How does rent to own model work in bulk?

I am wondering how the rent to own model actually worksLet’s say I bring in a home for $25K fully installed (occupant-ready), and collect a $5K non refundable down payment, and a $600/mo rent-to-own monthly payment. I am out $20K net day 1, and will recoup $7,200/yr (ignoring opex), which is an approx 2.75 yr payback (not bad)To bring in say 20 homes, I will need $400K, which is a ton of money that I don’t haveTo all of you veteran rent to own model people out there, how do you pursue such a campaign if you do not have $400K to spare?Do you take on a 2nd mortgage to make it happen, or a credit line secured by some other asset? Or am I blatantly missing something?I considered looking into the Legacy homes deals, but frankly, do not believe I could sell their product in the NE where my properties are. I had a “focus group” tell me that recently.Any insights are very much appreciated

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Jkmhp2, my Husband and I love to learn from other people.A while back we purchased a CD collection of an Individual who would buy Mobile Homes, fix them up (if they were used), put Tenants in them and then have Investors act as their Bank.The Investors would pay for the cost of the Mobile Home and Setup and the Investors Name would be placed on the Mobile Home Title as the Lien Holder (like a Bank).  The Investor had a tangible asset attached to their Name (now granted it is a depreciating asset, but an asset non-the-less).  The Investor would then receive a specified Monthly Cash Flow for a specified period to pay off the Loan.This specified Monthly Cash Flow would be paid by the Monthly Rent from the Tenant.  In addition the Monthly Rent would cover all expenses (including vacancies).  The Individual would then use the money from the Investor to purchase other Mobile Homes (and then go through the same process).The Individual was in charge of the Tenant, Rent Paid and any Repair Issues.  If I remember correctly, the Individual was using this tactic to fill up their Mobile Home Park.However, I do not remember if the Individual was purchasing New or Used Mobile Homes.I would imagine that New Mobile Homes would give an Investor more of a warm and fuzzy to invest (as the New Mobile Home looks better and probably has a better chance of staying rented).It sounded like a win/win situation for all involved.Has anyone heard or tried this method?If yes, what are the pros and cons?Thanks So Very Much!

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Yes, we have used this basic model for many years to fill our parks with used homes. It is normally not too difficult to find friends and family who need to invest some of their savings and get a nice 8-10% return. Just curious why the NE focus group did not like the Legacy homes?Bret

We sell Legacy homes all over the U.S., and they sell like crazy in Nebraska. I don’t know who was on the focus group, but you might want to give it another shot – we’re Legacy’s biggest customer and the only reason is because customers love their product. We own over 110 parks, so we get a pretty good sampling of consumer taste in mobile homes, and we have Legacy homes in probably 50 of those parks. What home did the test group prefer?

The test group preferred Skyline and Colony, since they are relatively big in western PA where my properties are. I have heard great things about Legacy, personally. I honestly feel the folks (residents and MH brokers) have a comfort level with homes they are more familiar with. Unfortunately, there are no Legacy models for them to feel/touch, which places Legacy at a competitive disadvantage, at least in the NE.

It is still a bit of a mystery as to how a large Rent to Own (RTO) campaign creates a favorable exit strategy if the desire is to sell the MHP quickly, unless the following is the equation:A new or used home is brought in, and the MHP owner has invested $25K into the home, transport, setup, etc. It is sold for $35K, and $5K is the deposit, the balance ($30K) is paid over time (level payments of $300/mo = $3,600/yr for the home rental).Lets say the lots are worth $35K/ea in the subject market, so the value of the home is conveniently equal to the lot’s value.In year 2, the MHP is sold, which means $7,200 was collected, bringing the unpaid balance to $22,800.That particular lot is sold for $35,000, and the balance of the RTO contract is purchased for say 50% of its balance (seems to be standard practice), which is $11,400. So, by bringing in the home, the profit generated upon sale of the MHP is $35,000 (lot value) + $11,400 (buyout of RTO contract) + $5,000 (deposit) + $7,200 (rents) - $25,000 (cost of home/transport/setup) = $33,600, which in effect is the value of the lot if it was a resident-owned home.Does this make sense?

Yes, except in many markets you will have a challenge getting $5k down for a home. I have never looked at the MHP asset as a quick flip. Longer term holds seem to work better for this model. It takes a lot of cash to buy many of those $25k homes and it takes awhile to get them repaired and ready so the 1-2 years does not seem practical. If you borrow on 5- 7 year term, then after that you have the free and clear $300/mo from the rental (minus taxes, insurance and repairs).Also, due to SAFE Act, RTO might not be legal in your state.  Best to check with your state association.

The cost of transporting from Texas (Legacy) to Pa. is a big hurdle–there is no way to discount that expense. Clayton Homes is near by in Tenn. and we have been very happy with there new homes more than Legacy.

Concerning the cost of transportation of a Mobile Home Carl makes a valid point that:‘there is no way to discount that expense’.Frank had recommended purchasing Tru Mobile Homes.We googled Tru Mobile Homes and gave them a call.  The Salesman answered immediately and sounded very knowledgeable.  However, he quickly stated that any cost advantage that his Mobile Home Plant could provide would be quickly negated by the cost of Transportation.  We did not realize that this particular Tru Mobile Home Plant was located in Texas.  The Saleman recommended that we contact their Tru Mobile Home Plant out of Tennessee.We wish you the very best!

Legacy uses “partner manufacturing locations” to produce homes in the north east. The Legacy program for a RTO program is pretty good. You (park owner) pays 20% down + moving and set up, and they (Legacy) finances over 10 years. Clayton on the other hand has a program that allows your tenant to become a buyer, and they can finance the sale through their in house financing.  I have some Legacy homes in our lease / option program and we got about $3,000 down.also- Legacy freight to Nebraska is $4,500, as they have to shop from the mid west or Texas to get homes there. one more thing- Legacy wants a minimum of 6 homes on each order, so their in house financing might not be on the table unless your committing at least $60,000 for the down and set up (assuming your close- one of my parks is 10 miles from the factory) and ready to commit to another 120,000 +/- in financing over the next 10 years. You also sign a personal guarantee- and I am not sure if you can transfer that if you sell the park. Unless your paying cash for the homes… but the return on non leveraged assets is quite different than that of your leveraged ones. I recommend you run the return on just a single mobile home as a rental (lease option / RTO - whatever) and see how the numbers play out. Plug in your expected turnover, costs to rehab, yearly depreciated value etc… remember not to add the space lease amount in this calculation as it will be added into your MHP projections. If your paying 10,000 up front, and borrowing $15,000 to add 15 - 20K in value to your park, you just need to know that depending on how stable the tenant base is, the expected turnover rate the amount you can really gross over space rent- the numbers might be very tight. In many markets if you filled your park with new homes, you might have a park worth $300,000 and homes worth $600,000… you might (probably will) have a unsaleable asset. So be very careful how you play this card- as it might be a great long term play, but if your a short timer it might crush you. 

Well done  Jim. I am curious about the comments on Tru MH. We may pull the trigger on a couple of those. They are for sure low end - any comments? Frank?  How do they hold up to the rental abuse?  The freight for us (TN - OH) makes it worth considering.Bret

Thank you all for your valuable input.