The Problem With Low Rents & Economics of Mobile Home Parks

I think everyone should read this.

The Problem With Low Rents by Frank Rolfe

Finally, Frank lays it out clear and simple. The “narrative” of MHP needs reframing.

MHP is low-cost “affordable” housing that is not government subsidized - “if it could be cheaper, it would.”

Typically the landlord has to “fill” the empty spaces and sometimes has to pay to evict or rehabilitate homes. So there is a risk/reward ratio on filling every lot. It’s a potential liability if the home is ruined and the tenant abandons. The landlord is taking the risk that the tenant is a “good” tenant and never becomes a “bad tenant.”

If it’s less risky for the same reward as other investors are able to maintain, then it’s a “good investment.”

The landlord takes the risk of filling every vacant lot, and a new 16x76 HUD-code home can be had for about $40k-$50k. So if the landlord spends $40k or $50k someone can have a home (in exchange for rent). Thus the landlord can bear the cost of the new home if the value of the “lot rent” equals the cost of the home. The value of the lot rent depends on the actual performance of that lot, though. So there is risk and commensurate return, and it is the ratio that is important.

In other words, every new home brought in and “rented” turns into an annuity for the owner; the monthly payments are whatever is left over after expenses, and the term is indefinite. The principal cost of the annuity is the cost of putting up the capital to get the home to where it is ready to provide low-cost housing. A portion is better turned over to the resident after a certain period (“home profit”) and they own the home and the responsibility. Another portion continues indefinitely.

This interplay of large lump sums spent by the landlord (filling, evicting/demo/rehab) and the little monthly rent payments creates an implied discount rate. Would you trade $50k for a stream of payments? Depends on how much, and how long, and how much effort and aggravation and stress it takes. The fact that one can do this in MHP means the landlord is the “capitalist” happy to shell out the bucks to “create” “affordable” housing where it will be used most wisely. If the extra rented lot plus home profit is worth the “return” compared to the “risk.”

If the extra rented lot plus home profit is not worth the risk, the park will go “downhill.”

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I’m not a socialist. I’m not for driving rents as low as can be.

But Rolfe’s argument that all investments are based on rate of return is, while factual, disingenuous.

I’ve seen way too many landlords who see a real estate investment as a cash cow to be milked until it collapses from exhaustion. His implication that higher rents will drive landlords to maintain their investments is simply untrue in the real world where most of us reside.

To make this topical, I have a privileged vantage point of MFD owners on Southern California. The maintenance level of many properties I’ve seen — valuables cash flowing properties, some owned by the same families for multiple generations — would turn your stomach. This is an arena where othering is rampant — where landlords and tenants are both particularly oblivious to the needs and desires of people of other ethnicities than themselves.

There are immoral people in every industry. The point, I think, is that it is not inherently bad to raise rents because the rent is used (mostly) to benefit the community. Of course if the rent is raised more than necessary and/or the reinvestment does not happen, that is socially undesirable. But the “narrative” of providing a service but not trying to make a profit from the “free market” is how “affordable housing” is typically framed. The narrative needs to be, “this is a valuable commodity, let’s preserve it.”

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You cannot have low rents and high-quality mobile home parks – at least not in the real world in which new owners have to make mortgage payments, make capital repairs and provide professional management.

Can you have high rents and low-quality mobile home parks? It’s possible, but is a pretty rare occurrence. Between loan covenants, city inspection requirements, and the competitive nature of housing (yes, other park owners will steal your tenants offering a free move if they are unhappy in your community) it would be extremely hard to simply raise rents and not put any capital back into the property.

But if it requires higher rents to attain and maintain the status of a nice place to live, I think it’s worth the risk for society to embrace higher rents since the opposite leads to 100% certainty of disastrous results on mobile home park quality of living and, ultimately, their destruction and replacement with more profitable uses for the land.

Brandon is 100% correct that there are some bad operators in the mobile home park industry – I drive by those properties all the time. But I don’t know any bad operators who charge high rents, only low ones. The last park I drove through that I thought “what a disaster this place is” was a park in Iowa that, consequently, charges the lowest rents in the market. I’ve never driven through one that had high rents and an appalling property condition.

I have been criticized for years over my narrative that the solution to elevating the mobile home park industry and the lifestyle quality of residents is through higher rents. However, I believe that it has proven to be true over and over again, and I have seen no example of a successful park – both for owners and residents – that has low rents. Since society acknowledges that every form of real estate requires capital and a decent rate of return, and that bringing old properties back to life is a plus for all involved, I don’t understand why only mobile home parks are singled out on this issue. I have provided articles and quotes out of major media outlets that applaud those who redevelop old downtown neighborhoods by pouring capital into rebuilding these deteriorating properties, and raising rents to support a better end product. Why the double standard?

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One reason for the double standard is because it’s housing. What’s the “right rent” is not an easy question to answer. There’s a lot of averages. Too low is obviously not the answer. “Keep raising it!” is also incorrect.

ROC (Resident Owned Communities) probably has great data on this.

The little item being ignored is the value of our money is being debased. 1965 could buy a new Marlette mobile home for $5,000 and lot rent of $30 per month in a classy park in MI. Mobile parks could not be built fast enough by owner operators. Does it cost more (higher expense ratio) to be a multi-park owner vr. than an owner-operator with 2-3 great parks–I would from experience say yes. An absentee owner generally has little community input and when the new out of state owner announcing new ownership one of the first item is increasing rents which can really be insulting to people with fixed incomes. Presently with the fever pitch of no normalcy complaining about high rents will be NEWS. We have a currency problem and it will become much worst–over $2 trillion handed out of funny money to some people who will not work since unemployment checks are greater than working—we are in a major mess having left the gold standard from the 70’s. High rents?? We all have to live with our conscious on how we treat our fellow citizens.

Considering the bond market right now and volatility of the stock market, mobile home annuities are looking pretty good to me.

The best and fastest way to improve a park is to raise the rents.

My conscious has very little to do with what the open market will set the rents at. Im in this for a business income not charity.

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Presuming one is completely self focused, amoral, there is ample reason to run a clean community and invest money in improvements. Doing so improves the park, entices new tenants (100% of whom chose you vs every other living option available to them), and enhances long term equity. Yes, current cash flow is sometimes chosen vs long term mutually beneficial equity enhancement for the owner and the tenant. But, as Frank mentioned, those who don’t manage a properties well nor do they reinvest in their properties are pulling more money from a future pocket to put less money into today’s pocket.

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