One thing that continually amazes me in this industry is the financial impact of raising the rent - even in small increments. I have heard many stories of investors raising rent anywhere from 5-50% depending on the unique situation and getting good results (i.e. minimal move-outs). I would be interested in hearing about the times when the investor got too aggressive in raising rents, what were the circumstances and outcome. On average, and assuming the rents are right at the market average, how much can you raise the rent before tenants start moving out?
There is a huge amount of hypocrisy regarding mobile home park lot rents that needs to be highlighted. Mobile home park lot rents are ridiculously low. The primary cause is that moms and pops never kept the rents up with inflation, preferring to abate needed increases through either bad management or to befriend their tenants. Here’s the proof. If you look at the initial lot rent in most parks built in the 1950s to 1980s, and then adjust for inflation, you will end up with a number typically 50% to 100% higher than the current lot rent. For example, a $75 lot rent in 1960 should now be $599 if the rent simply was raised by the CPI annually. Instead, it’s probably more like $275 in most markets (that’s the U.S. average). The median home in the U.S. is around $190,000 and the average apartment rent is $1,150 per month, while the average mobile home park lot rent is $275. See a problem here? And those who would say “sure, that’s true, but you’re not taking into consideration the home mortgage” I would have to point out that 80% of our tenants have no mortgage, and those that do, even in brand new Clayton Homes, only have a payment of around $400 per month or less, so that’s $675 for a three-bedroom detached dwelling with a yard. So enough with the discussion of “how high can mobile home park lot rents go” – they could go up 300% and still be cheap. So the real discussion needs to focus on why mobile home park owners are the only landlords that get any scrutiny on the rents they set. Where is the complaint on those apartments at $1,150 per month? The answer is simple. At the lower income levels that normally live in parks, there are more people living in Section 8 apartments than in all the mobile home parks in the U.S. Under Section 8, you and I, the American taxpayers pay all rent increases, while the tenant pays a tiny amount of even the initial rent, if any. So we get unfairly picked on because we are not Federally subsidized – even though our increases are actually incredibly small. We were criticized in the press for increasing the rent in our park in Austin from $390 to $450 per month, while the average apartment rent is $1,450 per month. You see, the U.S. government sets the rent levels for Section 8 using a study called the Fair Market Rent (FMR). The government, however, does not produce any such rent report for mobile home parks – the only type of housing it skips. This deprives us the protection of saying to the world “this is the FMR set by the government, so don’t criticize us, complain to the government”. So the real question here is not how high can you raise the rent, but simply how much grief will you get from that rent raise? Personally, I have no problem taking the heat for adjusting rents to the fair market level, and I was very vocal on that with the Austin media. We need all park owners to stop being afraid of charging reasonable rents. Without higher rents, parks will gradually disappear to higher and better uses – typically apartments charging those rents that are around $1,000 per month more. The park that is getting torn down in Palo Alto is becoming an apartment complex. So are the two in Hollywood, Florida. You can either have higher rents or no parks, in most larger markets.
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Thanks for the comments Frank and I appreciate the paradigm that not raising rents will actually result in fewer options for the tenants due to redevelopment for “highest and best use” of the land. I like to think that I can take the heat from pushing rents upward. If media pressure is all that happens when I push my rents above market, then I will do it all day long. I am getting ready to close on my first park and am contemplating pushing rents about 10% above surrounding parks (my park is 100% full in major market with old homes), which I believe are low relative to apartment rent.
The mobile home park industry is on the verge of great consolidation. The new professional owners are going to re-set the rents to where they are fair in relation to apartment and SF cost, NOT because that’s where mom and pops left them. Case in point: Denver, Colorado. Almost all of the mom and pop parks there have been purchased by professional investors, and the average mobile home park lot rent there is now around $600 to $700 per month. That’s still affordable housing in Denver, but is probably 200% to 300% more than the rents were years ago. That’s where all major market lot rents are heading, and it’s EXACTLY where they need to be to remain competitive as a land use.
In my opinion, raising your rents to 10% above other parks in your market is probably still hundreds of dollars less per month than a Class-B or Class-C apartment. So I would not be afraid you’ll lose tenants over that raise. But I’m sure people will complain; that’s a given. But here’s the big thing I’ve learned over the past 20 years in this industry: people WANT a detached dwelling without neighbors banging on their walls, their own yard, their own privacy, and the ability to park by their door. When you put Class-B and Class-C head-to-head against mobile home parks, the parks ALWAYS win.
Thank you Frank for bringing sunlight to the issues of rents. We are in a business that is not receiving or asking for government assistance and preforming a service that is looking more professional every day, THANK YOU!!