I just spent the past couple of hours reviewing the discussions on park owned homes (POH). I am located in Atlanta and have been looking primarily at parks in the Southeast and Midwest. There are a great number of parks for sale with a majority of POH’s.Having followed this forum for some time, I know the “smart money” consensus is on a “lot rent” rather than a POH business model. However, due to the implementation of the SAFE act along with default -v- eviction considerations, the trend seems to be moving toward rentals instead of outright sales. This brings up several issues and questions I am considering:1) If most investors are only interested in parks concentrating on lot rentals as opposed to POH’s, is there an opportunity to buy these parks at a “discount”? (Assuming the seller is willing to value the homes correctly)2) Most of the parks I have in mind contain existing homes in reasonable shape with acceptable occupancy rates. (Not huge infill situations)3) Most of the parks have a “delta” along the lines of $200 lot rent plus $400 home rent.4) I am willing to treat my participation in the investment as active rather than passive. (i.e: employing a full time manager/maintenace staff as opposed to a manager/greeter)Assuming the above assumptions are not only available but attainable, is this a potentialy viable business model?Please feel free to tell me if I am an idiot and thank you in advance for your consideration and feedback.Gil Farnsworth
Gil,We only rent as a path to ownership. For me, in my markets, rental parks are like flat apartment buildings… and they do not wear as well. So if I was looking at parks with rentals- I wold try to convert them to lease / options- and just have space rent. Here is the rub, you can not CAP rental income on the homes. The math does not work. So your buying two things, space rent (at the market level) and rental income- of which a great park would return 50%, most are break even. The fact is- people treat their own property better than a rental- so if they own it, it will have a better shot at being well cared for. If you can buy the park right- any of these deals can be winners… if you do not get the numbers right on the buy side- it is a long, long climb back to even break even…
Gil:I’ve talked to lots of MH people about “horizontal” apartments. As a lender who took back close to 5000 pads between 2009 and 2013, we were prevented by statute to sell homes, meaning we were in the rental business whether we liked it or not. I held MH for a maximum of 36 months and measured success through recovery percentage, not IRR. I also ran a portfolio of nearly 20,000 apartment units (probably closer to 50,000 in my career) at properties ranging from 60-750 units. As a result, I’m very comfortable with the rental model.However, I think the rental model works best if you keep these items in mind:Screening matters. Credit and criminal checks are essential and you should not skip those. Lease renewals and marketing matter. I think there’s a huge gap between MH and multifamily (MF) regarding renewals and marketing. What I consider basic MF marketing is very different from the “rent and forget” model of many MH owners. I’m not poking fun at MH owners; it’s time consuming to keep up the marketing messages.Move-in inspections and walkthroughs coupled with frequent house calls (at least quarterly) prevent misunderstandings and situations from developing. For example, hoarding is considered a protected class in some jurisdictions. Catch those problems early and prevent a lengthy eviction battle.Turnover in apartments is 40% (affordable/tax credti) to 70% (transient, contractor-heavy markets) per year. I usually price that at $800/turn for flooring, paint, and cleaning depending on the condition and market level of the unit. Obviously there’s some variability in those expenses. Look at the condition of your homes and run some numbers. A refrigerator costs the same whether you install in MH or MF.Generally speaking, in a low turnover apartment community, you can get by with 1.5 full-time equivalent (FTE) service techs per 100 units who should be able to handle 90% of your turns and your maintenance calls. Depending on your utility situation, I would increase that for MH if you have private well/sewer or master lease utilities.As a result personnel structure has to include people who can do more than scrub a countertop or repaint a cabinet. You need to generate enough business to cover the payroll burden. Alternatively, have a good list of contractors you can call and make sure to have more than 1-2 per task. Use Frank’s philosophy on avoiding overtime charges.Buy locally; I ran a 40 apartment, 10,000 unit portfolio in DC for a couple of years. The ability to move service techs from property to property based on demand was essential. The furthest distance between properties was 80 miles, the closest was 2500 feet. You can cut that FTE number with a geographically focused portfolio. I also consulted on a Chicagoland portfolio of 1200 pads and their personnel management was more of a challenge. Although they moved people around occasionally, I don’t think they invested enough in training and management to make full use of their personnel. Too much time wasted driving to and from Menard’s, not enough work done on site. Know your market well. Rentals can make sense in an urban or suburban location but make no sense in a rural location. SFH rental is competitive with MH rental and you’ll be waiting a long time for an acceptably warm body to drive by with a 2+ year rental need. I might consider rentals in a market near Columbus, GA or Warner-Robbbins where you’ll get some military traffic, but I wouldn’t consider it in Dahlonega.In some markets, you can participate in Section 8 (housing vouchers) programs. This can be a good solution if you have a good relationship with the local office and homes in good condition. YMMV.In acquisitions, expect rental parks to trade lower than lot rent parks, but also expect the financing to be more difficult. The valuation of the income stream from the home rentals is ‘disputed’ to put it politely. Some appraisers and banks may overlook it and apply the same cap rate as the lot rents. Most however (and all buyers) will significantly discount the home rental income stream which means that your disposition pricing and acquisition financing may not meet your expectations.Anyway, those are just some from the hip observations. I hope that others with a more intimate knowledge of the rental market will feel free to challenge my assumptions.Will