Hi! I am looking at a park that is in a primarily rental market and the sellers assert that this is the ONLY way to run this park. (Another park owner in the same area who has 2 parks said the same thing - can only rent here.) They are the original owners who just took it back from a buyer who bought 4 years ago and ran it badly. The sellers will give owner financing AND have offered to be available to help guide us in running it and bringing it back to what it was before they sold it. Assuming that offer is real, having that kind of help would make a big difference which is one of the reasons this looks attractive. It is currently mostly park owned and rented out. In the 10/20 book, Frank and Dave discourage park owned homes and rentals but I am wondering if that strategy has changed at all since MH financing for owners is so much harder now. Basically, here are my questions:
-Are rentals a more acceptable business model right now or would you still avoid them?
-Is it generally a bad idea to START my MHP business with a primarily rental park?
What type of rentals are they? Low grade, or more long term? Why is it more of a rental market? No large employees in the area? Lots of factors to consider. Park owned homes can help pay off your debt, if the tenant base is stable.
Hi Josh, it is a college town and that is the largest employer. The rentals are 2-4 years. As for a stable tenant base - I think that there would be stable population to come in (and out), but not long term tenants. Thank you very much for your responses.
To me, this doesn’t sound so bad. We have a park which is mostly rentals and it is very profitable, but keep the following ideas in mind before deciding this is what you want to get started with –
Rental tenants have maintenance issues – depending on size, you may need a maintenance man or staff on payroll.
Rental tenants come and go – depending on the size of the park, you may need a full-time manager to arrange for cleaning up after tenants who leave, approving the final repaired/rehabbed product (if there is damage), taking apps, showing units, placing local ads, etc.
These payroll costs are going to be significant and we have found that scrimping on them leads to problems with theft, unhappy tenants leaving the park, etc. This cuts into your profit margin. Also, you will always be in “marketing” mode to reach the recent arrivals into town. This may not be a big expense but will always be a headache. And, there is always more uncertainty – the tenants can come and go.
Basically, it is not quite the same business as what Frank and Dave are promoting because you are really planning to run an apartment community with detached units. But it would be a great intro to MHP’s if profitable, and any future park with more owner-occupied units you could trust to be less headache.
Overall, if the numbers make sense I don’t see rentals as a huge reason not to pull the trigger, but it will be (1) more hassle and (2) less profitable than the alternative. For a passive-type investment, it will be a lot of work.
The mobile home rent is $525, market lot rent is between $150 and $250 (for a very nice park near there.) The asking price is $490k. I have also discovered that the park has 41 total spaces but 17 are empty pads, 5 have occupied POHs, 5 are Occupied Tenant Owned Homes and 4 are POHs that are empty and possibly un-liveable. As well, none of the other parks in the area are very full. This is looking dreary… I may have answered my own question but if you have other thoughts, I am certainly open! Thank you for your help.
Rough value of the park is 24 lots x $200 lot rent x 12 x .6 (assume 40% expense ratio) x 10 (value at a 10% cap rate) = $345,600. That’s a best case scenario. Add in the value of the homes (sounds like maybe $5,000 each x 24 = $120,000. Take off the cost to make these homes in decent condition so you are not a slumlord (assume $5,000 each x 24) = -$120,000. So the value is maybe $345,600. There’s no way that’s a $495,000 deal based on what you’re describing, and I would not be very confident about $345,000 either (I’m thinking more like $275,000).
Every time someone tells us that a park “only works as rentals”, it normally means that the homes are junk heaps and they know that they are in no condition to sell (if they even have titles) and it is a total turn-off.
Frank, thank you so very much!! That is exactly what I needed to understand and I very much appreciate the valuation. The seller does not want to budge on the price so that saves me a lot of time. I have learned so much from this process. Thank you!
In about 6 months, the seller will call and say he changed his mind and he’ll take your offer – happens to us all the time. Uneducated buyers today are few and far between and, in our opinion, that’s good for the industry because it keeps the pricing on parks down.
