Hi All,
I’m working through an investment strategy to screen potential acquisitions and be focused in my search for my first acquisition. This strategy is to target communities with several occupied/rented park owned homes that are older in age. These homes would be sold for small dollars (less than $5,000 cash) and titles transferred to the existing renters. They would enter into lot rent. The lot rent on these recently sold homes would be (i) significantly above the park’s existing tenant owned home lot rents while (ii) being $100-$200 lower than the rents these tenants were paying when they rented their home.
It feels like a simple way to arbitrage the lot rent rates on park owned homes as long as the value I ascribe to these park owned homes is in-line with what I am selling them to the tenants for.
What are some issues with my logic? And are there real life examples of how this could go awry?
Thanks in advance.
Brian
Why would the new home owners stick around if the lot rent was significantly higher than their neighbors, especially for an older home? People talk. Also, they are probably renting the home because they don’t want to maintain it, can’t afford it, or don’t plan to stick around. Then you could be stuck in an endless loop of late rents, or abandoned homes.
Sure, sell it for a low amount, but the renter might not want to buy it. You may end up selling it to someone looking to move into the park, but they won’t buy it with a overpriced lot rent. It’s worth it in the long run to sell the home and have a long-term tenant instead.
If lot rents are low, simply raise rents in the entire park. This is a much more appropriate and time-tested value-add.
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Thanks Brandon. These are all great points. All homes in the park are of similiar age and quality. This park is the value community relative to others in the broader market; however, there is still a significant discount to market lot rent. Thumbing on this a bit more, I think the strategy would be to increase lot rents across the board. If/when POH tenants walk, I would get the home back to rehab and resell at this reset market rate.
Is this more in-line with what you are thinking?
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Yes that’s what I was thinking.