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I knew I had to laser focus on one asset class and one asset class only if I was to have the highest possibility of success. So, I looked at as many real estate asset classes as possible and looked at real life profit and loss statements for each of the main asset classes and noticed an unfair advantage that MHP’s had over other asset classes. Due to the incomparably high cash flow while owning a MHP, and the exciting proportionality-large equity payouts at the end of a MHP investment cycle it became clear very quickly that MHP investing was a wise move. When purchasing a mobile home park that has vacant lots which are ready to be occupied, what value, if any should you place on these lots?
From an accounting perspective, the majority of a mobile home park's value is comprised of land improvements , which can be depreciated at an accelerated schedule. Mobile home park depreciation schedules typically average 15 years compared to apartments of 27.5 years and commercial properties of 39 years. This unique tax feature often translates to tax free operating cash flows to the mobile home park investment owner. While demand for quality, affordable housing increases, the supply of mobile home parks is diminishing. It is estimated that approximately 1% of mobile home parks are redeveloped every year into higher and "better" uses.
Risks of Investing Manufactured Home Parks
Our top priority is to help our clients make sound investments by offering professional advice and expert investment strategy guidance. Invest in the manufactured home real estate niche by purchasing a manufactured home park investing, where you own the property that the homes will sit on, but not the homes themselves. Manufactured homes can range in price from $15,000 to over $100,000 depending on the size, built-in amenities, finishes, and so forth. Additionally, you’ll need to factor in other costs such as land, property taxes, insurance, the cost of moving the home into place, utilities, and maintenance.
All of this to say, manufactured homes can offer excellent investment opportunities in major metro areas since they can be purchased for relatively cheap and will generate cash flow in the form of rent, financing, land resale, or all of the above. A 2018 report compiled by Harvard’s Joint Center for Housing Studies found that the number of renters who spend 30% or more of their income on housing each month (those deemed cost-burdened) is rising year after year. Since manufactured homes can be built for a fraction of the cost of site-built homes, they are a desirable affordable housing option for tenants. I have learned that it is more cost effective and much quicker to purchase an existing park than constructing a new one.
How Much Are Manufactured Homes?
Due to the flaws in the first two methods I put all my efforts into valuing a mobile home park using the Income or Market Capitalization method. Under this method I take the Net Operating Income divided by the Capitalization Rate to come up with the Value. While this might sound like a simple process, it can be quite complex coming up with the true Net Operating Income and decided what cap rate to use in the formula. Regional Bank Mobile Home Park Loan – Rates can be fixed from 3 to 10 years and are tied to corresponding US Treasury Yields with corresponding terms and a 25 to 30 year amortization.
First is the fact that he, along with his partner Frank Rolfe, is the 5th largest owner of mobile home parks in the U.S. with over 20,000 lots spread out over 25 states. But he is equally well known for his ownership of MobileHomeParkStore.com - which was the first mobile home park listing service in the U.S. - and features between 750 and 1,000 mobile home parks for sale at any given time. Another factor in determination of an acceptable cap rate has to do with the requirements of your lender as well as the interest rates on the loan you use to purchase the property. If you are borrowing 80% at a 10% interest rate and are trying to buy the property at a 7% cap rate, you will have a large negative cash flow. On the flip side, if you are borrowing 80% at a 4% interest rate on a 7% cap rate, you should have a positive cash flow.
Manufactured Housing
If you are buying stabilized parks (roughly 70% tenant occupancy and above) it’s almost expected to have solid cash flow straight out of the gate. Operators in comparable asset classes (self-storage, multifamily apartments) often offer preferred returns to investors where investors are expected to receive say 6-8% return on investment each year as a “preferred return”. This is not a guarantee to investors, but more of an I owe you and that investors will get paid this before the operators get paid. If the preferred return (often abbreviated as “pref”) is not met in any given year then it rolls over and adds to the next year in a cumulative way. For example, if a specific investment offers a 8% pref and for some reason only 2% of that pref was met that year, then the remaining 6% roll over and adds on to the next years pref.
If you are a park owner, you’ve likely taken advantage of the cap rate compression in recent years and massively profited from this market shift. Stability – being that we are in the affordable housing sectors and that most tenants live in mobile home parks for financial reasons, the cost to move a mobile home is typically higher that the financial capabilities of the homeowner. Therefore, once a mobile home is set in a mobile home park, it typically stays there. If a homeowner needs to move, they more commonly sell their home to another approved tenant, leave their mobile home at the park and buy a new mobile home at their next location. We believe mobile home park investing offers outsized cash flow returns .
LOAN RATES
Not only was it physically difficult to locate one but to actually find out who owned it and then to see if they would actually consider selling. It was then that I decided to immerse myself into understanding the mobile home park business and make it my specialty. Over the past 20+ years I have sold many parks and become very familiar with them.
Cost Segregation is an IRS recognized method of creating increased tax benefits for costs related to manufactured housing communities. Property owners can treat specific components and their costs as personal property, thereby writing off their cost over five or seven years. They can also write off any land improvements over 15-years. I’m assuming by now you understand the MHP space on at least a slightly deeper level.
Remember this simple calculation is very generic and may or may not be the true indication of the value of a mobile home park. Community Bank Mobile Home Park Loan – Rates are usually fixed for 3 – 5 years with a 10 year term and are tied to Federal Home Loan Rates. More predictable financialsThe tenant-owned-homes create a more predictable outlook of both cash incoming and outgoing.
Mobile home parks are residential subdivisions – investor owns the land and property infrastructure and typically only leases the land to homeowners. You will find some sellers that expense everything and then find the opposite where owners capitalize as much as possible to make the bottom line look better. Spend some time going through all the expenses and estimating future capital improvements.
It should be noted, however, that if you depreciate your manufactured home, upon the sale of the property, you may be required to pay tax at ordinary income rates on the previous depreciation taken. The seller had owned the property for 16 years and had hardly raised rents in this blue-collar neighborhood during that time. Earlier this year I closed a multifamily loan on a B class property in Santa Monica, California at a 3.25 cap which made perfect sense in that neck of the woods.
Prices are just too high, cap rates are insanely low, but there is an oversupply of units on the market due to new apartment building starts and completed rehab projects. It’s unbelievable that investors are still paying too much for properties – sure that prices will go even higher. You won’t know when the next phase of the real estate market cycle will start, but you can learn to identify which phase you are in so you can make intelligent decisions on purchasing and selling. Demand for quality affordable housing often outstrips supply of mobile home park properties. Affordable housing is in high demand from young families, middle-aged people in transition, and seniors on a fixed income.
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These other issues will be addressed in an upcoming article. Mobile home park lenders also know that park owned homes have a much higher incidence of late paying or no paying residents, and much higher domestic problems resulting in tenants nearby being unhappy and sometimes moving out. In most mobile home parks, the park is in first position on the home above the mortgage in the case that the tenant stops paying the pad rent.
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