What do you say when someone tells you they dont like mobile home parks as an asset class because it doesn’t have tax benefits like multi family? Multi family has depreciation for their buildings, and MHP’s usually don’t have buildings to depreciate? What would say to this person who doubts?
MHP are depreciated over 15 years. You could possibly get a cost segregation done as well but I do not know if it would be beneficial on an all TOH park.
Exactly. For all TOH parks, what are the tax benefits? I know that the sewer lines/water lines/electrical system are depreciable.
Even with a fully TOH park there is infrastructure that should be allocated versus the land. You can depreciate that infrastructure. Some people even call out the infrastructure versus land value in the contract, or via appraisal, to support their position.
I am not aware of anyone who has bought a MHP and said, “Gee, I am gonna unload this asset because I can’t depreciate it enough - I am gonna go over to multifamily.” However you see people from multifamily get into MHP’s every day in search of a lower management intensity asset.
Whoever made this comment has no idea what they are talking about when using that as their argument for an asset class. Be sure to tell them that when they have to wake up at midnight to go fix a furnace in one of their units.
I totally agree. The problem here is that whoever makes the comment might not have to worry about furnace issues. They are usually just investors who want to profit as much as possible.
You can’t say that the profitability of a well run MHP is less than a well run apartment building without having owned both.
People that make those comments are making them from the peanut gallery. But then again that’s the whole stigma of MHP’s that have allowed MHP’s to have more attractive CAP rates for decades. So I am very happy to have fewer investors in this space.
I would say this person doesn’t have a clue about what they are talking about since buildings are depreciated over 27.5 or 39 years while roads, plumbing, fencing, land improvements are depreciated over 15 years.
I would say they are ignorant. With bonus depreciation in 2019, I was able to write off a large portion of a tax liability. Also, we amortize goodwill over 15 years.
You can say that in selecting investments you don’t let the tax tail wag the income and appreciation dog.
Taxation (e.g.) depreciation should rarely be the main factor in selecting an investment.
Im not an accountant or tax attorney. I keep hearing that water and sewer infrastructure have a 15 year recovery period but what I see in IRS Pub 946 https://www.irs.gov/pub/irs-pdf/p946.pdf is the following from page 28, 29 regarding MARC GDS
a. Certain improvements made directly to land or
added to it (such as shrubbery, fences, roads,
sidewalks, and bridges).
b. Any retail motor fuels outlet (defined later), such
as a convenience store.
c. Any municipal wastewater treatment plant.
d. Initial clearing and grading land improvements for
gas utility property.
e. Electric transmission property (that is section 1245
property) used in the transmission at 69 or more
kilovolts of electricity placed in service after April
11, 2005. See Natural gas gathering line and electric transmission property, later.
f. Any natural gas distribution line placed in service
after April 11, 2005, and before January 1, 2011.
g. Any telephone distribution plant and comparable
equipment used for 2-way exchange of voice and
6. 20-year property.
a. Farm buildings (other than single-purpose agricultural or horticultural structures).
b. Municipal sewers not classified as 25-year property.
c. Initial clearing and grading land improvements for
electric utility transmission and distribution plants.
7. 25-year property. This class is water utility property,
which is either of the following.
a. Property that is an integral part of the gathering,
treatment, or commercial distribution of water, and
that, without regard to this provision, would be
b. Municipal sewers other than property placed in
service under a binding contract in effect at all
times since June 9, 1996.
It seems to me that what is being said is the following
15 year Municipal sewer treatment plants are (aka lagoons, package plants)
20 Municipal sewers not classified as 25 year items
25 year Water distribution and treatment
25 year Municipal sewer placed in service after June 9 1996
@Brandon can you help me out here am I missing something here? Are we saying the water/sewer infrastructure is not municipal and therefore it falls into the 15 year general improvements category?
Thank you @PhillipMerrill for keeping me honest. You are correct, plumbing is not land improvements and not 15-year property. Always best to go back to the regs and check.
@Brandon not trying correct you. I was hopping I was wrong… I appreciate your high level understanding of the business and seem to remember you have some accounting background
For those of you who do “in house” or professional cost segregation at purchase what strategies do you employ? I.e push as much value as possible to 15 year improvements and good will as possible or push value to 20 and 25 year items? It seems to me like you better match your segregation to your business plan i.e long, medium, or short term hold, what capital projects you have planned etc. I know that some are even itemizing some the segregation in the purchase agreement. There seems to be wide degrees of aggressiveness in cost segregation. I really like this business as there is never an end to the learning.
Phillip, that is a personal decision and may not always match your business plan. My CPA advised me to take a very specific action for a very specific reason that was not necessarily related to the mobile home park business. The tax strategy considers your whole income scenario. Generally, however, my opinion is that it is best to avoid as much tax as possible earlier in the ownership span due to the time value of money concept.
That earlier write off gives you more cash to buy parks, homes, stocks, bonds, etc. With “Bonus Depreciation” we were able to write off a huge amount of value within the first year of ownership.
So what if that depreciation tax advantage is greater than that of MHP’s? And?
They also have higher expenses, and capital reserves better be at the ready.
But tell them, yes, multi-family is the way to go!
I would let them believe whatever they want.
You may want to read the Trump Tax Cuts carefully. Some assets will qualify for 100% first-year bonus depreciation. I do not know the exact rule, but I think you can write off A LOT of the park in year 1.
When someone tells me they don’t like MHPs because of X and Y, I tell them something like this, “oh you’re totally right, you should definitely stay away from MHPs. They’re dangerous and you will lose all your money”.
There are enough investors in this space…
Hahaha I tell everyone it’s overpriced, which it is. A bubble.
Honestly, do you think MHP’s are in a bubble too? I do.
Many asset classes are these days; rents too. But who knows, maybe its just a precursor to inflation.
This definitely seems to be the case. Not that prices aren’t inflated also.