I often read older posts. I found these gems on park owned homes. The first 2 are from Brandon who took the time to break it down in fair detail. I wish he would go into even further detail on these examples. Followed by a post by Frank, who was NOT responding to Brandon.
Given the title of this post, I thought I’d chip in my 2 cents (for what it’s worth, probably about 2 cents). We have two homesco companies that we attempt to run at breakeven. Why at breakeven? Because the breakdown between “home” rent and “lot” rent is arbitrary when you’re talking about a POH, so we might as well (in THEORY) try to shift as much income to the “lot” rent and as little income to the “home” rent as possible. So ideally we would run the homescos at breakeven and take the profits in the “park” company, the better to increase value in the “park” company, which value can be withdrawn at the time of refinancing (or upon sale).In PRACTICE, we have one homes company with a huge number of rentals, and it makes a fair amount of money (more than enough to justify its own overhead costs in management, aggravation, etc). It does a lot of sales also, and purchases homes “on site” as well as “in the field” or from rehabbers or factories (or dealers “show” model in one case). We do not separate the “rehab for sale” from the “rentals” rehabs, but the expenses of the “rental” operation appear be commensurate with the income from the home rents, and the profits on the sales operations are enough to cover the expenses of “make-ready.” In other words, both “halves” of this company appear to make money.The other homes company does MUCH less rentals and makes much less money (close to breakeven in good year, after sales income is included). Why? Different markets, I suppose.We also have one combined park-homes company. It struggles to make money. It will increase in value with our time and effort selecting (converting/keeping) good long-term tenants and filtering out transient tenants that do the most damage and leave with large expense repairs. However it is a slog. This is not ideal. Far better to worry about increasing occupancy without all the rehabbing to get there. What would you pay for such a park? Can such a park be “capped” with a 30-40% expense ratio per F&D’s formula, or even 40-50% expense ratio? Yes and no. The “lot rent” portion can be capped but the breakdown between “lot rent” and “home rent” is essentially arbitrary if you don’t care how much money the “homes” side of the equation makes. To answer the original question, you can’t count on tenants paying for their own maintenance. When purchasing a park the tenants are a complete unknown and you cannot count on keeping them. You will eventually have to find your own tenants, and how quickly you are able to do that (and keep them) within your market is a (the?) test of your management. You can choose the market, but you cannot “undo” it once chosen. So, all things being equal, POH is “evil” because it is a drag on your management time and effort for $0 return (if run ideally). And it is easy to go negative (and you have to have the capital cushion to absorb this, hopefully temporary, situation). I’d appreciate hearing other’s thoughts on this. Brandon@Sandell
Brandon’s Second Post:
Just a quick calculation – for a $40,000 new home the insurance and taxes probably run around $2,000 per year? For a $10,000 old home maybe $500 per year? You had better be clearing that much in rent after maintenance and move-out damages. If the average tenant stays 12 months and does $1000 worth of damage and you take 3 months to fix it and another month to market, you have to gross in home rent $1,500 to $3,000 with a 25% vacancy rate, which is a pretty wide range, just to break even. If I calculated correctly, that’s an additional $167-$333 on top of your pad rent in the average case. And that assumes $1000 covers your damages (and maintenance and time and effort) and 25% vacancy is accurate. As Jefferson likes to say, your mileage may vary. Maintenance is sure to be something even if you have perfect tenants, so add that in. And you won’t have perfect tenants unless you find them yourself so you have to factor that in too. Brandon@Sandell
Franks contribution, he was NOT responding to Brandon.
Frank: While all these points are valid, I’m not sure I would say that POH = evil because the POH is what’s giving you the lot rent and that’s not evil. Unless tenants will live in a tent on your vacant lot, the home is what makes the money happen, so the POH is more of the solution than the problem. I think the more accurate way to look at it is that we all prefer that the tenants own their own homes, but when we need to fill a vacant lot, we have to use the POH as the catalyst to make it happen – BUT AS FAST AS POSSIBLE WE WANT THE TENANT TO OWN THEIR HOME OUTRIGHT. This differs from the weekly rental communities in which the intention is that the resident never owns the home. Now that’s evil – and stupid.I’m sure that many customers would also say that there’s no way that POH = evil because without the POH they’d be stuck in an apartment or living with their parents. What’s really evil is rental property without any goal of home ownership by the tenant (like apartments). Then you have a life long hassle.