One aspect of park ownership has troubled me, coming from a multifamily background where I actually take psychological comfort in pouring money into my buildings (because that way I know they are well maintained and are not turning into slums).
Yes we preside over an oligopoly with high switching costs and sharply limited supply. Yes our demand is extremely elastic. But that does not mean our customers’ incomes are extremely elastic.
There are only so many hours per week one can expect a customer to work. All structures have some rate of deterioration constantly - components age. 50 year old mobile homes which look and function like new have had a lot of loving care and $$ put in them over the years.
This brings me to my point - $500 lot rents. The theory we all go by is that lot rents in general are too low when adjusted for inflation. Thus the story goes they will naturally rise as the professional investor takeover continues in the industry.
We high five each other for turning building maintenance and cap-x reserves into an externality - an externality we push off onto a consumer we turn around and tell each other out of the other side of our mouths is so poor and so lacking in financial discipline that we must be sure to get lot rent on the 1st of each month or risk him drinking/smoking/gambling his rent away.
We cannot simultaneously believe that this consumer must be treated like a child (get the rent as soon as he is paid) and yet also believe that this person has the ability to save up to replace building components.
In this model, the only way a $500 per month lot rent (plus $200 more for water, electric, gas, phone, cable) remains “affordable” to a family of 4 where mom & dad earn a combined $20 per hour - is if the owners of the trailer simply let it deteriorate until they live in an unsightly hovel.
There is a huge difference to this demographic between $250 per month lot rent and $500. YES I believe we can get $500 - I’m rapidly catching up to market in the two below-market, off-market parks I bought last year. But I do the math on the income of many of my customers and it simply does not compute that when I get lot rents to the $400 and $500 level, these folks will maintain their homes. I do not think they will move - $500 sure beats $750, $900 or $1000 or more. But I look 10-15 years out and wonder what will become of the homes.
Another example of “cognitive dissonance” while trying to imagine short sighted people maintaining their homes:
I was at the SECO conference about a year ago, in a seminar on selling energy conservation features to home buyers. The presenter mentioned that it in fact is difficult to convince the average trailer buyer to spend just a few dollars more per month on “no brainer” energy savers like extra insulation etc. because you can’t get these folks to think past tomorrow.
One of my own residents was in my office yesterday recounting the fact that she works at a local dollar store and occasionally gets some insanely cheap deals on LED light bulbs - as low as $0.50 each. When this happens she tries to sell them at cost to friends in the park to help them save money - and many do not because they can’t see how saving 90% on a bulb’s electricity could ever possibly pay back the fifty cent upfront “investment.”
How in the world can we get these folks to maintain homes? The only way I can see it is to become - yes - an apartment complex where you the park owner own the home (right, big no no, I know) and charge a $200-$300 per month premium for doing so - that goes exclusively into a cap-x reserve and maintenance fund.
No - I’m not converting. But so far I have felt great about the park owned homes I’ve got - pouring 100% of the rent premium back into repair and maintenance. "Good, roof is coated. Good - soft floor is repaired. Good - sink is fixed the RIGHT way so trailer floor is not destroyed. Good - that window is fixed before water damage spreads through the wall. Etc. etc. etc. I do not understand the aversion park owners have to doing maintenance on POH as long as the premium over market lot rent is high enough to cover it. In fact it almost should be a plus - you reduce your risk of the building becoming damaged due to neglect because in essence you are taking more money out of the occupant’s pocket each month and simply earmarking it for maintaining the structure - vs charging only lot rent and TRUSTING him to maintain it himself.
Ideally what your goal should be is to increase rents and at the same time force transition to higher quality tenant base. You must increase the overall quality of your community to match your rents. This involves both the community owner spending money as well as having tenants with the money and desire to invest in their homes. This will also often require transition from a family community to a all adult community.
Bottom line is either a natural transition to higher quality tenant’s or forced transition. Along with this you up your community standards to force residents to do exterior upgrades to siding, skirting and roofs. This will again either result in overall higher quality community or higher quality tenant base.
A community owner can also move the community in that direction by purchasing the worst homes as they come up for sale and renovate to a higher standard and resell. The sale must target buyers with the cash to purchase or finance on their own. No POHs no rent credit programs. Again you are targeting higher quality tenants.
As rents rise you will be transitioning out of being a affordable housing provider.
I personally am in favor of rental units. I know it requires maintenance but I keep the asset of the home for rental use over and over again. I also control the look of the park that way. And on the units I have renovated I know they are built well. So what if I set back a portion of rent income to maintain units. Why risk being told I can’t move a new home on a lot when the owner pays it off and decides to move it to a lot they just purchased?
Both approaches are fine from a business perspective. They make money - period. From an investment standpoint a park full of home owners means you have an engine with fewer moving parts. The return is more predictable, overhead is less, and fewer risk factors.
A recent example in Texas is when WTI hit $25 / bbl and work at Eagle Ford area dried up, tenants walked away. But if they own their homes less likely…but notably will still have turnover. No pain, no gain.
Most of the people in the park now are local people who live here year round so I don’t have a lot of tourists or temp workers anymore. I do get people who will live here in their own unit while they save money to buy their own lot.
In New Mexico, wee see the Class A parks charging so much for lot rent that the value of used homes is forced down. If someone can afford $900 on housing and $500 goes to lot rent, that leaves $400 towards home maintenance AND financing/rent payment. Result: Value of the home to the next buyer has to be lowered to make the numbers work.
There IS a a limit to what we can charge (there always is). For my metro area, that limit is when the combined lot rent/financing payment is about 10-20% over a Class C apartment of similar size.
Regarding the subject of this post, there absolutely is a split between the return of the equity to the park owner from the value of the home. I have thought about this a lot.
In other words, a home appreciates or depreciates or does nothing at all to change in its value as the current owner just exactly keeps up the maintenance to that amount.
As that happens, the park owner can charge more or less for lot rent, as the market will bear. And the home’s market value will fluctuate with the perceived present value of that annuity. The lot rent is a stream of payments that the owner of the home has to transfer to the owner of the land. That stream has some NPV and it can be adjusted by the landowner unilaterally.
The more the landowner charges, OF COURSE the less the homes will be worth (trade for). Is this fair? The landlord holds all the strings…
On the other hand, the same home not in a MHP would probably cost even more because no rent annuity to subtract from the value. Plus there are forever costs there too, like taxes.
So the customer who would not otherwise be able to afford a home can afford a MHP home+annuity because it’s spread over time different. Get in cheaper now, more expensive in the long run. And in return the MHP is supposed to protect the value of the home from awful neighbors which you have no control over if you are on private land.