Park-Owned Mobile Homes
What are Park-Owned Mobile Homes?
In today’s Mobile Home Park market, Park-Owned Mobile Homes are a reality that every MHP Investor must consider. But what, exactly is a Park-Owned Mobile Home? To clarify, the general term “Park-Owned Home” (POH) refers to any rental unit that the MHP Owner owns in his park, which they usually rent out at a “unit rent”-price, or attempt to sell. They could be Park-Owned Mobile Homes, or RVs. But for the purposes of this article, we’ll call them all “Park-Owned Homes” or POHs. Those homes within a MHP that are owned by the Tenants, and who pay Space Rent are called Tenant-Owned Homes or TOHs. WHY PARK-OWNED MOBILE HOMES? Why would anyone want to own the trailers in their MHP? Wouldn’t it be far better to have the tenants own their own homes? That way the tenants would do the maintenance and repairs themselves, at their expense, they’d take greater pride of ownership, and since it’s difficult and expensive to move a mobile home from one park to another, they’re not likely to go anywhere, so that’s real security for a landlord. So, why on earth would any park owner ever want to own the trailers instead? Realistically, that’s not really a choice you have, because in today’s market virtually no tenants are moving their trailers into MHPs like they used to. Today, if you have a vacant space in your park, there’s really only one way to fill it. You have to buy the trailer yourself. The incentive for park-owners should be obvious: they’re turning a vacant space that earns no income into a money-making rental unit. And they’re filling up their park, raising it’s Net Operating Income (NOI), and thus its value. And, they can take a greater hand in how their park turns out.
AREN’T PARK-OWNED MOBILE HOMES TOO EXPENSIVE TO OWN? The conventional wisdom today is to “never own the mobile homes, the maintenance will kill you.” We hear this constantly, especially from recent graduates of the many “MHP Bootcamps” that exist today. These trainers turn out students who very quickly disregard any Mobile Home Park that has Park-Owned Homes in it. They’ve been conditioned to believe that POHs are so bad that there’s no possible way to make them profitable. But in doing so, they reduce the number of parks they can consider for purchase by a massive percentage, and these some of the most profitable parks . To be fair, ‘conventional wisdom’ is partly right. If you don’t have anyone to run your park for you, and it’s 1,000 miles from where you live, you’ve got to keep it as simple and risk-free as possible, which means nothing you have to maintain or repair, in other words no park-owned units. Yet, many, maybe even most of the most successful MHP Investors/Owners not only tolerate POHs, but actually embrace them. Why? Because, done right, they can be hugely profitable. GEOGRAPHIC EFFECTS OF PARK-OWNED MOBILE HOMES In many higher-priced states, like California and most of the Western states (everything west of the Rockies), Florida, most of the Northeast, and now even Texas, it doesn’t make much sense to own park-owned mobile homes, and here’s why. In Sacramento, California, for instance, the market space rent is around $500 per month. If you own a park there (and I speak from experience, because I did for 9 years), and you have an empty space to fill in your park, just about the only way you’re going to fill it is to buy a mobile home yourself and have it moved in and installed. Then you can either rent it out, or attempt to sell it. For now, let’s assume you decide to rent it out. I had two Park-Owned Mobile Homes in my 80-space park in Sacramento. I got $550 for one and $600 for the other. What? Only a $50 bump over the bare space rent? Why so low? Because as soon as you push the rent of your POH up too high, you’re in competition with apartments, and you’ll rarely win that one. So, in higher-priced markets like California, there is very little financial incentive to buy POHs. However, if you have vacant spaces to fill, there isn’t really any other choice. So, many MHP owners, even in places like California, often end up buying used mobile homes and RVs to fill their parks up, because they have no other choice. However, when you leave these high-priced markets, and move into the rest of the country, in the South and Midwest, for instance, quite the opposite plays out. Again that Sacramento park gets $500 per month for space rent and $600 for a 3-bedroom unit. In a place like South Carolina or Arkansas, the space rent might only be $175 per month, but you can still get $500 for a 3-bedroom mobile home. The key to this puzzle is ‘cost of entry’, in other words, what you have to pay for the park. In places like California, MHPs start at a price of around $50,000 per space. In the South, it’s fairly easy to find parks for $10,000 per space, or even less. So, even though the space rent is one-third of California’s, you’ll only pay about 20% as much for a MHP in the South. Now, when comparing unit rents, it slants very favorably toward the Midwest and the South. If you can get $500/month for a POH in South Carolina and you paid $10,000 per space for the park, that’s an annual return on that space of 60%. That same space in California gets you $600, but cost you $50,000 for an annual return of 14.4% on that space. Of course, the cost of adding the Park-Owned Mobile Home hasn’t been taken into account yet. We get into that below.
PARK-OWNED MOBILE HOMES: SIZE MATTERS Let’s look at a very typical example of buying a POH in the South, where we have done literally hundreds of park-owned homes. Throughout most of the South, used mobile homes are quite common, so the market to buy used ones is generally very good. Double-wides aren’t very common in the Southern states, because they cost twice as much to move and set up. Very long single-wides are the preference, typically 14’ X 72’ or 16’ X 80’. This brings up a very important consideration in this process, and when considering a park for purchase. Make sure that the vacant spaces you plan to fill are large enough, particularly deep enough, to fit a typical modern mobile home. Many older parks were built in the days when mobile homes were 40 feet long, and so with setbacks, maybe the sites were 50 feet deep. Nowadays, unless you want to buy expensive new coaches that can be ordered in any length, you’ll either have to buy older 1970s-era trailers (dubbed “Iron Dragons” because of their metal siding), or putting RVs in those spaces. Neither is a good option, so when considering parks with vacant spaces that you plan to fill, pace them off and make certain that they’re deep enough to take a modern coach including setbacks front and rear (totaling a minimum of about 80 feet). HOW MUCH IS A PARK-OWNED MOBILE HOME? Again citing a typical example in the South, we generally buy 1990-ish 3-bedroom/2-bath single-wides for between $3,500 and $6,500. Then we have to move it from where it is to where we want it to go. This averages around $2,000 or so (different on every one, based mostly on mileage). Then, it needs to be set up on stands, leveled, and hooked up to the utilities, which typically runs another $2,000 or so. Then we need to put skirting on it, have a set of stairs built for the front and back doors, maybe replace the carpet, paint and do every imaginable repair to get it rent-ready. On average, this runs another $3,000 to $5,000, maybe more, maybe less. That puts you at somewhere around $15,000 to go from vacant space to rent-ready unit. PARK-OWNED MOBILE HOMES – NEW OR USED? Of course these prices are on the lower end of the spectrum. That’s not to say that they are unrealistic. We hit numbers like this often, and sometime do better than that. But it takes hard work to get it done for these kinds of low final prices. Especially when trying to manage a project from across the country, it is very easy to experience what we call “slippage” in all its forms, dragging it out and costing you more money. Again, managing this end of it is just one more thing we do. But buying used trailers that must be moved, set up and repaired in an attempt to save money is just one approach, but by no means the only approach. Buying brand new mobile homes is another option. We have a couple of good suppliers, actually we buy direct from the manufacturers in the South. We have been able to buy new 3-bedroom/2-bath singlewides for around $25,000 delivered and set up. And since they’re new, they don’t need repairs. They do, however still need skirting and stairs front and back. But you’ll likely get a better renter and higher rents for a new unit. And, you can get them financed if you want to leverage. We’ve purchased new units from the manufacturer, taken their financing, and paid around $300 per month to them while collecting $500 per month from the tenant. So we clear $200 per month for a few years then we own it outright. Both ways work. WIND ZONES, AGE & OTHER CONSIDERATIONS High winds are a factor in many parts of the country. Check with your local authorities to see which Wind Zone your park is in. Wind Zone 1 is basically normal, and nothing special is required. If you’re in Wind Zone 2, you can only bring in Wind Zone 2 or higher trailers, and the tie-down system is beefier. Again, check with your local authorities and always get permits. Don’t try to sneak a mobile home into your park. There’s even a Wind Zone 3, but maybe you shouldn’t buy a park in Wind Zone 3 anyway. Age is also a consideration. Try to buy modern-looking trailers rather than the old all-metal “Iron Dragons” from the 1970s and earlier. These older trailers are also not set up for the big electrical needs of modern households today. And anything prior to 1976 probably has aluminum wiring instead of copper, and it’s prone to fires. Fire bad!!! Condition is also very important. Cosmetic stuff is easy and cheap to fix. Structural is not. And if all the wiring or plumbing has been stripped out of it, you should probably pass, unless you’re a professional in that trade. Buy the best trailer you can, it’s usually worth it. HOW MUCH CAN I MAKE ON A PARK-OWNED MOBILE HOME? In many markets in the South, that unit will rent for around $500 per month. That’s $6,000 per year. Now, there is an ongoing Cost-of-Ownership (COO) for every unit that you own, once you rent it out. It must be maintained, repaired as needed, there are annual tags or taxes that must be paid on every POH, and other costs. We are currently managing and maintaining hundreds and hundreds of POHs right now, and our average COO is about $1,000 per year-per unit. I can document all these numbers, but how we achieve them is not something I’m prepared to take the time or space to explain in detail here. Suffice it to say we have a very refined system that allows us to consistently average that $1,000/year/unit-mark. I’d be happy to go over it with you in detail when you call. So, that means you should net around $5,000 per year on your $15,000 investment (the park-owned mobile home). That’s a 33.3% Cash-on-Cash Return!. What else can you invest in that will produce a 33% return? There’s only one thing, and it’s even better!
VACANT PARK-OWNED MOBILE HOMES The only thing better than buying then renting out used POHs, is fixing then renting out vacant POHs that you already own. Often when you buy a MHP it will include several POHs, some rented and some vacant. Usually, they’re vacant because the owner has failed to repair and maintain them and they have fallen out of inventory. We do enough of these turn-around projects in the South these days that we’ve hired our own crews to do the work (hiring locals is usually problematic). And our average cost, averaged over hundreds of POHs, to get them ready to rent is less than $4,000. The income-side remains the same, so you should net around $5,000 per year on your $4,000 repair investment for a 125% return. Many unseasoned buyers look with skepticism at vacancies, believing that they are an indication of deep-lying problems that should be avoided at all costs. We see vacancies as upside, as opportunity, as profit. Filling vacancies, whether vacant spaces or vacant units, is our business, it’s what we do again and again and again. Because it works. PARK-OWNED vs. TENANT-OWNED We have parks that are all POHs, and other parks that are all TOHs and every degree in between. Each has it’s advantages, it’s strengths and weaknesses. The big plus to TOHs is stability. Those people aren’t going anywhere, and one way or another, you’re going to get your rent. But the downside is you can’t make much money renting spaces for $175 a month. The big plus to POHs is cash flow and lots of it. As shown above, you can completely turn a park around this way. The downside is the added responsibility for the maintenance and repairs, etc. But with a strong enough system (like ours) you can keep those costs in check. The bottom line is that after all the smoke clears, the money you can make with park-owned homes is too good to pass up, for any reason. The parks we run that are all TOHs are generally very easy for us to run and the expenses run lower. On our parks with lots of POHs, there is much more to do, to keep track of, and costs run higher, but these parks make more than anything else we have. Sometimes I think a mix of something in the middle is a good compromise, half POHs and half TOHs. Who knows? Every park and every situation is different. SHOULD I SELL MY PARK-OWNED MOBILE HOMES? I see this a lot. MHP owners go through all the trouble of tracking down decent used mobile homes, inspecting them, negotiating then buying them, getting them moved and set up, getting permits, then finishing it all up. They could keep it as a rental unit, and if you’ve been paying attention (above) you already know how lucrative that can be. But their fear of the maintenance and repairs is so great that they would rather sell it to someone else in the hope and/or belief that they will take care of fixing it when it breaks. This thinking is flawed on several levels. First off, we’ve already shown how much money can be made by renting it out, and we have shown that we can keep the costs low. So they’re missing out on this huge golden goose that never stops laying eggs. Second, they’re assuming that they’ll buy the trailer for $15K then sell it for $20K to some guy with a wad of cash. But that almost never happens. Usually, the only way the units can be sold is to take a small down payment from the tenant (often about the same as what it would have cost him to move in as a tenant), then a payment plan for the balance. The combined total of space rent and payment to you for the unit (if they’re separated in that way) can’t be much more than the rent would have been, or the tenant won’t be able to afford it. So, in a best-case scenario, the MHP owner will get about the same amount of cash flow from selling the unit as he would have by renting it. Except that now, per the terms of the note the MHP owner carried back on the trailer, the higher cash flow is only temporary. In 2 or 3 or 5 years, when the loan for the trailer is paid off, then that cash flow goes away, and now you’re just getting space rent. All things considered, if you’re going to go to all the trouble, why not benefit by it forever? And in a not-necessarily-the-worst-case-scenario, when or if you have to evict, it can be much more difficult and time-consuming evicting people who have a claim to the ownership to the unit they’re living in. We always advocate keeping the POHs as rentals. RENT-TO-OWNS Some MHP owners want to sell their tenants their homes under Rent-to-Own Contracts (RTOs), allowing them to continue to treat the buyers as tenants until the trailer is paid in full, and keeping the title to the trailer in their name, transferring it only once the tenant pays it off. Not enforceable in all states (so check your laws, sorry Texas), RTOs have most of the same problems as outright sales with carry-backs, and a few of their own. For instance, you sell one of your POHs to a tenant on an RTO with the understanding that from now on, he has to maintain and repair it. Winter sets in, his heater quits. He doesn’t have the money to fix it. He calls you, you say, “Too bad, it’s yours now”. He calls the County and tells them his evil landlord is renting him a place with no heat. They come down on you like a freight train and you pay for the guy’s heater. So, even though you’ve given the tenant every benefit, the main one that you’re looking for, which is freedom from repair bills, will likely be denied you the first time it comes up…and every time, for that matter.
ABOVE: These two homes have just been moved into a park. The temporary blocks the movers set them down on are still in place. They still need to be set up, skirting and steps before they’ll be rent-ready. CONCLUSION: PARK-OWNED MOBILE HOMES- YES OR NO? If it’s not already obvious to you, we love Park-Owned Mobile Homes. We have, manage and maintain many hundreds of them. Over the years, we’ve developed our systems and methods to a very high degree in this area, because owning Park-Owned Mobile Homes is so critical to our success in the mobile home park business. Success with Park-Owned Mobile Homes boils down to the same thing as success with MHPs in general: Operations, operations, operations. In the end, it’s not the park, or the trailers that are going to make you money, its going to be the operations of the park and the trailers that will produce. And that’s what we do. Call me if you’d like to know more about what we do, and what we can do for you and your park, or to help you find the right park, or to make sure the one you’ve already found is the right one, or to devise an Operational Plan and/or a Turn-Around Plan. Bottom line: I love talking about MHPs. So call me any time with your MHP questions, no matter what they are. There is no cost or obligation, so please call me, ANDY TALLONE at (925) 323-2134 or EMAIL ME. I look forward to talking with you about MHPs in general, and answering any questions you may still have about Park-Owned Mobile Homes.