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.
You future wealth comes from raising rents and infilling. Of course, some situations also have high expenses that you can reduce such as sub metering water, which are good if a deal has them but lot rents and infilling are the most powerful opportunities for wealth building.
A problem with pushing ownership of crappy old homes onto the renters is so often these sub $5k homes have a lot of issues that are coming due, like the roof, and the renters just don’t have the wherewithal to take care of them. I’ve been known to take care of those issues before selling them off and do not always get back the money I have sunk into them. But I can’t tell you the number of times I have had the owners of old home run off after their home has become unlivable because the roof has been leaking and rotting out the floor and exterior wall’s studs and such and I am left with having to shell out thousands to remove the home only to be left with a vacant lot.
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Thanks Andrew! It makes sense you do some of the work prior to selling off the homes but am confused regarding your comment on not always getting the money back. I understand you may put more capital into renovating the home than you are able to sell it for; however, would you be getting multiples back on your capital by way of increased value (i.e. you have another pad with a rent paying tenant which gets capped at sale or refinance)?
As I continue refining the strategy, it feels like putting some capital into homes before selling them for a larger dollar amount would likely attract a higher quality tenant - presumably leading to better curb appeal at this pad. Would you agree?
Yes that right according my experience at owning MHPs. Look, if you have an average older park that does not have a ocean view, you will make something like $2,000 or $3,000 per lot. You can sharpen your pencil on that, on a deal you are looking at but lets just go with that range. If you may have to dump $5,000 into a home that you do not recoup when you sell. Not ideal, I agree, but you may have extended the life of the home, let’s say, 10 - 15 years. In a year – year and a half, you will have gotten the $5,000 back and you have avoided a much larger expense – that being disposing of the home, loss of rent on the vacant lot, the cost of finding and moving in another home, if a used home, having to find and pay someone to fix it up, and perhaps selling at a loss and carrying the paper on it.
I would be happy to fill all my vacant lots at a $5,000 loss.
But again your big focus should finding properties that you can profitably raise the NOI by raising rents and filling lots. What to do with POHs is just a minor annoyance, that come with most deals. Without the opportunity to make huge value add gains, investing in real estate make little sense in my thinking. A stabilized property only makes the cap rate, and what are they – 7% or so. Even if they are 9% or 10% do you think those kind of returns are going to make you rich? They might keep you rich if you already are rich but make you rich? Raising rents and filling vacant lots is where your future wealth is.
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