$500 / mth home rent - should I be renting homes, not selling them?

mobile home university
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My market is really strong right now - only 1.5% rental housing vacancy rate and almost no three bedroom apartments available anywhere. Two bedrooms are pushing $800 - over $1,100 for new Class A product.

I bought this park with Frank’s mentality of “Sell the houses, don’t cap the income.”

Well, roughly 10% of the homes in this park are POH. The thing is - the three bedroom, mid-80’s singlewides with siding and pitched roof POH’s are renting for $500 / month over the lot rent of $325. Plus even the POH residents pay their own water/sewer.

With these margins I’m thinking maybe I should go ahead and do rentals? This is $6,000 yearly gross for a home worth only maybe $8,000 book (though the actual market value seems to be more like $12-$15K).

Even if 70% of that $500 in home rent revenue is eaten up in maintenance and turnover costs - if the average renter stays 24 months (50% turn-over ratio - guesstimate from the apartment industry) that is $1,800 per year pure NOI on top of the NOI for the unit’s lot rent.

This is a strong commercial real estate market and this park is almost 100 lots with city water/sewer. If you assign the park a 9 cap then $1,800 additional NOI on top of a lot’s “dirt” NOI adds $20,000 per lot value to the park - or almost $2 million dollars to the park value if all the lots were rentals instead of resident-owned.

What are your thoughts folks - if an area’s rents get high enough does the traditional Frank logic of “don’t own the home” still hold? At some point the margins have got to be juicy enough that renting the homes makes more sense than selling them.

Frank - you agree?

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Just more food for thought: this math of 70% expense ratio on the home structure would give me over $8,400 to spend on rehab/turns on the home every 24 months while still adding $1,800 per year NOI to the lot over and beyond the dirt.

Point of comparison - at our Class B, mid-80’s apartments in a major midwest suburb we spend, on average, maybe $1,500 per turn - probably even less. That would be cleaning, paint, new carpet.

I know mobile homes don’t hold up as well - but an $8,400 turnover budget for a 3 br singlewide mobile home every 24 months has got to be more than enough to keep the home maintained in perfect condition over the long run - right?

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The income from renting the dirt is the only thing most banks will finance when you sell. Home rental income is not, and should not be part of a CAP rate calculation - this is the bedrock calculation from MHU Due Diligence Manual. With POH the only difference in price is the market value of the POH which is typically 3-5K per unit when talking about 80’s and 90’s type units. When considering this, the additional work, higher expense ratio, and less pride of ownership from renters it will take away from the value of your Park in the long run.

With that said many people make plenty of money with a renter model, it’s really about how you want to manage your investment and use your time. If your goal is to fill this Park up and buy more Parks (or sell this for a bigger Park) then you should give yourself as much time as possible to do that. A Park with 100% TOH is much more marketable.

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My initial inclination is you should consider raising your lot rents to reduce the spread, rather than keep the homes. The homes aren’t worth much in the long run and are a depreciating asset, but a higher lot rent is worth a whole lot in the long run. It’s hard to say without knowing the exact situation though.

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I am with Noel, if your market is that strong, raise the lot rents.

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@Ivan_ilych , as per your question:

  • “Should I be renting homes, not selling them?”

As per your post:
“Well, roughly 10% of the homes in this park are POH. The thing is - the three bedroom, mid-80’s singlewides with siding and pitched roof POH’s are renting for $500 / month over the lot rent of $325. Plus the POH residents pay their own water/sewer.”

“With these margins I’m thinking maybe I should go ahead and do the rentals?”

My Husband and I own a Turn-around Mobile Home Park where 2 of our POHs are similar to your situation.

We have 2 POHs that we purchased and moved to the MHP that are:

  • POHs
  • Single-Wides
  • Years: 2000 & 2004
  • 3 Bedroom
  • 2 Bathroom
  • Delta Between Lot Rent & MH Rent: $500
  • Lot Rent: $250
  • MH Rent: $750
  • Tenants Pay: Water, Sewer, Electric & Gas

Currently, we rent both of these MHs.

Similar to you we also are in a strong market for Rentals. We probably could get much higher for the MH Rentals. However, we prefer to be below market, so that Tenants will think twice about moving out :slight_smile:.

In fact just last night my Husband and I were calculating the Rent (Lot & MH) received on the 2000 Mobile Home. We purchased and moved this 2000 Mobile Home into our Turn-around MHP 2 years ago.

Here are our calculations:

  • Purchase Price: $15,000
  • Moving Costs: $3,000
  • Renovations: $750
  • Months Rented: 20 Months (Out Of 24 Months)
  • Rent (Lot & MH): $750 Total
  • Calculation: 20 Months x $750 = $15,000

Some will say that we should not include the Lot Rent. However, I disagree as there would be no Lot Rent if we had not purchased and moved the MH.

Thus, renting the MH for the past 2 years has allowed us to cover the Purchase Price of the MH.

Now there is the Moving Cost = $3,000 (which could be covered in the next 4 months).

In the above formula we did take into account Tenant turnover and initial renovations (4 months of no income).

You will notice that the formula did take into consideration the initial renovations, but did not take into consideration repairs during the rental period.

However, to be honest there have been no repairs needed, since we moved the MH and did the initial repairs prior to renting (and it is relatively a newer MH…2000 versus the 1966 POH that we renovated). Please understand that we strongly believe in repairing any issues. We are all about repairs. We even have a wonderful Contractor. We just have not had any repairs needed.

So @Ivan_ilych the answer to your question in our situation is:

  • Yes. Renting our 2 newer POHs is working for us versus selling them.

As per my Husband he states that in the past Frank has stated that if the Delta (difference between Lot Rent & MH Rent) is $400 or more then renting becomes a profitable venture.

Now, renting is work. Renting a MH is much more work than Renting a Lot.

As a MHP Owner you just need to evaluate if that “work” is worth the extra money.

We are blessed with a wonderful Licensed Manufactured Home Repair Person. Thus, when issues arise, we are able to address and fix them quickly.

So for us…we Rent.

And for us…raising Lot Rent is not the answer (now Frank would probably disagree on this topic as he owns a MHP in roughly the same area).

Sometimes…:

  • When the Delta between Lot Rent and MH Rent is high enough
  • And you have a great Contractor
  • And you have a strong Rental Area
  • And you desire to do the “Extra” work
  • And you or your Manager have the social skills and ability to show the POHs
    Then Renting a POH can be a viable and profit earning venture.

We wish you the very best!

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I analyse the numbers on a home rental much differently. From a business perspective the math can never be simply based on a here and now because investors place value on cash and understand the impact of Long Term.
Manipulating numbers to enhance returns is a common mistake to be avoided.

Total monthly rent - $750
Lot rent - $250 (POH or TOH rent is same therefor not included)
Home rent- $500

Deductions/Expenses
Repairs- $200 (long term 40% of $500)
Management- $50 (10% everyone’s time is worth money)
Opportunity value- $156 (cash invested $18750 @10% return)
Vacancies- $40 (8%)
Insurance, taxes etc. $?

Total expenses/month long term hold -
$446 + $ ? + Depredation on home = negative cash flow investment as long term hold.

These would be a OK short term hold strategy to a max 5 years at which time the home should be sold to a tenant if possible.

This is only how I assess POH cost and income factors as strictly a business investment. If the homes were purchased at the bottom of their depreciation curve you could eliminate that variable however the condition of the homes would result in repair costs more than surpassing higher priced homes deprivation.

There is no way to calculate long term hold on POHs and have a positive cash flow unless one or more of the following is factored in…repairs are deferred, the owner does not value their time, home purchase is financed at very low interest rate, purchased at bottom of deprivation curve or vacancies are nil.
Any one or more of those factors is required to improve the likely hood of long term hold positive cash flow.

The two most significant factors contributing to negative cash flow are repairs and the opportunity value of cash. Neither of which should ever be ignored.

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Hello,

I want to rent my home but I have some questions about home renting laws, Does anyone suggest me about them??