To Rent Or Not To Rent, That Is the Question

mobile home university
1

There have been a number of postings and discussions about the financial wisdom of renting POH’s. I am now facing a situation in which I have a park where there are a high number of vacant spaces (30 of 81 lots; 38% vacancy). I am working to fill those spaces with TOH’s but also am considering renting one or two of the new homes I have purchased and placed in the park. The intent was to sell them, but I am also considering renting to improve near term cash flow.

Using the old adage of “Do the Math and the Math Will Tell You What To Do”, I thought it was time for me to look at the financials in more detail using another park I own as the “test case”. And thought I would share this should you be in a similar situation.

For background, I have owned the test case park for four years, currently there are no vacancies. I have five POH’s I rent in the park, most of these were acquired in my original purchase four years ago. There are no loans on these homes, I own them outright. Percent return would increase if I had loans against them, but my actual profit would be lower. I used the current market value of the homes in my calculations, not what I paid. I mentioned the lot vacancy rate above because one consideration in calculating the return is whether to include lot rent in my revenue or omit it as it may be income the park would produce whether or not an owner rented a home (i.e., if I have 30 open lots to fill, I would not necessarily be getting any revenue for those lots unless I placed a home on them for rental). I calculated my ROI for both situations – with and without lot rent revenue.

My calculations include expenses actually incurred (property taxes, insurance, and repairs and maintenance) of the homes over the four-year period. On the revenue side it is my actual revenue generated, including periods of vacancies. There were two times in which a tenant moved and the homes needed significant money for renovations and improvements.

I am not able to cut and paste my spreadsheet table into this message for details and reference, my return was 17.7% annualized if I omit the lot rent from the revenue equation, and 27.7% if I include it in the revenue for the four-year period.

Depending on your ROI targets this may or not be the best use of your capital. That return works for me in my current situation, especially given current yields for alternative investments (stocks, bonds, CD’s, etc.). Cash flow is my primary consideration at this time, not the potential implications should I choose to sell the park. I also did not figure in the PITA factor (pain in the….) for being a landlord. That’s up to each owner, I lean on my park managers to deal with most of the care and feeding of renters as part of their jobs. Nor did I spend much time on tax implications, but I did model it and found a benefit of about $3500/yr or 3% increase in my total return for renting the homes (not included in the ROI shown above).

This is my experience with my real-life numbers over four years. I do have to say that I now have very good tenants in each of the homes, this helps significantly in the ROI. One more reminder on how important it is to select tenants wisely (or as best as we can anyway).

I hope this is helpful to some, comments welcome.

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Your calculations are missing the primary reasons why POHs are not a positive financial option. First you have depreciation on the home. This will eventually bottom out but no property will last forever without extensive rehab and/or eventual need to replace. This brings the next most important factor into play. Profits and expenses for a rental business are never based on yesterday. Rear view accounting never applies to the rental business. Those using this method do so to inflate their returns. It simply is not accurate……. “yesterday I had no expenses therefor my profit is 100%”.
The only way to estimate returns is to understand your market and project out to the end of the life of a property. A mobile home will likely have the highest expenses long term of any form of rental property. The two primary reasons for this is the poor/low quality of construction and the tenant demographics.
At best it would be most accurate to assume a bare minimum 60% of income in the form of long term expenses and use that as your base calculation on returns. Only a guesstimate at best but miles more likely to be accurate than rear view accounting.
This will in the majority of cases show that the rental portion on the home is likely a wash leaving the lot rent as your profit center. Long term POHs will lose money.
The two exceptions may be extremely high priced rental markets and slum landlords (zero to bare minimum repairs).
Having said all that I will say that it is only my personal opinion based on my experiences.

3

Greg,

A point or two;

You indicated “Your calculations are missing the primary reasons why POHs are not a positive financial option. First you have depreciation on the home.” I agree with this to some extent, in my case these are homes from the early to mid nineties and much of the depreciation (i.e., loss in value) has already occurred. The need for affordable housing is significant in most of the US and is true where my parks are located. For the homes in this example, I am confident that I could sell them for close to what I paid for them. So, depreciation loss is, in this example, minimal. Your thought does ring truer for a new/newer home to be rented. I’ll need to look closer at that for the new homes.

As far as the rear view mirror thought goes, these are actual expenses and revenue over a four-year period. A good data set. To continue with your line of reasoning, there would be no reason to obtain a proforma / financials when looking to purchase a park. I’ll take cold hard data to make my plans moving forward any day.

Also, the test case park is in an area that does not have high priced rentals, and I am not a slumlord (if I do say so myself). I am proud of the parks I own and how well they are maintained and managed. I’ll stack mine up against many parks I visit.

One more thought on mobile homes, I have found that newer homes are built quite well, comparable to stick built homes these days (structurally anyway).

I am wide open to feedback on things I may have omitted or missed in my calculations, kinda hoping for it, but for now I stand by my numbers until I am provided valid information that would change my thinking. The analysis was based on actual data, if some choose to ignore, that’s fine. I’ll make my decisions with objective evidence.

Thanks for the thoughts and comments, good discussion.

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Your POH rent rates and lot rent rates would be helpful for general context - especially for those who are trying to decide in advance what sort of expense ratio to expect given their circumstances. I always talk about the spread between lot rent and home rent that helps to steer the decision, and find it a solid basic barometer for my purposes in a given market. If lot rent is $250 and a 3/2 rents for $500 to $750 total you have a 200% TOH:POH spread, or 2x, which I think is desirable and would meet or exceed the numbers you mentioned.

The only other consideration are the intangibles, like less tenant turnover, pride of ownership, and reduced management time (from someone, not necessarily you).

I appreciate you laying out your case for POH - it’s a topic that deserves attention even though it’s not “popular” among some of the investors / operators in this group. In practice you have to deal with POH over time so you might as well accept that it’s part of the business and be savvy at managing them, which further benefits acquisition decisions for future properties based on return objectives.

Great post, thank you.

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MickG (sorry darn auto correct)

Thanks for your willingness to share your data. Do you have a standard remodel/tenant proofing plan you apply to each home you turn? If so how do you think this affects your ROI

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jhutson - thanks for the comments. I was afraid someone would ask the question about lot rents. I’m one of those owners that has not raised rents to market values. My lot rent is $200 currently for the POH lots, four rent for $675 and one rents for $825 (double-wide on a corner lot). All are 3/2’s. I like the ratio you put forward, makes sense. And to be clear, it’s not necessarily that I am pushing for POH’s, just trying to “do the math” so I (and others) get this right.

PhillipMerrill - I don’t have a standard as I do not have that many turns (5 rentals over two parks, 131 spaces). Good thought though. BTW, only my late mother was approved to call me “Micky” .

Thanks to both of you for contributing to the discussion.

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MickG …in the rental business expenses are estimated looking forward not back. Your four year data is only a snapshot in time. Historically rental expenses , long term, on a property are in the 50% range. Mobile homes would be higher.
You must estimate based on expenses for the next 30 years not the past 4. New siding, new furnace/AC, new roof, new floors etc. etc… This plus all routine maintenance/repairs and touch up between tenants. Vacancies, utilities (when vacant), evictions, legal, advertising, accounting, insurance etc. Most of these you may have either omitted or not yet experienced. The list of expenses is extensive and often unexpected going forward.
Actual expenses of the past 4 years are not a accurate measurement unless you were selling tomorrow. ROI on a rental business can only be determined at time of sale. Until then ROI is only wishful thinking. Nice to think about but in this business often fleeting.

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Greg, Okay, valid point(s). But what you did not see is that within my expenses are many of the things you mentioned (e.g., a roof replacement, two new washers, one dryer, an AC, unit one furnace, deck/repair replacement, window replacements, etc.). These expenses came in at about 16% of rents collected (just the R&M). All the other expenses you mentioned were captured in my analysis. Also, to reiterate, I have had very low turnover in recent years which has aided my ROI. To quote Sgt Joe Friday, just the facts ma’am…

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Your lot rents are too low. This skews your numbers. You are putting some of the potential “park” profit into subsidizing the numbers on the “homes” side of the business. I’m not saying it’s wrong business, only that it skews your analysis of the “homes” portion.

But back to your question – if you are getting a premium of ~$ 350 per month you might break even. More and you can definitely make money but you have to operate highly efficiently which is harder than hell to do all the time every time. You have to work for your money.

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Furthermore, I would add you are not asking the right question. The right question is “what are my options?” And you will find the choices are “rent” or “sell” or “lose” and unless it’s a cash sale they the first two look a lot alike in the short term until you see the ending. Consumer protection laws dictate that the “sale” part follows special rules for housing.

To rent or to sell, that is the question and what your park will attract in terms of qualified cash buyers and their market price comps will dictate the FMV for cash sale. Rental comps give you the rent gross. Calculate out the cost to the customer of financing of the FMV per month and you should find it’s cheaper than renting. If not, you’re renting too cheap because as a landlord you have all the risk of the financier plus maintenance and vacancy risk to boot. Your choice is 1. As a park owner collect the lot rent and keep order and repair the common areas, or 2. collect that plus whatever profit there is after the homerent is collected every month in exchange for lots of aggro and taking this huge risk with your capital.

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The fact remains that rental properties average 50% overall expanse rates in the brick and mortar business. Mobiles will be higher. Your expenses in the past years are irrelevant.
You have been lucky so far but this is not something you can depend on in this business. Base your calculations on a minimum 50% expenses and adjust your rental rates to show a profit at that rate.

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It would be fantastic to pay $200.00 lot rent. My parents pay $875 plus yard maintenance . Is there a way to shop around (as a tenant or POH) to find lower priced regions throughout the USA? Say one wanted to relocate. What is the best way to find these gems? Say someone was willing to leave the city and relocate based on price alone. Is there a list somewhere that updates lot rent s in a region?

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You have several options. First, you need to boost your lot rent. That will directly influence the future purchase price as part of your exit strategy. Second, you could do a lease option since the homes are more recent and HUD certified. You offer a reasonable down payment and a three year lease option. Meanwhile, the lessee is responsible for all mobile (mfg) home repairs and yard maintainance. If they opt out after three years or abscond, you have the down payment and you can do it all over again.