such listings on the large internet park listing services, such as Mobilehomeparkstore.com.
The most common negotiating strategy is to identify capital improvements that would cost as much as the proposed down payment, and then tell the seller that you need to reserve the down payment money to make those repairs. After closing, you either skip the repairs, or find a lower cost alternative.
Wrap the existing note
It is often possible to wrap an existing mortgage when buying a mobile home park. What this means is that you do not have to get a new loan, and the seller subordinates his note to the existing first. Here's an example. A seller has a mortgage of $400,000, and he wants to sell his mobile home park for $500,000. Rather than put up a $100,000 down payment and obtain a new loan, you assume the loan of $400,000, and place a second of $100,000 in favor of the seller. You do not put anything down.
Why would a seller do this? Often, it's for speed. It takes a long time to get a new mortgage on a mobile home park. Many times a seller, especially someone who does not have a very large profit coming their way, are interested in getting the park into someone else's hands as quickly as possible, and move on to the next deal.
Lease/purchase the park
This is another fairly common construction on purchasing a mobile home park for zero down. Instead of an outright purchase, you lease the park at a set monthly amount, with the option to buy it at a pre-set price in the future. This allows you to make the necessary changes to increase the net income prior to closing.
This construction is especially attractive on parks that are not making sufficient net income to support a mortgage of the amount necessary to buy it.
Conclusion
Zero down deals are still alive and well in mobile home parks. They don't require that you buy bad properties or deals with no income or some other difficult blemish. They are just a standard construction of the affordable housing industry.
Go to www.mobilehomeparkstore.com or call (800) 950-1364 and learn all about mobile home park investing, and our specialty products for investors.
Tuesday, September 28, 2010
How To Dispose of Ancillary Assets to a Mobile Home Park
Mobile home parks sometimes come with the strangest assets. I have wound up as the owner of everything ranging from used car lots to commercial laundries, and from apartments to single-family homes. How does this happen? Since most mobile home parks are fairly old, the original owner sometimes had additional businesses for rental properties that he owned in his heyday. And when you buy the park, you get the whole works.
What is the asset worth?
The first question to ask is "what is this asset worth, if separated from the park?" This is often a tricky question, because the proximity to the park can be extremely damaging to values, particularly with single-family homes. Nobody really wants to live next door to a mobile home park. I generally use a rule of 50% of market value for a property not adjacent to a mobile home park. Commercial properties, however, do not seem to suffer from the same stigma. I have normally received a price commensurate with properties that have no geographic location near to a mobile home park.
What is the economic impact of selling the asset as opposed to renting it?
The answer to this question almost always points to selling the asset. To truly analyze the income from renting, it is important to include all the costs associated with owning the asset, which includes repair & maintenance, property tax, insurance and, of course, operating costs. I once had a used car lot that was using as much in repair and maintenance as the gross rent. Much of that cost was buried in the mobile home park pro-forma, but it was really the used car lot's problem.
Can you obtain a partial release from the lender?
Even if it is to your advantage to sell the asset, you will not be able to convey title unless the lender is willing to give a partial release of this portion of the property. And the time to ask is now, not once you have begun the process to separate it. In most cases, the lender is often happy to release the portion for the proceeds it is normally hard to have the lender accept anything less than 100% of the amount you receive.
Begin the process of subdividing the property
If you have permission from the bank, then it is time to begin the process or separating the asset from the park. This step is generally called "subdividing the property" making it into two separate pieces. This will require city approval, and you will have to have a survey done of the area to be carved out, as well as go before the planning and zoning commission and often the city council.
You may also have to work out such issues as ingress and egress, especially if you will have to share a common entrance and road with the park.
List the asset for sale
In most cases, utilizing a specialist broker to list and sell your asset is money well spent. Sure, you can put up your own sign but do you really have the qualifications to negotiate price or speak with buyers such a specialized item in a market you don't know that well. When I went to sell the 8-plex apartment complex that came with a park in Shreveport, I enlisted the aid of a real estate broker that specialized in multi-family in Shreveport. As a result, I found a buyer quickly and at a much higher price than I could have ever obtained.
Close on the sale
When you get offers, remember that you are selling an asset that is next to a mobile home park. It is not a time to get proud and have visions of grandeur. Take the first reasonable offer and run with it. Since the offers and interest tends to want after the initial listing of the asset on the market, it is important to treat every offer seriously.
Conclusion
Trimming off and selling all non-mobile home park assets is just good business. If you follow this road map, you should have no problem in maximizing your park's value through converting such assets to cash.
Go to www.mobilehomeparkstore.com or call (800) 950-1364 and learn all about mobile home park investing, and our specialty products for investors.
What is the asset worth?
The first question to ask is "what is this asset worth, if separated from the park?" This is often a tricky question, because the proximity to the park can be extremely damaging to values, particularly with single-family homes. Nobody really wants to live next door to a mobile home park. I generally use a rule of 50% of market value for a property not adjacent to a mobile home park. Commercial properties, however, do not seem to suffer from the same stigma. I have normally received a price commensurate with properties that have no geographic location near to a mobile home park.
What is the economic impact of selling the asset as opposed to renting it?
The answer to this question almost always points to selling the asset. To truly analyze the income from renting, it is important to include all the costs associated with owning the asset, which includes repair & maintenance, property tax, insurance and, of course, operating costs. I once had a used car lot that was using as much in repair and maintenance as the gross rent. Much of that cost was buried in the mobile home park pro-forma, but it was really the used car lot's problem.
Can you obtain a partial release from the lender?
Even if it is to your advantage to sell the asset, you will not be able to convey title unless the lender is willing to give a partial release of this portion of the property. And the time to ask is now, not once you have begun the process to separate it. In most cases, the lender is often happy to release the portion for the proceeds it is normally hard to have the lender accept anything less than 100% of the amount you receive.
Begin the process of subdividing the property
If you have permission from the bank, then it is time to begin the process or separating the asset from the park. This step is generally called "subdividing the property" making it into two separate pieces. This will require city approval, and you will have to have a survey done of the area to be carved out, as well as go before the planning and zoning commission and often the city council.
You may also have to work out such issues as ingress and egress, especially if you will have to share a common entrance and road with the park.
List the asset for sale
In most cases, utilizing a specialist broker to list and sell your asset is money well spent. Sure, you can put up your own sign but do you really have the qualifications to negotiate price or speak with buyers such a specialized item in a market you don't know that well. When I went to sell the 8-plex apartment complex that came with a park in Shreveport, I enlisted the aid of a real estate broker that specialized in multi-family in Shreveport. As a result, I found a buyer quickly and at a much higher price than I could have ever obtained.
Close on the sale
When you get offers, remember that you are selling an asset that is next to a mobile home park. It is not a time to get proud and have visions of grandeur. Take the first reasonable offer and run with it. Since the offers and interest tends to want after the initial listing of the asset on the market, it is important to treat every offer seriously.
Conclusion
Trimming off and selling all non-mobile home park assets is just good business. If you follow this road map, you should have no problem in maximizing your park's value through converting such assets to cash.
Go to www.mobilehomeparkstore.com or call (800) 950-1364 and learn all about mobile home park investing, and our specialty products for investors.
Monday, September 27, 2010
HOW TO RETIRE ON JUST ONE MOBILE HOME PARK
Most mobile home park owners tend to amass a portfolio of several parks, simply because, after acquiring the skill sets, it seems wasteful not to buy "just one more". But, in reality, they only need to buy one mobile home park to be set for life. How can this be?
There are several reasons.
Sufficient scale.
A mobile home park is a mass of different income units. Because of this volume, small improvements in revenue or expenses on just one lot are multiplied by the sheer volume of lots. For example, a small $20 lot rent increase in a 100 space mobile home park yields a cash flow improvement of $2,000 per month.
In a single family home, or a duplex or four-plex, by comparison, a $20 rent increase yields under $100 per month in cash flow.
Opportunity for massive improvements in income.
Many mobile home park sellers are moms and pops with little professional management experience. As a result, there is room for incredible improvement in their operating numbers. Let's just look at three areas that they normally struggle with.
The first is the level of lot rent. Many owners that have had the park for a long time are enormously under-market in their lot rent. If the market rent is $300 per month, and they are charging $150 per month, then there is $150 per month upside. Why would they be so low? What normally happens is that they become too friendly with their tenants, and refuse to raise it out of fear of making "enemies". Another common reason is that they simply don't follow the market or do any research on the lot rent level of their competitors.
The second is the water and sewer expense line item. Many have a leaking system with many abusers that spike the cost up to ridiculous proportions. These issues can be fixed quickly, and the water and sewer cost shifted over to the residents. Since water and sewer is normally 10% of total revenue in a mobile home park, this benefit is enormous.
The third area is management cost. We've seen parks that have a $50,000 per year manager on a 50 space park. How can they be so wasteful? Normally, just like the rent level, they got too friendly with the manager and kept giving them annual raises even when the total compensation was far above the norm. In some cases, the manager is a family member. What's the world record? We've seen $100,000 management packages at parks before. Think you can cut that down?
No future obsolescence.
The nice thing about mobile home parks is that they are incredibly low-tech. There is no great invention coming down the pike to derail them. If you owned a record store in 1960, and thought you could retire on it, you'd have been mistaken when they brought out the CD, internet and ipod. But there is nothing that can alter the need for affordable housing. And the market just keeps getting larger as America gets poorer.
In addition, since you only own the land in a mobile home park, you do not have to worry about saving for building upgrades like replacing roofs or siding. There are few big capital hits you have to save for (or borrow for).
Some practical examples.
If you bought an average 50 space park for $500,000, with $100,000 down, here's what you could expect to do with it after closing.
You might raise the rent $40 per month, for a net gain of $24,000 in cash flow. Then you might submeter the water and bill it back to the tenants, for a savings of another $24,000 per year. And then you might fire the manager and hire a less costly option, for another savings of $10,000 per year. So, in a nutshell, you've increased the cash flow after debt payment by almost $60,000 per year. That's how much you could put in your pocket. And none of these steps required any time, effort or risk on your part. And they did not require any large capital expenditures.
So you'd have $60,000 per year in cash flow from the park, while it is still servicing its debt. And after it's paid off, you'd have over $100,000 of cash flow. All from an investment of $100,000 in the form of the down payment.
Now do you see what we're talking about?
Conclusion.
You truly can retire on just one mobile home park. No other form of real estate investment can make that claim (or at least support it). Mobile home parks produce more investment wealth than any other option.
Go to www.mobilehomeparkstore.com or call (800) 950-1364 and learn all about mobile home park investing, and our specialty products for investors.
There are several reasons.
Sufficient scale.
A mobile home park is a mass of different income units. Because of this volume, small improvements in revenue or expenses on just one lot are multiplied by the sheer volume of lots. For example, a small $20 lot rent increase in a 100 space mobile home park yields a cash flow improvement of $2,000 per month.
In a single family home, or a duplex or four-plex, by comparison, a $20 rent increase yields under $100 per month in cash flow.
Opportunity for massive improvements in income.
Many mobile home park sellers are moms and pops with little professional management experience. As a result, there is room for incredible improvement in their operating numbers. Let's just look at three areas that they normally struggle with.
The first is the level of lot rent. Many owners that have had the park for a long time are enormously under-market in their lot rent. If the market rent is $300 per month, and they are charging $150 per month, then there is $150 per month upside. Why would they be so low? What normally happens is that they become too friendly with their tenants, and refuse to raise it out of fear of making "enemies". Another common reason is that they simply don't follow the market or do any research on the lot rent level of their competitors.
The second is the water and sewer expense line item. Many have a leaking system with many abusers that spike the cost up to ridiculous proportions. These issues can be fixed quickly, and the water and sewer cost shifted over to the residents. Since water and sewer is normally 10% of total revenue in a mobile home park, this benefit is enormous.
The third area is management cost. We've seen parks that have a $50,000 per year manager on a 50 space park. How can they be so wasteful? Normally, just like the rent level, they got too friendly with the manager and kept giving them annual raises even when the total compensation was far above the norm. In some cases, the manager is a family member. What's the world record? We've seen $100,000 management packages at parks before. Think you can cut that down?
No future obsolescence.
The nice thing about mobile home parks is that they are incredibly low-tech. There is no great invention coming down the pike to derail them. If you owned a record store in 1960, and thought you could retire on it, you'd have been mistaken when they brought out the CD, internet and ipod. But there is nothing that can alter the need for affordable housing. And the market just keeps getting larger as America gets poorer.
In addition, since you only own the land in a mobile home park, you do not have to worry about saving for building upgrades like replacing roofs or siding. There are few big capital hits you have to save for (or borrow for).
Some practical examples.
If you bought an average 50 space park for $500,000, with $100,000 down, here's what you could expect to do with it after closing.
You might raise the rent $40 per month, for a net gain of $24,000 in cash flow. Then you might submeter the water and bill it back to the tenants, for a savings of another $24,000 per year. And then you might fire the manager and hire a less costly option, for another savings of $10,000 per year. So, in a nutshell, you've increased the cash flow after debt payment by almost $60,000 per year. That's how much you could put in your pocket. And none of these steps required any time, effort or risk on your part. And they did not require any large capital expenditures.
So you'd have $60,000 per year in cash flow from the park, while it is still servicing its debt. And after it's paid off, you'd have over $100,000 of cash flow. All from an investment of $100,000 in the form of the down payment.
Now do you see what we're talking about?
Conclusion.
You truly can retire on just one mobile home park. No other form of real estate investment can make that claim (or at least support it). Mobile home parks produce more investment wealth than any other option.
Go to www.mobilehomeparkstore.com or call (800) 950-1364 and learn all about mobile home park investing, and our specialty products for investors.
Friday, September 24, 2010
How to Turn Around A Mobile Home Park
When you buy a Mobile Home Park that needs to be turned around (and most parks need some type of turnaround), the first thing you need to do is disengage the prior ownership/management. Face it, if the park is not running like it should be, you will most likely want to start over with a new management team. Even though the prior owner is usually to blame for the poor operations of the park, it is difficult to keep the prior managers that have been trained poorly or incorrectly. So, in most cases, fire everyone and start over. There are always exceptions to the rule, but they are few and far between. I have found that it is easier to train a new manager than to retrain the existing one.
However, when you are firing or not hiring people, you want to stay on good terms with them. Don't tell the owner that he is clueless or the manager that you are not hiring them because they are incompetent. Keep everyone on good terms because you may need to call on these people later to help with issues that may arise such as locating sewer cleanouts or water turnoffs, who to call for a certain problem or issue, tricks on how to get the lift station pump back on, tenant histories, etc. If you completely alienate these people, they will not be willing to answer simple questions down the road that can save you or your new manager time and money.
Also, either before or after the transition to new management, you need to collect as much information as you can. One important piece of information to find out is a list of who has helped out with the repairs and maintenance of the park in the past. This can be the guy that is 70 years old and has puttered around the park for 30 years doing odd jobs, to the previous owner down the street that built the park and knows it inside and out, to the plumbers and electricians that have worked in the park since its inception. Many of these old-timers have great memories and will be able to help you solve problems as they arise. You can never have too many people on your team that may have advice as you go to turning around and operating a mobile home park.
Once you get as much information as possible, you need to develop a turnaround plan. This turnaround plan will begin during your due diligence and then be updated once you take over and then many times after that. The important thing is to write it down and use it as a reference.
The key in devising your plan on turnaround projects is to come up with a specific written plan and then execute it in small steps. Don't try to take on too much at one time. For example, patch the roads now to save some money and then after you have the increased occupancy, and have higher rents and lower expenses and more equity, then just before you are ready to sell or refinance, put your asphalt overlay in then.
Don't go out and buy 25 homes that need complete rehab. Instead buy a good variety of homes in smaller chunks and then as they are rented or sold then buy some more. You will soon learn whether your demand is for the 2005 16' x 80' three bedrooms you can sell for $20,000 or the 1980 14' x 70' two bedroom homes that you can sell for $5,000. Once you know what the demand is for then you should go about filling that demand rather than just making a guess at it.
This turnaround plan will include such things as:
General Cleanup of the Park:
The goal here is to have the residents see that we care about the park and that we will do our part and clean up the common areas, keep the grass mowed, haul out the piles of trash scattered around in hopes of having the residents start to take pride of ownership of their own homes and lots.
The first cleanup of the park is usually on us and we will do a thorough once over cleanup of the park that will include bringing in dumpsters for not only the common areas but also for the residents to use to get rid of the junk in their yards. We stress to them that this is there one time to straighten up and clean up for free. Because the next time, it will be on their dime. If they don't mow their grass or pick up the trash in their yard then we will do it for a fee and these extra fees will be either an additional profit center or a tool to motivate the residents.
We will also work with the residents on a case-by-case basis to help them buy paint, skirting, steps and other similar items that they can't afford to pay for in one big lump sum but can pay an extra $30 per month for if we buy it and make sure it is installed properly. This system of loaning the residents money is usually only for them to do improvements to the outside of their homes and not the inside. The things that we see or that our bankers and future buyers will see.
The typical scenario for us is to have an initial cleanup weekend or weekends until we are satisfied that the biggest part of the work is done. This is the only time that our residents can dispose of appliances and couches for free.
Infrastructure Items:
What needs to be fixed immediately? You want to prioritize this list as the costs can be huge. For example, water that is leaking everywhere that the park owner is paying for is much more important to fix than some potholes here and there.
You will look at things such as water lines, sewer lines, electrical services, gas services, roads, trees, other park structures, etc and then do an inspection of each.
You will make a list of each item and then decide what needs to be fixed now, next year, in five years, and so on.
If the sewer line backs up 5 or 6 times a year and it costs $300 per time to roto rooter, then that needs to be weighed against the cost of replacing the sewer lines. I would much rather spend about $1,500 per year unclogging lines than spend $150,000 up front running new sewer lines.
The items that usually require immediate attention are those that will reduce your risk of loss of both money and residents. Most of the time it is trimming trees, repairing roads, installing water meters, and a general park cleanup.
Existing Park Owned Homes:
Are the existing park owned homes in reasonable repair?
If not, what needs to be done and who will do it? At what cost?
Are they worth fixing? Most of the time the homes are worth fixing when you consider it will cost you about $2,000 to $3,000 to dispose of an old home and then $3,000 to move a new or used home in without including any of the cost of buying and rehabbing the home that you put in to replace the old one. For $3,000 to $5,000 you can make most older homes presentable and attractive to potential purchasers.
What work will you do to them (ie: repair them to a minimal standard to living up to replacing all the carpet, painting, cabinets, new skirting, siding, etc.
Remember it costs about $2,000 to $3,000 to dispose of an old home. If you put that money into the home in repairs and just give it away, you now have a rented lot. If you pull it out, you have still spent that $2,000 to $3,000 and have a vacant lot.
Buying & Selling or Renting Homes:
Will you buy homes to fill lots - how many - what price range - total budget for homes?
For the homes you buy will you rent them or sell them?
Where will the money come from to buy the homes, set them up, and rehab them?
Who will move the homes, set them up, rehab them, and sell them?
Where can you buy the parts from (skirting, doors, etc) and can you get them wholesale?
Preparing Your Budget
Before you ever bought the park you should have prepared a budget and projections of how you will operate the park, upcoming rent raises, items you will pass through to the residents, how to improve collections, who to evict and so on. Sometimes the park you are buying will need nothing more than an adjustment to the rents and getting them to market. This is an easy one as the residents are aware of the rents in neighboring parks and they will expect a rent raise.
We just took over a park that had rents of $90 per month in a market where the rents were in the $250 to $300 range. Crazy Huh? After purchasing while hanging around the park and training the new management, several of the residents came up and most of them asked about the rent raise. The normal question went something like this… "How much is the rent being raised because I am on a fixed income, on disability, between jobs, or name the excuse". The answer was easy and went something like this… "I am not sure yet but the park down the road charges $275 and then another close by park charges $300 and most other parks in this area are in that range. I don't think the rent will go to $300 per month but we will evaluate the market and come up with a fair amount". Everyone seemed to be ok with this answer and a few people said it would be ok if the rent did not go up above $200 or $250 per month. A few weeks later, the residents received their rent raise letter bringing the rents to $250 per month and offering a $50 discount if the rent was paid by the 5th of the month. The only person that we lost over the rent raise was someone that had an RV on one of the lots and was using it as storage. There are a few other issues to deal with in this park but the rent was the big one. With an extra $110 per month per lot the park's cash flow will support the other improvements to be made without a problem.
When you are buying homes, make sure that you budget enough to cover all of the costs of getting the homes setup and ready to go. If you have $100,000 to buy homes with, you can only pay $10,000 per home installed, rehabbed, and ready to go. If you have 50 vacant lots then you may opt to go for lower priced homes first so you can get more of them rather than buying only a few new homes. After all, the lot rent is going to be the same on a new home versus a decent older home. Turning around parks that need to be in-filled are the most difficult, time consuming and costly types of turnarounds. You cannot count on others bringing homes in to fill your vacant lots. It is something you have to do. Don't get suckered into thinking that the dealers will fill your park up.
I was recently talking with a successful investor (new to the MH Business) that was looking at a community with about 300 vacant lots. He was thinking about spending 3 million for the deal with only 100 occupied lots. He thought he could fill the park up within 3 years. I asked him if he had about 3-4 million in additional funds to buy the homes to fill it up. He said no, but had figured that the local dealers would bring homes in and sell them onsite and it would not be a problem filling it up. I know the market where this park is well and also know that there are probably less than 25 new homes being put into communities per year in this market from dealers (and this is a big market). I told him that if he marketed like crazy, offered big move-in specials, and did everything right, that he would be lucky to get 10 homes per year. At that rate, it would take about 30 years to fill the park. This is reality now and unless you are going to buy the homes and move them in, it is difficult to fill lots.
Additional Random Thoughts:
Also remember that a park that has mostly older and smaller homes (more of a trailer park) will need to be much less appealing than the newer park with big lots and newer homes. An older park will attract a different clientele than a 4-5 star park and there is nothing wrong with that. I have no problems owning the oldest parks in town. With older parks, focus on the cleanliness and safety of the park and not new clubhouses, pools, new asphalt, and replacing all the homes with new ones. Instead focus on trying to get the residents to maintain what they have and try to get them to keep the outside painted nicely, the skirting up, a nice set of steps, and junk piles that are at least stacked up nicely. Safety and Cleanliness! Also, I have found it useful to educate these residents on how to keep the rain from coming into the homes with sealant for their roofs and also around the windows. After all, you want the homes to last a long time and water is the biggest enemy.
As you move up to nicer communities, your focus will not really change but you will want to keep up the common areas and amenities a little more. Focus here on keeping the grass mowed, the streets patched, and the entrance inviting and so on. You will also have to enforce your rules stricter as you don't want someone to bring in a pile of junk and a trash heap next to $30,000 and $50,000 homes. Not that you can't allow older homes into the community, you just need to make sure they are kept up well and have good paint outside and attractive skirting.
Remember in the mobile home or manufactured home business, as a community owner, you will make the same amount of money (if not more) from the older homes and communities than you will for the fancy 4 and 5 star ones. For one, you can usually charge the same amount of rent because your residents on the older home parks don't have mortgages and can actually afford to pay the same lot rent as their counterparts in the 4 and 5 star parks that have big mortgages on their homes. Those big 2004 doublewides sure look nice but in many cases they are ticking time bombs with big mortgages on them. The question for many community owners is not if, but when am I going to have to buy that home from Greentree as a repossession to keep it in my park. After all, if I do not buy it then it will be a sad day when the mover shows up to move it down the road to another park.
Another reason that newer and older parks make about the same amount of money is that in older parks your maintenance expenses are usually lower, there are fewer repo's, higher occupancy levels, and less common areas and amenities to worry about.
Converting from large dumpster pickup to individual receptacles. At most parks that are currently on a centralized collection system (dumpsters), we will tend to go toward individual pickup in a short period of time. Not only is this more desirable for the residents, but it also helps to save all the problems with dumpsters. The biggest one that we have experienced is people overloading them with items that don't belong in them as well as being too lazy to actually get the trash into the dumpster. Also, with dumpsters it tends to be a place that both residents and non-residents like to drop off appliances and couches and tables.
Conclusion
Turning around a mobile home park can be a rewarding project but needs to be well laid out in advance with reasonable budgets and expectations. If the turnaround is management related, and you can solve the management problems, these are relatively easy. If the turnaround is market related and the issue is occupancy then strap yourself in and get ready for a bumpy ride. These can be done, but they take lots of time and money.
About the Author
Dave Reynolds is a successful real estate investor that has specialized in the acquisition of Mobile Home and RV Parks for the past 12 years. He has the keen ability to quickly assess deals, cut through hype, measure upside vs. downside risk, and make sound decisions. He has owned and operated over 60 Mobile Home & RV parks over the past 12 years in 16 different states.
Dave received a B.S. in Accounting from Mesa State College in Colorado in 1992 and attended graduate school majoring in Accounting and Taxation at Colorado State University in 1993-1994.
In addition, he acts as a consultant and educator for other mobile home park investors, has authored 4 books, and developed the largest and most respected websites dedicated to Mobile Home & RV Park Industries. These websites which receive over 10 million hits per year can be found at www.mobilehomeparkstore.com, www.mhbay.com and www.rvparkstore.com. Go to www.mobilehomeparkstore.com or call (800) 950-1364 and learn all about mobile home park investing, and our specialty products for investors.
However, when you are firing or not hiring people, you want to stay on good terms with them. Don't tell the owner that he is clueless or the manager that you are not hiring them because they are incompetent. Keep everyone on good terms because you may need to call on these people later to help with issues that may arise such as locating sewer cleanouts or water turnoffs, who to call for a certain problem or issue, tricks on how to get the lift station pump back on, tenant histories, etc. If you completely alienate these people, they will not be willing to answer simple questions down the road that can save you or your new manager time and money.
Also, either before or after the transition to new management, you need to collect as much information as you can. One important piece of information to find out is a list of who has helped out with the repairs and maintenance of the park in the past. This can be the guy that is 70 years old and has puttered around the park for 30 years doing odd jobs, to the previous owner down the street that built the park and knows it inside and out, to the plumbers and electricians that have worked in the park since its inception. Many of these old-timers have great memories and will be able to help you solve problems as they arise. You can never have too many people on your team that may have advice as you go to turning around and operating a mobile home park.
Once you get as much information as possible, you need to develop a turnaround plan. This turnaround plan will begin during your due diligence and then be updated once you take over and then many times after that. The important thing is to write it down and use it as a reference.
The key in devising your plan on turnaround projects is to come up with a specific written plan and then execute it in small steps. Don't try to take on too much at one time. For example, patch the roads now to save some money and then after you have the increased occupancy, and have higher rents and lower expenses and more equity, then just before you are ready to sell or refinance, put your asphalt overlay in then.
Don't go out and buy 25 homes that need complete rehab. Instead buy a good variety of homes in smaller chunks and then as they are rented or sold then buy some more. You will soon learn whether your demand is for the 2005 16' x 80' three bedrooms you can sell for $20,000 or the 1980 14' x 70' two bedroom homes that you can sell for $5,000. Once you know what the demand is for then you should go about filling that demand rather than just making a guess at it.
This turnaround plan will include such things as:
General Cleanup of the Park:
The goal here is to have the residents see that we care about the park and that we will do our part and clean up the common areas, keep the grass mowed, haul out the piles of trash scattered around in hopes of having the residents start to take pride of ownership of their own homes and lots.
The first cleanup of the park is usually on us and we will do a thorough once over cleanup of the park that will include bringing in dumpsters for not only the common areas but also for the residents to use to get rid of the junk in their yards. We stress to them that this is there one time to straighten up and clean up for free. Because the next time, it will be on their dime. If they don't mow their grass or pick up the trash in their yard then we will do it for a fee and these extra fees will be either an additional profit center or a tool to motivate the residents.
We will also work with the residents on a case-by-case basis to help them buy paint, skirting, steps and other similar items that they can't afford to pay for in one big lump sum but can pay an extra $30 per month for if we buy it and make sure it is installed properly. This system of loaning the residents money is usually only for them to do improvements to the outside of their homes and not the inside. The things that we see or that our bankers and future buyers will see.
The typical scenario for us is to have an initial cleanup weekend or weekends until we are satisfied that the biggest part of the work is done. This is the only time that our residents can dispose of appliances and couches for free.
Infrastructure Items:
What needs to be fixed immediately? You want to prioritize this list as the costs can be huge. For example, water that is leaking everywhere that the park owner is paying for is much more important to fix than some potholes here and there.
You will look at things such as water lines, sewer lines, electrical services, gas services, roads, trees, other park structures, etc and then do an inspection of each.
You will make a list of each item and then decide what needs to be fixed now, next year, in five years, and so on.
If the sewer line backs up 5 or 6 times a year and it costs $300 per time to roto rooter, then that needs to be weighed against the cost of replacing the sewer lines. I would much rather spend about $1,500 per year unclogging lines than spend $150,000 up front running new sewer lines.
The items that usually require immediate attention are those that will reduce your risk of loss of both money and residents. Most of the time it is trimming trees, repairing roads, installing water meters, and a general park cleanup.
Existing Park Owned Homes:
Are the existing park owned homes in reasonable repair?
If not, what needs to be done and who will do it? At what cost?
Are they worth fixing? Most of the time the homes are worth fixing when you consider it will cost you about $2,000 to $3,000 to dispose of an old home and then $3,000 to move a new or used home in without including any of the cost of buying and rehabbing the home that you put in to replace the old one. For $3,000 to $5,000 you can make most older homes presentable and attractive to potential purchasers.
What work will you do to them (ie: repair them to a minimal standard to living up to replacing all the carpet, painting, cabinets, new skirting, siding, etc.
Remember it costs about $2,000 to $3,000 to dispose of an old home. If you put that money into the home in repairs and just give it away, you now have a rented lot. If you pull it out, you have still spent that $2,000 to $3,000 and have a vacant lot.
Buying & Selling or Renting Homes:
Will you buy homes to fill lots - how many - what price range - total budget for homes?
For the homes you buy will you rent them or sell them?
Where will the money come from to buy the homes, set them up, and rehab them?
Who will move the homes, set them up, rehab them, and sell them?
Where can you buy the parts from (skirting, doors, etc) and can you get them wholesale?
Preparing Your Budget
Before you ever bought the park you should have prepared a budget and projections of how you will operate the park, upcoming rent raises, items you will pass through to the residents, how to improve collections, who to evict and so on. Sometimes the park you are buying will need nothing more than an adjustment to the rents and getting them to market. This is an easy one as the residents are aware of the rents in neighboring parks and they will expect a rent raise.
We just took over a park that had rents of $90 per month in a market where the rents were in the $250 to $300 range. Crazy Huh? After purchasing while hanging around the park and training the new management, several of the residents came up and most of them asked about the rent raise. The normal question went something like this… "How much is the rent being raised because I am on a fixed income, on disability, between jobs, or name the excuse". The answer was easy and went something like this… "I am not sure yet but the park down the road charges $275 and then another close by park charges $300 and most other parks in this area are in that range. I don't think the rent will go to $300 per month but we will evaluate the market and come up with a fair amount". Everyone seemed to be ok with this answer and a few people said it would be ok if the rent did not go up above $200 or $250 per month. A few weeks later, the residents received their rent raise letter bringing the rents to $250 per month and offering a $50 discount if the rent was paid by the 5th of the month. The only person that we lost over the rent raise was someone that had an RV on one of the lots and was using it as storage. There are a few other issues to deal with in this park but the rent was the big one. With an extra $110 per month per lot the park's cash flow will support the other improvements to be made without a problem.
When you are buying homes, make sure that you budget enough to cover all of the costs of getting the homes setup and ready to go. If you have $100,000 to buy homes with, you can only pay $10,000 per home installed, rehabbed, and ready to go. If you have 50 vacant lots then you may opt to go for lower priced homes first so you can get more of them rather than buying only a few new homes. After all, the lot rent is going to be the same on a new home versus a decent older home. Turning around parks that need to be in-filled are the most difficult, time consuming and costly types of turnarounds. You cannot count on others bringing homes in to fill your vacant lots. It is something you have to do. Don't get suckered into thinking that the dealers will fill your park up.
I was recently talking with a successful investor (new to the MH Business) that was looking at a community with about 300 vacant lots. He was thinking about spending 3 million for the deal with only 100 occupied lots. He thought he could fill the park up within 3 years. I asked him if he had about 3-4 million in additional funds to buy the homes to fill it up. He said no, but had figured that the local dealers would bring homes in and sell them onsite and it would not be a problem filling it up. I know the market where this park is well and also know that there are probably less than 25 new homes being put into communities per year in this market from dealers (and this is a big market). I told him that if he marketed like crazy, offered big move-in specials, and did everything right, that he would be lucky to get 10 homes per year. At that rate, it would take about 30 years to fill the park. This is reality now and unless you are going to buy the homes and move them in, it is difficult to fill lots.
Additional Random Thoughts:
Also remember that a park that has mostly older and smaller homes (more of a trailer park) will need to be much less appealing than the newer park with big lots and newer homes. An older park will attract a different clientele than a 4-5 star park and there is nothing wrong with that. I have no problems owning the oldest parks in town. With older parks, focus on the cleanliness and safety of the park and not new clubhouses, pools, new asphalt, and replacing all the homes with new ones. Instead focus on trying to get the residents to maintain what they have and try to get them to keep the outside painted nicely, the skirting up, a nice set of steps, and junk piles that are at least stacked up nicely. Safety and Cleanliness! Also, I have found it useful to educate these residents on how to keep the rain from coming into the homes with sealant for their roofs and also around the windows. After all, you want the homes to last a long time and water is the biggest enemy.
As you move up to nicer communities, your focus will not really change but you will want to keep up the common areas and amenities a little more. Focus here on keeping the grass mowed, the streets patched, and the entrance inviting and so on. You will also have to enforce your rules stricter as you don't want someone to bring in a pile of junk and a trash heap next to $30,000 and $50,000 homes. Not that you can't allow older homes into the community, you just need to make sure they are kept up well and have good paint outside and attractive skirting.
Remember in the mobile home or manufactured home business, as a community owner, you will make the same amount of money (if not more) from the older homes and communities than you will for the fancy 4 and 5 star ones. For one, you can usually charge the same amount of rent because your residents on the older home parks don't have mortgages and can actually afford to pay the same lot rent as their counterparts in the 4 and 5 star parks that have big mortgages on their homes. Those big 2004 doublewides sure look nice but in many cases they are ticking time bombs with big mortgages on them. The question for many community owners is not if, but when am I going to have to buy that home from Greentree as a repossession to keep it in my park. After all, if I do not buy it then it will be a sad day when the mover shows up to move it down the road to another park.
Another reason that newer and older parks make about the same amount of money is that in older parks your maintenance expenses are usually lower, there are fewer repo's, higher occupancy levels, and less common areas and amenities to worry about.
Converting from large dumpster pickup to individual receptacles. At most parks that are currently on a centralized collection system (dumpsters), we will tend to go toward individual pickup in a short period of time. Not only is this more desirable for the residents, but it also helps to save all the problems with dumpsters. The biggest one that we have experienced is people overloading them with items that don't belong in them as well as being too lazy to actually get the trash into the dumpster. Also, with dumpsters it tends to be a place that both residents and non-residents like to drop off appliances and couches and tables.
Conclusion
Turning around a mobile home park can be a rewarding project but needs to be well laid out in advance with reasonable budgets and expectations. If the turnaround is management related, and you can solve the management problems, these are relatively easy. If the turnaround is market related and the issue is occupancy then strap yourself in and get ready for a bumpy ride. These can be done, but they take lots of time and money.
About the Author
Dave Reynolds is a successful real estate investor that has specialized in the acquisition of Mobile Home and RV Parks for the past 12 years. He has the keen ability to quickly assess deals, cut through hype, measure upside vs. downside risk, and make sound decisions. He has owned and operated over 60 Mobile Home & RV parks over the past 12 years in 16 different states.
Dave received a B.S. in Accounting from Mesa State College in Colorado in 1992 and attended graduate school majoring in Accounting and Taxation at Colorado State University in 1993-1994.
In addition, he acts as a consultant and educator for other mobile home park investors, has authored 4 books, and developed the largest and most respected websites dedicated to Mobile Home & RV Park Industries. These websites which receive over 10 million hits per year can be found at www.mobilehomeparkstore.com, www.mhbay.com and www.rvparkstore.com. Go to www.mobilehomeparkstore.com or call (800) 950-1364 and learn all about mobile home park investing, and our specialty products for investors.
Thursday, September 23, 2010
THE MOBILE HOME INDUSTRY TURNAROUND PLAN
Our industry continues to be plagued by declining sales of new manufactured homes going into mobile home parks and communities nationwide. With only around 50,000 new home shipments in 2009 we need to figure out how to get those numbers back up to 100,000 for 2010 and steadily grow back to 200,000 plus home sales per year. How do we do that?
Before I answer that question consider why someone would want to live in a mobile home park or manufactured home community in the first place. This is relatively simple mobile home parks are (or should be) the most affordable detached form of housing there is. In most cases, they are still the most affordable detached form of housing, but in some markets this has changed due to high monthly lot rents and mortgages on the homes themselves. At a lot rent of $500.00 per month and a mortgage also of $500.00 per month, our customers have a lot of options especially with low interest rates. They can buy single family homes, townhomes, condos, or rent nice apartments.
In many of the markets with these higher lot rents, many of the newer communities are struggling while the older mobile home and trailer parks are still doing quite well. The difference here is due to the "package" of" lot rent plus home mortgage". This has become apparent at our mobile home park investing boot camps that we have held in Denver, CO over the past couple of years. You will see a nice 4 star community with 30% vacancy nearby an older 1 star park with only 5% vacancy and in many cases the monthly lot rent is about the same! The big difference between the two is that the older park has homes that are paid off and the newer community has homes that are upside down on their mortgages and continue to get repossessed as the homeowners get frustrated with the monthly rent hikes and the time it is taking to pay down their mortgages.
This repossession problem has been plaguing community owners for the past 10 years and it has forced many of us to either "buy our occupancy" or see the park owner across town go to Greentree or 21st Mortgage and buy the home to move to their community. There are many park owners out there that have just given up and stopped buying all these repossessed homes as they were tired of seeing their cash flow go to buying homes or they just ran out of money to buy the homes. The newer communities that have kept high occupancy are those that either had deep pockets or else were able to keep their rents lower in order to push the value of the homes up. In most cases, the value of the home is indirectly proportionate to the lot rent. Higher lot rents = lower home values. As an example, I have been able to purchase many late model singlewide homes in the Denver market where rents approach $600.00 per month for under $10,000 each. I can buy these homes and move them 200 miles east and sell them for $18,000 to $20,000 all day long in parks where my lot rents are under $200.00 per month.
Back in the late 1990's and early 2000's we all got real greedy and started to put into action the problems we face today. Park owners started raising rents like crazy and in the meantime played hardball with all finance companies trying to force them to pay all the back lot rent and move the homes out of the community so they could fill the lot with another new home. This caused a lot of bad feelings between the finance companies and dealers. The dealers were greedy because they could get just about anyone financed for a new home at whatever price they were asking for the home. And the lenders made a too large a percentage of their loans to those that were unqualified. The manufacturers started building more doublewide homes and homes that were more upscale and pricey that would net them a better profit per home. We all messed up to varying degrees.
The smart park owner would have forged a relationship with the reps of Greentree, Conseco, 21st, Chase, and all the other lenders out there. They should have forgiven the back rent and offered some type of incentive to forgive the back rent and try to keep the home in the park. The park owner could have helped in securing the home, cleaning it up, showing it to prospective buyers in order to help offset the losses the banks were carrying around. However, just like anything that involves dealing with the government or large companies, trying to cut through the red tape was a hassle and who knew that new homes would no longer show up in our communities every month.
This business was built around the affordability concept and we need to get back to our roots of being affordable especially with the recession in full circle right now. People need affordable homes to live in. As long as the homes are affordable we then need to focus on financing. We need lenders that will do chattel loans for homes that go into parks.
Fast forward to 2010 and beyond. Park owners are tired of having to buy occupancy, retailers are tired of losing money or closing shop because they can't sell homes and get them financed, and manufacturers didn't really want to go bankrupt due to the same problems the retailers have, and the prior lenders are really tired of getting burned on a home that they repossess and end up selling for 30% of the remaining loan amount plus getting stuck paying back taxes lot rent.
So how do the manufacturers get back to shipping 200,000 homes per year with 25-50% of those ending up in communities to fill those vacant spaces? I think that we all need to band together and come up with some type of program that is a win-win for all parties. I have given this a lot of thought and have come up with an idea that I think would work but it will take action from Manufacturers, Retailers, Lenders, and Community Owners.
First of all, manufacturers, let's focus on building affordable homes. I would define an affordable home as a 16' x 80' three bedroom and two bath home in the $25,000.00 to $30,000.00 range setup and ready to be lived in. This will include the markup for the retailer.
Next, park owners will need to play a huge role in all of this. Why? Because we as park owners are going to have the long term benefit of the homes coming into our parks in the form of lot rent and increased value by renting those extra lots.
So the park owners, manufacturers, and retailers are going to have to work together and create a package that will attract lenders that will make loans with reasonable terms. How about 10% down with an amortization of 12 years at 8.5% interest for a total loan of $27,000? That would equate to a mortgage payment of $300.00 per month. With a short term and good interest rate, the consumer will be getting a good deal and will be building equity instead of losing it.
The next step will be to create an insurance policy or fund for the lender so they do not repeat the process of getting burned on repossessed homes. This insurance policy will be paid for by each sector of the industry with the majority of it being paid by the manufacturers, retailers, lenders, and park owners.
Using our new pricing model of $25,000 to $30,000 homes with the previously mentioned loan terms, we come up with an estimate of the default ratio. In this case, let's estimate that 1 out of every 10 homes will end up being repossessed and for the sake of simplicity estimate that each repossessed home will cost the lender $20,000 by the time they pay attorney fees and resell the home for a loss. So, in this sample scenario, we have a loss of $20,000 for every 10 homes or $2,000 per home. If we come up with a way to insure against this loss of $2,000 per home with all sectors still making a reasonable profit then we have solved the entire problem.
Going back to the insurance policy or fund, as a park owner I would gladly contribute $2,000 to the fund for a brand new home that is moved into any one of my parks all day long as long as the home is in this price range with the loan terms previously discussed. I believe that just about every park owner out there would do the same. However, on a home priced in the $50,000 to $75,000 range I would not want to contribute one penny to the fund because I don't think that home will ever be paid off in greater than 95% of the communities out there.
However, we have to hold everyone accountable. So, manufacturers, retailers, and lenders should also contribute something as well. I would propose that the park owners pay of the cost and the other three sectors share the other of the cost.
I would also propose that park owners work closely with the lender when a home is repossessed to help get that home ready to be sold again as quickly as possible. First off, the park owner cannot charge the lender the back rent or any rent until the home is sold again. So it will be in the best interest for the park owner to get that home ready as soon as possible. There are several potential solutions to minimize the loss to the lender as well as the park owner on lost rent. Remember, we allocated $20,000 in losses for every home that is repossessed. So, if we can minimize this loss, then we are a step ahead already.
Solution 1: Lenders can sell the home to the park owner for somewhere in the 50-100% of the outstanding balance due on the loan depending on the home condition and remaining balance due on the loan. The lender will finance this amount to the park owner who will in turn either rent the home out to cover the payments or sell the home with owner financing so that it covers their loan payments to the lender. In this scenario, if the park owner pays $15,000 for the home, the lender will probably cut their losses from $20,000 to $10,000.
Solution 2: Park owners will work with the lender to get the home ready to sell and then will bring potential buyers to the lender for approval. Once again, the lender will sell the home for 50-100% of the outstanding balance due on the loan depending on the home condition and remaining balance due on the loan. The new buyer will step in and make payments to the lender and once again the lender should be able to cut their losses down to $10,000 or less by offering financing on these repossessed homes.
Other Solutions: There are several variations of how this may or may not work so let's get creative. We can enlist the help of the local retailers to help sell these homes located in parks as well. We just have to get away from the model of park owners requiring lenders to pay back lot rent and then pulling the homes out of the park to be placed on a retailer or storage lot. The smart park owners want to keep good homes in the park and will work with the other sectors to accomplish this goal.
Once we come up with a plan that works to get new homes coming to our communities again, we can't stop there and the park owners need to avoid getting greedy again. To enact this plan successfully, we may need to reduce our monthly space rent on those lots that are being filled by the new homes. If our new customers are going to have a $300.00 per month mortgage for 12 years, we can't price them out of the market. On a park that has lot rent of $600.00 per month, the rent may have to drop to $400.00 per month with a limit to how much it can increase per year while the home loan is being paid down. Remember, that you would never have rented that lot in the first place had that new home not come in under this new program so it is time to face reality. And the same goes for those park owners that have rent at $200.00 per month. Don't think that once you hit that 100% occupancy mark that you can double your rent over 2 years. It didn't work the last time so it is time to learn from our mistakes.
I am tired of hearing about a decrease in shipments to all time lows and a manufactured housing corporate stock prices falling, and manufacturers filing for bankruptcy, and seeing many beautiful communities seeing a net loss in occupancy year after year. Mobile Home Parks and Manufactured Home Communities should be offering the BEST VALUE to the consumer for AFFORDABLE HOUSING. We are in a recession and what better time to go back to our roots and glory days and not gouge the consumer and lenders and make reasonable returns on our investments.
If you have any thoughts or suggestions on this article feel free to email Dave Reynolds at dave@mhps.com or call 1-800-950-1364.
It is estimated that 5,000 mobile home park transactions have been completed through the use of the website alone and Dave was able to observe and learn the business, markets, values, and the entire industry. In June of 2008, Dave Reynolds and his partner, Frank Rolfe, another experienced mobile home park investor, started conducting Mobile Home Park Bootcamps held 4 times per year. These bootcamps have been well received and sold out each time.
Before I answer that question consider why someone would want to live in a mobile home park or manufactured home community in the first place. This is relatively simple mobile home parks are (or should be) the most affordable detached form of housing there is. In most cases, they are still the most affordable detached form of housing, but in some markets this has changed due to high monthly lot rents and mortgages on the homes themselves. At a lot rent of $500.00 per month and a mortgage also of $500.00 per month, our customers have a lot of options especially with low interest rates. They can buy single family homes, townhomes, condos, or rent nice apartments.
In many of the markets with these higher lot rents, many of the newer communities are struggling while the older mobile home and trailer parks are still doing quite well. The difference here is due to the "package" of" lot rent plus home mortgage". This has become apparent at our mobile home park investing boot camps that we have held in Denver, CO over the past couple of years. You will see a nice 4 star community with 30% vacancy nearby an older 1 star park with only 5% vacancy and in many cases the monthly lot rent is about the same! The big difference between the two is that the older park has homes that are paid off and the newer community has homes that are upside down on their mortgages and continue to get repossessed as the homeowners get frustrated with the monthly rent hikes and the time it is taking to pay down their mortgages.
This repossession problem has been plaguing community owners for the past 10 years and it has forced many of us to either "buy our occupancy" or see the park owner across town go to Greentree or 21st Mortgage and buy the home to move to their community. There are many park owners out there that have just given up and stopped buying all these repossessed homes as they were tired of seeing their cash flow go to buying homes or they just ran out of money to buy the homes. The newer communities that have kept high occupancy are those that either had deep pockets or else were able to keep their rents lower in order to push the value of the homes up. In most cases, the value of the home is indirectly proportionate to the lot rent. Higher lot rents = lower home values. As an example, I have been able to purchase many late model singlewide homes in the Denver market where rents approach $600.00 per month for under $10,000 each. I can buy these homes and move them 200 miles east and sell them for $18,000 to $20,000 all day long in parks where my lot rents are under $200.00 per month.
Back in the late 1990's and early 2000's we all got real greedy and started to put into action the problems we face today. Park owners started raising rents like crazy and in the meantime played hardball with all finance companies trying to force them to pay all the back lot rent and move the homes out of the community so they could fill the lot with another new home. This caused a lot of bad feelings between the finance companies and dealers. The dealers were greedy because they could get just about anyone financed for a new home at whatever price they were asking for the home. And the lenders made a too large a percentage of their loans to those that were unqualified. The manufacturers started building more doublewide homes and homes that were more upscale and pricey that would net them a better profit per home. We all messed up to varying degrees.
The smart park owner would have forged a relationship with the reps of Greentree, Conseco, 21st, Chase, and all the other lenders out there. They should have forgiven the back rent and offered some type of incentive to forgive the back rent and try to keep the home in the park. The park owner could have helped in securing the home, cleaning it up, showing it to prospective buyers in order to help offset the losses the banks were carrying around. However, just like anything that involves dealing with the government or large companies, trying to cut through the red tape was a hassle and who knew that new homes would no longer show up in our communities every month.
This business was built around the affordability concept and we need to get back to our roots of being affordable especially with the recession in full circle right now. People need affordable homes to live in. As long as the homes are affordable we then need to focus on financing. We need lenders that will do chattel loans for homes that go into parks.
Fast forward to 2010 and beyond. Park owners are tired of having to buy occupancy, retailers are tired of losing money or closing shop because they can't sell homes and get them financed, and manufacturers didn't really want to go bankrupt due to the same problems the retailers have, and the prior lenders are really tired of getting burned on a home that they repossess and end up selling for 30% of the remaining loan amount plus getting stuck paying back taxes lot rent.
So how do the manufacturers get back to shipping 200,000 homes per year with 25-50% of those ending up in communities to fill those vacant spaces? I think that we all need to band together and come up with some type of program that is a win-win for all parties. I have given this a lot of thought and have come up with an idea that I think would work but it will take action from Manufacturers, Retailers, Lenders, and Community Owners.
First of all, manufacturers, let's focus on building affordable homes. I would define an affordable home as a 16' x 80' three bedroom and two bath home in the $25,000.00 to $30,000.00 range setup and ready to be lived in. This will include the markup for the retailer.
Next, park owners will need to play a huge role in all of this. Why? Because we as park owners are going to have the long term benefit of the homes coming into our parks in the form of lot rent and increased value by renting those extra lots.
So the park owners, manufacturers, and retailers are going to have to work together and create a package that will attract lenders that will make loans with reasonable terms. How about 10% down with an amortization of 12 years at 8.5% interest for a total loan of $27,000? That would equate to a mortgage payment of $300.00 per month. With a short term and good interest rate, the consumer will be getting a good deal and will be building equity instead of losing it.
The next step will be to create an insurance policy or fund for the lender so they do not repeat the process of getting burned on repossessed homes. This insurance policy will be paid for by each sector of the industry with the majority of it being paid by the manufacturers, retailers, lenders, and park owners.
Using our new pricing model of $25,000 to $30,000 homes with the previously mentioned loan terms, we come up with an estimate of the default ratio. In this case, let's estimate that 1 out of every 10 homes will end up being repossessed and for the sake of simplicity estimate that each repossessed home will cost the lender $20,000 by the time they pay attorney fees and resell the home for a loss. So, in this sample scenario, we have a loss of $20,000 for every 10 homes or $2,000 per home. If we come up with a way to insure against this loss of $2,000 per home with all sectors still making a reasonable profit then we have solved the entire problem.
Going back to the insurance policy or fund, as a park owner I would gladly contribute $2,000 to the fund for a brand new home that is moved into any one of my parks all day long as long as the home is in this price range with the loan terms previously discussed. I believe that just about every park owner out there would do the same. However, on a home priced in the $50,000 to $75,000 range I would not want to contribute one penny to the fund because I don't think that home will ever be paid off in greater than 95% of the communities out there.
However, we have to hold everyone accountable. So, manufacturers, retailers, and lenders should also contribute something as well. I would propose that the park owners pay of the cost and the other three sectors share the other of the cost.
I would also propose that park owners work closely with the lender when a home is repossessed to help get that home ready to be sold again as quickly as possible. First off, the park owner cannot charge the lender the back rent or any rent until the home is sold again. So it will be in the best interest for the park owner to get that home ready as soon as possible. There are several potential solutions to minimize the loss to the lender as well as the park owner on lost rent. Remember, we allocated $20,000 in losses for every home that is repossessed. So, if we can minimize this loss, then we are a step ahead already.
Solution 1: Lenders can sell the home to the park owner for somewhere in the 50-100% of the outstanding balance due on the loan depending on the home condition and remaining balance due on the loan. The lender will finance this amount to the park owner who will in turn either rent the home out to cover the payments or sell the home with owner financing so that it covers their loan payments to the lender. In this scenario, if the park owner pays $15,000 for the home, the lender will probably cut their losses from $20,000 to $10,000.
Solution 2: Park owners will work with the lender to get the home ready to sell and then will bring potential buyers to the lender for approval. Once again, the lender will sell the home for 50-100% of the outstanding balance due on the loan depending on the home condition and remaining balance due on the loan. The new buyer will step in and make payments to the lender and once again the lender should be able to cut their losses down to $10,000 or less by offering financing on these repossessed homes.
Other Solutions: There are several variations of how this may or may not work so let's get creative. We can enlist the help of the local retailers to help sell these homes located in parks as well. We just have to get away from the model of park owners requiring lenders to pay back lot rent and then pulling the homes out of the park to be placed on a retailer or storage lot. The smart park owners want to keep good homes in the park and will work with the other sectors to accomplish this goal.
Once we come up with a plan that works to get new homes coming to our communities again, we can't stop there and the park owners need to avoid getting greedy again. To enact this plan successfully, we may need to reduce our monthly space rent on those lots that are being filled by the new homes. If our new customers are going to have a $300.00 per month mortgage for 12 years, we can't price them out of the market. On a park that has lot rent of $600.00 per month, the rent may have to drop to $400.00 per month with a limit to how much it can increase per year while the home loan is being paid down. Remember, that you would never have rented that lot in the first place had that new home not come in under this new program so it is time to face reality. And the same goes for those park owners that have rent at $200.00 per month. Don't think that once you hit that 100% occupancy mark that you can double your rent over 2 years. It didn't work the last time so it is time to learn from our mistakes.
I am tired of hearing about a decrease in shipments to all time lows and a manufactured housing corporate stock prices falling, and manufacturers filing for bankruptcy, and seeing many beautiful communities seeing a net loss in occupancy year after year. Mobile Home Parks and Manufactured Home Communities should be offering the BEST VALUE to the consumer for AFFORDABLE HOUSING. We are in a recession and what better time to go back to our roots and glory days and not gouge the consumer and lenders and make reasonable returns on our investments.
If you have any thoughts or suggestions on this article feel free to email Dave Reynolds at dave@mhps.com or call 1-800-950-1364.
It is estimated that 5,000 mobile home park transactions have been completed through the use of the website alone and Dave was able to observe and learn the business, markets, values, and the entire industry. In June of 2008, Dave Reynolds and his partner, Frank Rolfe, another experienced mobile home park investor, started conducting Mobile Home Park Bootcamps held 4 times per year. These bootcamps have been well received and sold out each time.
Friday, September 17, 2010
Top Ten Reasons to Invest in Self-Storage
1) Higher cap rates and cash-on-cash returns than most other forms of commercial real estate.
Self-storage facilities historically trade for around 2 points higher in yield than multi-family, retail and industrial properties. If the apartment cap rate in a market, for example, is 7%, then self-storage would probably sell at a 9% cap rate.
2) Lower expense ratio than most other forms of commercial real estate.
Due to the unique function of renting storage area, the costs in operating self-storage are traditionally lower than most other asset types. An apartment complex, for example, has very high management, utility and repair costs. None of these really apply to self-storage.
3) Diversity of tenants.
A typical self-storage facility may have 400 tenants. A typical commercial building has normally one or two. Since the income stream is dependent on many separate, small units, there is much greater safety in that income stream than situations where you are fully dependent on just one or two tenants.
4) Superior delinquency process.
When a tenant does not pay in a self-storage facility, the laws are in place to get that tenant out within 45 to 60 days. They also provide for auctioning the contents, to reduce the amount of indebtedness or, in many cases, to cure it completely. In apartments, for example, the process can take months and, even then, you have no way to recover any rent owed.
5) Month-to-month tenancy.
In self-storage, most tenants are on a month-to-month lease. This allows you to move rapidly to increase rent when desired. In an apartment complex or industrial building, for example, rents are often multi-year, and cannot be increased until the rent anniversary.
6) No rent regulation.
There are no current laws, to our knowledge, that restrict a self-storage owner from increasing rent at any time, subject to the rules of due notice. All forms of multi-family, in some states, are subject to rent controls and other tenant-friendly regulations.
7) Easy management.
Managing a self-storage facility is remarkable easy. You show a space, rent it, sell a lock, and follow along with the monthly payment. When someone moves out, it’s pretty much “sweep and go”. Compare this to the normal multi-family or retail center.
8) Demand projections are favorable.
Self-storage demand continues to rise dramatically, as more people move around or downsize and want to store some of their “stuff”. There are no changes apparent in the future that will reduce this demand.
9) Availability of debt.
Due to the existence of several public companies dealing in the ownership of self-storage facilities, as well as many other private REITS, there has been an enormous amount of education for lenders as to the attractive attributes to self-storage assets. Obtaining bank financing for self-storage facilities, in most cases, can be successfully completed. This leverage results in higher returns.
10) No on-site tenant equals low liability.
Most self-storage tenants are only on-site for brief amounts of time and, even then, only a few times per year. As a result, they are not around to have the typical accidents and other liability claims that, for example, apartments do. In a world of litigation, it’s nice not to have suits for black mold, slips and falls, and the many other types of legal woes that plague multi-family owners.
Self-storage facilities historically trade for around 2 points higher in yield than multi-family, retail and industrial properties. If the apartment cap rate in a market, for example, is 7%, then self-storage would probably sell at a 9% cap rate.
2) Lower expense ratio than most other forms of commercial real estate.
Due to the unique function of renting storage area, the costs in operating self-storage are traditionally lower than most other asset types. An apartment complex, for example, has very high management, utility and repair costs. None of these really apply to self-storage.
3) Diversity of tenants.
A typical self-storage facility may have 400 tenants. A typical commercial building has normally one or two. Since the income stream is dependent on many separate, small units, there is much greater safety in that income stream than situations where you are fully dependent on just one or two tenants.
4) Superior delinquency process.
When a tenant does not pay in a self-storage facility, the laws are in place to get that tenant out within 45 to 60 days. They also provide for auctioning the contents, to reduce the amount of indebtedness or, in many cases, to cure it completely. In apartments, for example, the process can take months and, even then, you have no way to recover any rent owed.
5) Month-to-month tenancy.
In self-storage, most tenants are on a month-to-month lease. This allows you to move rapidly to increase rent when desired. In an apartment complex or industrial building, for example, rents are often multi-year, and cannot be increased until the rent anniversary.
6) No rent regulation.
There are no current laws, to our knowledge, that restrict a self-storage owner from increasing rent at any time, subject to the rules of due notice. All forms of multi-family, in some states, are subject to rent controls and other tenant-friendly regulations.
7) Easy management.
Managing a self-storage facility is remarkable easy. You show a space, rent it, sell a lock, and follow along with the monthly payment. When someone moves out, it’s pretty much “sweep and go”. Compare this to the normal multi-family or retail center.
8) Demand projections are favorable.
Self-storage demand continues to rise dramatically, as more people move around or downsize and want to store some of their “stuff”. There are no changes apparent in the future that will reduce this demand.
9) Availability of debt.
Due to the existence of several public companies dealing in the ownership of self-storage facilities, as well as many other private REITS, there has been an enormous amount of education for lenders as to the attractive attributes to self-storage assets. Obtaining bank financing for self-storage facilities, in most cases, can be successfully completed. This leverage results in higher returns.
10) No on-site tenant equals low liability.
Most self-storage tenants are only on-site for brief amounts of time and, even then, only a few times per year. As a result, they are not around to have the typical accidents and other liability claims that, for example, apartments do. In a world of litigation, it’s nice not to have suits for black mold, slips and falls, and the many other types of legal woes that plague multi-family owners.
Wednesday, September 15, 2010
How To Make $100,000 A Year Cash Flow With One Mobile Home Park Investment
With the national economy in free fall, and millions of jobs being cut across all industry segments, many people are trying to formulate a plan to replace their income if they get laid off. And to many people, that income can approach $100,000 or more. So how do you replace $100,000 of income. For many people, the answer may be in a good old fashioned trailer park.
The type of park you'll need
To make an immediate $100,000 in cash flow with a mobile home park, you'll need to find a park that has around 80 lots. A park with 80 lots is going to cost around $800,000 and will require about $160,000 down (although in select cases, you may be able to get away with $80,000 down).
The park will need to have city water and city sewer services, and be in a market of at least 100,000 population.
How the deal must be structured
You will need to buy the park with seller financing. You'll want to put between 10% and 20% down, and the note should be non-recourse. Try and get a note length of at least 7 years, so that you have plenty of time to refinance it before the loan comes due. If you are unable to seller finance it, you will be burdened with two things: 1) a larger down payment, as banks right now want around 25% down and 2) banks will only give you recourse debt.
How to create the $100,000 of cash flow
Your goal is to create an additional $100 per month of cash flow per pad. You basically have two components to this 1) raise revenue and 2) cut costs. Let's go over raising revenue first.
Mobile home park residents are at a great disadvantage when it comes to raising rents. It costs them $3,000 to move their home. So unless they have $3,000 in cash burning a whole in their pocket, they really have no way to move out if they don't like the new rent amount.
Most parks you can find for sale are under-market in their rent. So you'll need to find one that is $50 per month under market � which is not that hard to do. That $50 rent increase is going to get you half way to your $100,000 per year goal.
In some parks, you will also find vacant park-owned mobile homes. Getting these back in service may also be a critical path to getting the rent up at least $50 per pad.
Now let's look at the expenses. The single largest cost in any mobile home park is the water and sewer. In most parks it equals 10% of the total revenue. So this is your first stop in trying to get the costs down. Often you can accomplish this with finding and fixing leaks in the system, or leaks in mobile homes. Other times, you will need to separately sub-meter each space to make sure that the tenant conserves. And in many cases, you'll want to bill the customer for their own service.
The second big area to attack is the management cost. In many parks, the manager that is getting paid $30,000 per year can be replaced for 1/3 of that. That one step alone can often get you $20 per pad per month in savings.
Here's the score card.
Getting that $100,000 of cash flow is predicated on raising rents and lowering costs an average of $100 per month per lot. If you can get that done, then you will have 80 lots x $100 per month = $96,000 of cash flow per year. But that's not all. You also have to factor in your cash-on-cash return on the money you put down. That will push you over the $100,000 mark.
Next steps.
As the mobile home park industry is an extremely odd niche, it will definitely be in your favor to learn more about it, by taking a course on mobile home park investing. You can also find thousands of parks for sale without even leaving your house, by visiting such sites as Mobilehomeparkstore.com and Loopnet.com.
The economy isn't wasting any time falling apart. Should you be wasting time not getting started?
The type of park you'll need
To make an immediate $100,000 in cash flow with a mobile home park, you'll need to find a park that has around 80 lots. A park with 80 lots is going to cost around $800,000 and will require about $160,000 down (although in select cases, you may be able to get away with $80,000 down).
The park will need to have city water and city sewer services, and be in a market of at least 100,000 population.
How the deal must be structured
You will need to buy the park with seller financing. You'll want to put between 10% and 20% down, and the note should be non-recourse. Try and get a note length of at least 7 years, so that you have plenty of time to refinance it before the loan comes due. If you are unable to seller finance it, you will be burdened with two things: 1) a larger down payment, as banks right now want around 25% down and 2) banks will only give you recourse debt.
How to create the $100,000 of cash flow
Your goal is to create an additional $100 per month of cash flow per pad. You basically have two components to this 1) raise revenue and 2) cut costs. Let's go over raising revenue first.
Mobile home park residents are at a great disadvantage when it comes to raising rents. It costs them $3,000 to move their home. So unless they have $3,000 in cash burning a whole in their pocket, they really have no way to move out if they don't like the new rent amount.
Most parks you can find for sale are under-market in their rent. So you'll need to find one that is $50 per month under market � which is not that hard to do. That $50 rent increase is going to get you half way to your $100,000 per year goal.
In some parks, you will also find vacant park-owned mobile homes. Getting these back in service may also be a critical path to getting the rent up at least $50 per pad.
Now let's look at the expenses. The single largest cost in any mobile home park is the water and sewer. In most parks it equals 10% of the total revenue. So this is your first stop in trying to get the costs down. Often you can accomplish this with finding and fixing leaks in the system, or leaks in mobile homes. Other times, you will need to separately sub-meter each space to make sure that the tenant conserves. And in many cases, you'll want to bill the customer for their own service.
The second big area to attack is the management cost. In many parks, the manager that is getting paid $30,000 per year can be replaced for 1/3 of that. That one step alone can often get you $20 per pad per month in savings.
Here's the score card.
Getting that $100,000 of cash flow is predicated on raising rents and lowering costs an average of $100 per month per lot. If you can get that done, then you will have 80 lots x $100 per month = $96,000 of cash flow per year. But that's not all. You also have to factor in your cash-on-cash return on the money you put down. That will push you over the $100,000 mark.
Next steps.
As the mobile home park industry is an extremely odd niche, it will definitely be in your favor to learn more about it, by taking a course on mobile home park investing. You can also find thousands of parks for sale without even leaving your house, by visiting such sites as Mobilehomeparkstore.com and Loopnet.com.
The economy isn't wasting any time falling apart. Should you be wasting time not getting started?
Monday, September 13, 2010
Why the Retail Home Stores Debacle Has Been Great for Community Owners
Fast forward to today, and annual home sales struggle to break 50,000 units - and you're lucky to get a single phone call a year for an available lot. While this collapse has been heartbreaking to retail dealers and salespeople, as well as manufacturers who are still struggling to survive after most have fallen into bankruptcy, the impact on the manufactured home community business has been much different. In many ways, the retail home sales collapse has been a blessing.
It's easier to plan in a world free of repossessions.
My most discouraging years as a park owner were those immediately following the great retail collapse of 2000. While no normal tenant in a manufactured home community can afford the $3,000+ to move a home, a bank sure can, and Greentree, CIT and others were ripping homes out of communities at the same speed they had put them in only a couple years earlier. As a result, it was nearly impossible to budget or plan. I had one community that lost 50% of its population over about a two year period. That's not what the community business is all about. It's supposed to be stable. But not when you've got something like 150 abandoned units going to repo status (which I had at one time in our communities as a collective whole).
I would much rather bring in just a few units - and lose no units - than have a continual revolving door that leads to the impossible challenge of predicting revenue.
Higher lot rents
Most Americans living in a manufactured home community have two components to their monthly expense in living there. One is the lot rent. The other is the mortgage on the home. And since it is a zero sum game, the lower the mortgage, the higher the lot rent can be. Contrary to what most outsiders think, the older, paid-for homes can afford a much higher lot rent - and often a collection of 1970s
and 1980s homes will be paying more for a lot than the folks with 2000 models.
With retail effectively dead, I have continually fewer residents with giant mortgages, so I can increase lot rent more aggressively.
More rewards for playing it safe and not stupid
Back when retail home sales were at a blistering pace, any idiot could buy a manufactured home community, fill it up, and keep it filled, even if it was in the worst location known to man and terribly managed. Today, proper acquisition diligence and management is paramount to making a decent return. And many of the prime acquisition candidates are properties that were bought during the home sales boom and now lay in ruins.
The death of retail sales has brought more value to the legitimate operator, and allowed for better buying opportunities.
Better opportunity in selling your own homes inside communities
The easy credit options given the consumer during the retail home sales bonanza allowed them to often buy a brand new home for less than a 20 year old home sold on legitimate underwriting. As many community owners end up with their own stable of homes over the years that they sell and carry paper on, it made selling these older homes more difficult and time consuming. Today, that 1988 home has a monopoly - none of the potential buyers has a brand new home from a retailer as an option. As a result, you can command more for the older homes, and better terms. In addition, you have better retention of those buyers, as they have no temptation to buy a new home.
Community owners are the retail home sales centers of today and, in my opinion, sell many more units today than the real retail home sales centers do, even though nobody tracks that data.
Conclusion
When I tell people how bad retail manufactured home sales have become, they are completely shocked that the industry can function at all with sales down 80%. Most people do not realize that retail sales, while essential to manufacturers and retailers, are not really that important to community owners today.
And that's a good thing, for after ten years of lousy sales, most of us have given up all faith in manufacturing and retail sales and have excluded retail sales from our business models entirely.
That's not to say that America's community owners would not welcome a return to healthy retail sales but, at this point, we'd have to see it to believe it. Currently, every article suggesting a turn around in retail sales seems like a sighting of the Loch Ness Monster or Bigfoot. And, like a burned-out starlet in Hollywood waiting for her big break, we're not longer hanging by the phone.
Thursday, September 9, 2010
How to Make Huge Returns on Mobile Home Parks
When you write about mobile home park returns you always run the risk of being branded a liar, as nobody believes that you can make 20% plus returns on anything anymore. With a stock market that makes 2% a year, and CDs that make 1%, and single family homes that lose money, investors are just conditioned to expect a low single-digit return - and if you suggest more, they just discard that thinking as a bunch of hype that they've heard before in the days of the dot com and housing bubbles.
But the truth is that you can make high double-digit yields in mobile home parks, if you know what you are doing. Here's how.
You can still buy mobile home parks at a 10% cap rate or better.
Mobile home parks still have one of the highest yields of any type of real estate. A quick glance of the listings on www.mobilehomeparkstore.com or www.loopnet.com will support this. Why are mobile home parks so much higher yielding than the other forms of real estate? One of the key reasons is simple supply and demand - most buyers are scared of mobile home parks and avoid them, event though their fears are unfounded. While many investors think of Jeff Foxworthy-type "trailer trash" as the customer base of mobile home parks, the truth is that 1 in 10 Americans live in mobile homes, and there are parks in which everyone drives a car like a Honda Accord and went to college.
You can still obtain seller financing at low interest rates to push your yield even higher.
While a 10% cap rate is impressive, if you pay all cash that's all you get. But the availability of seller financing makes the yields even higher. For example, if you buy a mobile home park at a 10% cap rate, and the seller carries back 80% of that amount in a note at 6% interest, then your cash-on-cash return is around 26%. That's an incredible rate of return. But how come mobile home park owners can seller finance? It's because most mobile home park owners are "moms and pops" who own their parks free and clear, and who are more interested in the monthly income that a seller-financed note can provide.
You can still find a bunch of ways to increase the yield on mobile home parks.
It costs $3,000 to move a mobile home park from one park to another. As a result, tenants cannot leave when you raise their rents. Besides the ability to raise rents - even in a recession - you also have the ability to cut costs in a mobile home park, such as sub-metering water and sewer usage. There are probably 10 major ways to boost the income on every park, and every dollar saved or revenue created results in an even higher yield. I've had parks that have had - I know this sounds impossible - in excess of 100% cash-on-cash returns per year, after years of grooming the operations and maximizing rent levels.
Conclusion
If you want to hit high yields on your investments, then you need to be investing in mobile home parks. If you want to earn low single-digits - and have no capital accumulation to pay for your retirement or your kid's college education - then stick with traditional investments such as stocks and bonds.
But the truth is that you can make high double-digit yields in mobile home parks, if you know what you are doing. Here's how.
You can still buy mobile home parks at a 10% cap rate or better.
Mobile home parks still have one of the highest yields of any type of real estate. A quick glance of the listings on www.mobilehomeparkstore.com or www.loopnet.com will support this. Why are mobile home parks so much higher yielding than the other forms of real estate? One of the key reasons is simple supply and demand - most buyers are scared of mobile home parks and avoid them, event though their fears are unfounded. While many investors think of Jeff Foxworthy-type "trailer trash" as the customer base of mobile home parks, the truth is that 1 in 10 Americans live in mobile homes, and there are parks in which everyone drives a car like a Honda Accord and went to college.
You can still obtain seller financing at low interest rates to push your yield even higher.
While a 10% cap rate is impressive, if you pay all cash that's all you get. But the availability of seller financing makes the yields even higher. For example, if you buy a mobile home park at a 10% cap rate, and the seller carries back 80% of that amount in a note at 6% interest, then your cash-on-cash return is around 26%. That's an incredible rate of return. But how come mobile home park owners can seller finance? It's because most mobile home park owners are "moms and pops" who own their parks free and clear, and who are more interested in the monthly income that a seller-financed note can provide.
You can still find a bunch of ways to increase the yield on mobile home parks.
It costs $3,000 to move a mobile home park from one park to another. As a result, tenants cannot leave when you raise their rents. Besides the ability to raise rents - even in a recession - you also have the ability to cut costs in a mobile home park, such as sub-metering water and sewer usage. There are probably 10 major ways to boost the income on every park, and every dollar saved or revenue created results in an even higher yield. I've had parks that have had - I know this sounds impossible - in excess of 100% cash-on-cash returns per year, after years of grooming the operations and maximizing rent levels.
Conclusion
If you want to hit high yields on your investments, then you need to be investing in mobile home parks. If you want to earn low single-digits - and have no capital accumulation to pay for your retirement or your kid's college education - then stick with traditional investments such as stocks and bonds.
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