We are heading into a new year and are still struggling to increase our occupancy level on our vacant lots. The homes that are there seem to stay there and can be sold or rented but most of the lots that are getting rented are when we buy the homes and bring them in ourselves. If we can't afford to buy the homes do we just sit around and wait for the economy to turn around and the banks to start financing new homes to go into parks again? Of course not, unless you don't care. So for us that do care lets come up with a plan to rent those vacant lots. After all, they are costing us money to sit vacant.
Key to Remember: Don't focus on renting all of your vacant lots at one time but rather focus on renting 1 lot at a time without losing any of those that are rented. After you get 1 rented, then focus on renting one more and so on.
A Logical Approach to Seeing What Vacant and Occupied Lots Look Like on Paper:
Look at each lot separately and figure out how much that is costs you to own that lot and keep it maintained and functional (utilities protected, grass mowed, permit paid up, trash cleaned up, etc.). Let's say that it costs you $300 per year to keep it maintained. For you to break-even, you will need to bring in at least $300 or more per year on this lot. At a 10% capitalization rate, an extra expense of $300 per year equals a $3,000 decrease in the valuation based on the income approach.
Next figure out what this same lot will cost you if you have it rented for the full year. In this case, let's say that the additional expense to rent this lot would be $50 per month and this additional expense is due to water, sewer, trash and management of the resident. Note, this extra expense is a variable cost. By renting this lot, your other costs are not really going to increase in most cases (taxes, insurance, repairs, management, etc.). In many cases your management cost may go down especially if the manager is mowing the vacant lots and does not have to mow the rented lots. So this additional cost of $50 per month equated to $600 per year and as long as you bring in at least $600 per year in income from this lot you are over break-even.
Next figure out what the net effect would be if you had that lot rented at your normal rates. In this case we will assume that the normal lot rent is $200 per month.
Variable Cost of Renting one more Vacant Lot $600.00 per year
Normal Lot Rent of $2,400 per year
Net Income of renting an additional lot is $2,400 = $600 = $1,800 per year
Increase in equity by renting that extra lot at a 10% cap = $1,800 / .10 = $18,000
Now that we know this number, we can look at our options.
Random Thoughts:
With these numbers, you could realistically pay someone $1,800 to rent that lot and get that $1,800 back within one year. You could pay someone $3,600 to get that lot rented and get your $3,600 back within two years.
Also, you could reduce the lot rent as a move in special all the way down to $50 per month to break-even and if you reduced it to $100 per month you would have a $50 per month profit.
You could pay the dealer or mover or mobile home broker or your resident that refers someone to your park as well. People like to receive money for helping you out and you don't mind paying it if it gets you closer to your goals.
So here is a short list of ideas:
You can offer to pay the move and setup costs for people to move in
Offer incentives to dealers or movers or their customers as long as you abide with the laws
Maybe you become the mover and buy a truck if you have several lots to fill and by doing so you can save 50% of the moving and setup costs in some cases
Buy a big screen TV as a move in special
Give the resident money to make a down payment on a car
Set up a college savings account for the resident's children
Provide a nice storage shed or carport as a move-in special
And the list goes on…
You should not be doing one think 100 times but rather you should be doing 100 things one time. And for those 100 things that are working keep on doing them as often as possible. So to accomplish our goal, we should think outside the box and start trying some unconventional marketing strategies.
Going back to the increase in value of $18,000 each time you fill a lot. This opens up other opportunities. Using a simple concept that as long as you can buy a home, set it up, and rehab it for less than $18,000 and even if you sell it for only ONE DOLLAR, you are one dollar ahead. Of course, we do not want to trade dollars in this manner. However, as the park owner, you should not care about making money on buying and selling homes but rather on increasing occupancy and cutting costs. As long as you don't overpay for the homes and setup and rehab costs, you should have no problem getting those homes sold for a break-even or small profit. And if you lose 25% of what it costs you to fill that lot(in this case $18,000 x 25% = $4,500), you are still way ahead because you now have another rented lot and a net increase in equity of $13,500.
Back to reality… In my experience I will eventually get somewhere between 90-100% back over the long run on homes that I buy, setup and rehab. So, if I spend $10,000 I will get about $9,000 to $10,000 back plus the increased equity by renting that lot. I usually buy the home and sell it for about a 10% profit but when you account for people that do not follow through and for the cost to rehab and evict non-payers, that will cost me somewhere in the 10-20% range over time and this wipes out that 10% profit.
This small loss on buying and selling homes is acceptable as long as that loss is a small fraction of the ultimate value that I get when I sell the park (adjusted for the time value of money and the hassle and headaches that go along with finding, buying, selling and rehabbing the homes).
Here is a simple formula that I use when I am out there trying to figure out the maximum price that I would buy a new or used home for:
I use a factor of 7.5 in this formula and this is a factor that measures values, costs, and risks. It is an arbitrary number but is how I evaluate the maximum cost of the homes I buy to put in my parks. I multiply this factor by the sum of 10% as a loss factor (the amount I anticipate losing on the sale of the home) and 10% (the amount I figure for hassles of doing all this). So:
(7.5) x (20% of the value of a newly rented lot) = Maximum Price I will pay for a home to put on that lot.
So, in this case with the value of a newly rented lot of $18,000
10% Built in Loss: $ 1,800
10% Hassle Factor: $ 1,800
Total $3,600
7.5 x $3,600 = $27,000 where $27,000 is the most I would pay for a new or used home to fill a lot.
Based on this formula, I would not buy any new $45,000 double-wides, but I could buy new single-wide homes that cost less than $27,000 installed. In fact, I just purchased 7 new homes that came in around the $27,000 mark to put in my parks.
What about other options?
Back to the variable costs of a vacant lot and in this case we will assume that you have a huge number of vacant lots like 100 vacant lots out of 200 total lots. Using our number of $300 as the cost to maintain each of these vacant lots, we are paying about $30,000 per year just to keep them maintained. At a 10% cap rate, these vacant lots are bringing down the value of the park by $300,000!
In this case we will also assume that there is no way in your wildest dreams that you will ever rent more than of these vacant lots in this century or the next and you also know that unless you hit the lottery you will not have enough money to buy homes to fill these lots. What options do you have in this case?
Do Nothing - but remember you are spending $30,000 per year to maintain your nothing attitude
Alternate Uses - what about sticking some small storage units in these lots or renting them to RV's, or providing them for parking of oversize vehicles, or RV and Boat Storage, or… you name it?
Maybe you could move all the current units to one portion of the park and then try to sell the frontage or a certain parcel of the park off for alternate uses?
How about increasing the size of the current lots. Maybe you could offer the lot that is next door to an occupied lot for rent for a reduced rate? Assuming you can get $25 per month for this extra lot per month you just wiped out that $300 per year cost on that lot. However, you may be able to rent that lot for of the normal rate to the resident that wants a bigger yard, or wants to build a garage, or have extra parking, plant a garden, and so on. If you do choose to combine lots in this manner, you might want to consider preserving the utilities though in case the demand ever does turn around.
The key is to get the park stabilized and running at the best profit margins you can and at the same time provide your residents with an affordable place to live that they can call home. You want your residents to plant trees and flowers, build nice decks and carports and sheds and demonstrate a pride of ownership.
If you take a 400 space park that has 200 vacant lots with an average lot rent of $200 per month and combine those 400 lots into 200 lots and get just $50 more for those bigger combined lots, you have just increased your net income by $50 x 200 - 12 months = $120,000 per year. At a 10% cap rate, you have increased the value by $1,200,000. In addition, you now have 100% occupancy and it is much easier to get a loan on a park with 100% occupancy as compared to one with 50% occupancy.
I am not suggesting that you do this without considering other options but if you are able to pull this off and preserve the other 200 vacant lots for future use without losing the permit and right to use those lots, this can be a great solution.
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