Economics of renting versus selling

Home has been sitting on our lot waiting for its turn to get rehabbed. I don’t yet know how much we put into it. $20k plus.

Prior to rehab, there was probably some “basis value” in the home but also some carrying cost. Probably the carrying cost over time has eroded any residual value.

Newly remodeled asking $30k home rents for $950 per month. I would call this a “good market.” We will make a little profit ON AVERAGE.

Lot rent costs $330 [on this lot] but rises with inflation. Therefore “Home-portion” rent is $620. [Although how much the “portion” is arbitrary.]

We can sell for $5k down plus $350 per month for 10 years plus taxes, insurance, maintenance. But the owner might default, don’t forget that. They also may not take care of the home, and those two things are definitely correlated.

If the rental market compares accurately to the purchase, there’s an implicit amount that is less than $270 in T&I and maintenance per month. ($950 less $330 lot rent less $350 amortization).

If T&I are 5% of FMV together ($1500) that leaves $1,740 annually to cover maintenance, vacancy loss, and, if, on average, there is anything left over, profit. Let me point out that’s less than 2 months gross income [did I mention there is vacancy loss?]

So here is the question – is it better (more profitable) for the Dealer/Operator to sell or rent? It is definitely less aggravation to sell and there’s some profit (or recoupment of loss) right at the front. But selling is hard work and takes skills.

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I have given this topic some thought Brandon. And while i haven’t done any research. Nor addressing your question . But essentially where you have a home rent this high relative to a lot rent like this. And one theory i have , is that the market lot rent is artificially low and poised to grow/be higher due to this large of a spread.

Lot of factors come into play but this is my thought on it. Id love to see if there is merit to this theory if there was a resource that compared POH rents, relative to all in housing costs ( on an MH purchase) keeping lot rent into a consideration and seeing if there is a “normalized” spread that should have some correlation to rent cost on an MH rental unit in a park.

I will be interested to see what others respond on this. Thanks for posting

I believe, more importantly, is whether you want the pita of having a “renter” as a tenant. Generally speaking they are of much lower quality than owners and will therefor potentially be much more work to manage and will probably do more harm to the property than an owner.
You also have to take into consideration depreciation on the property going forward.
Additionally renters will leave and you will have the task of screening new tenants. When a buyer defaults you keep the deposit and find a new buyer. Not necessarily a bad thing.
Bottom line for me is regardless of the numbers I have zero desire to rent homes or manage that type of tenant. It simply is not my business model.

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I’m going to be in the minority here but I don’t mind renting to people for where I am at in my investing career. I do this for a few reasons: I screen really hard. I look at how clean tenants keep their car, and I also usually charge a little below market rent to keep them longer. I have a rehab crew working on projects for me full time and so I only pay hourly wages for repairs. Lastly, I make more money.

When I rehabbed one of my 1976 homes it was basically as durable as a stick built home, which helps a ton. PEX, new roof, new HVAC, laminate floor and tile throughout. Tenant moved out after 3 years and the $1000 dollar deposit covered all the repairs. He even got $100 back. His lease made him repair anything < $100. I probably had 2-3 repairs per year < $500 in aggregate. No this was not slumlording the dude had a nice place.

If I had someone rent for five or more years I’d probably offer them an option to purchase for a nominal amount in accordance with federal and state laws… I don’t get myself bent out of shape about POH since I’m an active investor in a given market. If I was just sitting back and collecting mailbox money I’d probably be more vested in TOH.

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@jhutson. My only comment would be that if you charged higher rent you would most likely get higher quality tenants. The rental business does not support the theory that charging below market rents result in tenants staying longer. Rental rates is rarely the reason tenants move.

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It’s not black and white all the time @Greg. I operate in a couple markets. One of them is mediocre (and tiny population to boot), but it’s close to home and I like that.

After trying higher rents and lower rents I found that lower rents gives me exposure to tenants across the spectrum. And because I know how to screen I can find quality with relative permanence. It’s especially helpful when the candidate has a local job and also has family in the area. This approach also allows me to consider people on a fixed income.

I appreciate there are downsides to how I operate and it doesn’t meet your investment criteria. That’s okay, but there’s more than one way to skin a cat. I enjoy learning from you and everyone else how they operate so I can make myself better as my investments evolve.

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Actually your screen process in regards to selecting locally employed, with family in the area should allow you to charge market rents.
Exposure across the spectrum, as you state, is not as advantageous as targeted markets. You do not want below market rents attracting lower quality applicants, it wastes your time.
There are plenty of landlords that for various reasons choose to supplement their tenants rent, as long as you are hitting your profit goals there is no downside.

What are some of the criteria you use to screen?

I already called out the nuanced things I look for - the rest I use is pretty standard and straight forward across rental investments. The basics are here: https://www.biggerpockets.com/blog/tenant-prescreening

If we can stay on the topic i am having the same debate with myself. i have 5 parks totaling around 80 doors. all poh. i have been doing this 13 years. i have mortgages on all properties. its very had to turn a profit with repairs and move outs. not to mention all the damage some of them do. my average rent on poh in ocala fl is around 700. lot rents i see are 300. Do i sell off the units? i have never done this before. and if you do it seems they always default and give you back the home needing rehabing again. plus now all legal fees. this business is going to kill me. what to do what to do. help!!

Sell them off at full market value, Screen buyers to a very high standard and do not hold the mortgages. Let the buyers find there own financing. If you require a descent sized DP that is non refundable it will cover any default costs.
The key is finding quality buyers so as to improve the quality of your community. I would only target 55+ buyers and move the communities in that direction. It is for now the preferred direction of the future of communities especially in areas such as yours. Move away from “affordable” housing into senior/retirement housing. Local governments prefer it as there is no education costs and it makes for higher quality more easily managed rental properties.

Also once your park in Florida is > 50% tenant owned there are restrictions around rent raises and other topics, so be aware of those laws before going through with it. But @Greg is right. If you have strong demand and can choose the best buyers… focus on the ones that have staying power and a strong history of responsibility.

Screening is so painful and letting your “ready to go” unit sit idle is not fun, but you have to have the long term outlook and go slow if the market demands it.

okay thank you. so i guess it all comes down to how much i can get for the units and how much lot rents i can get. Is there anyone that can help me do its? i see lot rents all over the place from 320 to 600.

I’d have a real estate attorney in FL help you the first time, then you can do it on your own later.

They can answer questions around how much notice, specific verbiage, process, frequency of rent raises…and other special considerations.

Screening isn’t that difficult. Set up a criteria with a scoring system. It takes all emotion out of it and you don’t get sucked in to peoples “story”. I’ve automated the heck out of things. When people Schedule a time to see a property on my website I’m able to get everything I need to do a pre-screen background before I contact them. Some people screen themselves out in the pre-screen others in the application process. It’s not hard and helps me avoid the time wasters. I found automating things is a good time saver. I’m looking at expanding into MHP and have been lurking here over a year. I currently have 21 units (SFH & Multi units - some paid off some with Mortgages) and work a fulltime job while I continue to expand (financial entities and seller finance folks seem to like it). After having a few places torn up in the early years I wised up and squared away my screening. I haven’t had anything torn up in years and due to the automation I’m able to spend my reclaimed free time focusing on my business and planning expansion.
I’m inclined to think that with a good criteria, correct screening, 4 to 6 mo maint checks, wallet training (you break it because you abused or were rough you pay for the repair), and a little automation and you may end up better off financially.

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