Newbie here…so forgive my ignorance
But if I can find a park with a strong CAP say 20-25% and the tenants pay for their own maintenance, why is this bad to have all POH’s?
If you cap the the income from POHs you could be paying 30k for a 5k trailer.
Assuming all the homes are paid for free and clear.
If all homes are paid for free and clear, then how can there be any POHs? I’m confused.
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and take the profits in the “park” company, the better to increase value in the “park” company, which value can be withdrawn at the time of refinancing (or upon sale).In PRACTICE, we have one homes company with a huge number of rentals, and it makes a fair amount of money (more than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
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So much good information here my thinking was if I’m able to get $600 a month for rent opposed to $250 dollars for a lot rent and tenants cover their own maintenance that sounds like a better deal to me.
Rent - lot rent- insurance-vacancy- repairs = headaches and baby sitting for very little return.
One of the main reasons that attracts me to this business is the lot rent model.
A park filled with tenant owned homes also becomes much more attractive to out of area buyers when you sell making the park much more liquid.
Some people make profits no matter what they do so your idea may work for you if that’s what you really love to do.
I don’t even have a park yet but this is what I’ve learned in the last couple months here and going through Franks course.
Have fun
There’s a Hugh flaw in this plan. You actually believe they’ll peform their own maintenance? More likely that leak, etc will be ignored until it’s major damage then they’ll run off. No way it’ll happen.
My experience with POH from my park owner customers that have them…everything is let go. Water leaks, drain leaks, roof leaks, broken cabinet doors, you name it I see it. They (renters) have nothing vested in the home so they let it go. Sad part is they DO NOT have to pay for the repairs so I don’t understand the mentality.
I was recently offered an 8 home/lot deal marketed as a 10 cap property. But once you dug into the actual home cost upkeep and maintenance, it was a 6 or 7 cap deal. And if you don’t upkeep the homes properly, they become a liability and financial hazard. The owners I see do the best with rental homes are either 1) long term owners who handle their own maintenance themselves or with solid inexpensive contractors and 2) owners who own and manage rent to own / Lease to own homes to build equity in their properties.As for insurance, you can typically figure $50-$100 per home for rental home liability (higher in the ice covered steps of the northern US) vs $15 to $30 for a site only. Property coverage on rental homes normally costs 1 to 2% of the total insured value (higher in the Hurricane and tornado/hail states).
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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
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So, to answer your question, yes: POH = evil.:0)
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.
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It is not necessary for park owners to own the homes their tenants live in. There is no reason a park owner must finance the purchase of a home they own in their community. Residents selling their home in a community do not finance their buyers so why do park owners feel it necessary to do so. Park owners do this primarily to fill spaces as quickly and easily as possible. There is no reason buyers should not be required to acquire their own financing on the purchase of a home. I have sold 4 homes in the past 3 years and in all cases buyers were required to provide their own financing. Park owner policy should be the same as home owners selling their homes - if you can not get financing on the purchase of your home you are not qualified to live in the community. It is very easy for a park owner to justify the existence of POH by using the excuse that most buyers can not get conventional loans to purchase homes but this is simply an excuse owners use to justify placing tenants in the park as easily and quickly as possible. POHs are a choice not a necessity of the business.
Greg,You’re fortunate to have a park in an area where the tenants are prosperous. We have a park like that in Bloomington, Illinois in which every home is a doublewide with a garage, and every sale is just the customer writing us a check. But we do hundreds of applications per year across 20 states and it’s rare in many parks to have an applicant with a 550+ score, which means they are not conventionally bankable. I wish we could use strictly third party financing, but that’s not feasible in many markets in the U.S. Although these customers can pay fine, they are excluded from the credit markets due to the conventional criteria, although we’re seeing more MH-specific lenders coming on the scene who understand the issues and know that, while these are not bad loans, they require outside the box thinking.
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My point exactly Frank it is the park owners option to finance not a situation where they are forced to finance any more than the home owner selling next door. Park owners have POHs by choice as a business decision. Those without POHs also do so as a business decision.In our situation buyers have bank loans, savings, friends and private loans they have relied upon to buy homes for sale in our community from us and from residents. The ability to afford to purchase by what ever means necessary is a excellent starting point in our screening process. When a buyer makes an offer on a residents home we do not even start the screening process until they confirm financing. This usually screens out 75% of the offers made on homes in our community. If we were to provide financing we would then be opening the door to allowing what we consider undesirable applicants into our community. In your case your present residents are probably attracting better quality applicants than you are when you consider there buyers access finances to purchase while yours are unable to finance on their own. Bottom line is you are setting the standards for your community by offering financing to buyers.
Greg , total agreement–we do not finance homes or have rentals–yes a different level of parks. But in reality a different business model since we are not interested in parks with POH since there is a reason they are there and also a problem they exist!!! Why are people not bringing new homes or newer homes into your parks??? I thought with the Crigslist ad you were checking demand. Remember we have in the past talked about section 8 homes. Just some thoughts from the heartland–friendly jabs.
No denying the fact though that Frank has a proven and extremely successful business. Easy to say mine is better but in reality it really isn’t. Just different.I also should admit if I could afford to finance my higher end homes I defiantly would but I would not chose to have rentals. I do not see giving up the attraction of only owning/renting dirt only to turn around and own the homes like a conventional landlord. The logic in that business plan totally escapes me.