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This is a great way to insulate your home while also upping its exterior appeal. You should also consider installing insulated skirting if you have the time to do it yourself or money to hire a professional. Some sellers have employees but, rather than report them the legitimate way, they pay them in cash “under the table”. As a result, whatever they get paid vanishes into oblivion and won’t be found since there’s no payroll tax, etc. Once again, you can find these errors by simply working through what your labor cost will be regardless of what mom and pop claims.
Obviously, if you were to put $1,000,000 of cash into a mobile home park where there are risks and time involved in managing that investment, you will want more than a 5% return on that money. Cap rates have been all over the place in that last few years but they are once again rising. The parks that are selling now have cap rates in the 9.00% and higher range. Determining the proper cap rate to use in the formula is arbitrary and will depend on what you are looking for as an investor. One investor may be satisfied with a 7% cap and the next investor needs to buy at a 12% cap in order to justify the risk and time involved.
So how do I determine what a specific mobile home park is worth?
However, you will not be paying property taxes since you won’t own the land. You will still have to pay for utilities like electricity, water, garbage, gas, and all. Many times the income and expenses from the entire operations are lumped together and the seller or broker says the property is priced at say a 10 cap. Sam Zell, another well known billionaire investor, heads up Equity Lifestyle Properties , one of the largest real estate investment trusts that owns and operates mobile home and RV parks throughout North America. ELS continues to grow and curate their holdings within the mobile home park space as a strong believer in the need and potential of this asset class. Often times these pocket listings can come with favorable terms in regards to price or purchase terms, so having the opportunity to evaluate them before others can be of great value.
When you rent, you won’t have to pay property taxes every year because the owner of the home will do it. Frank Rolfe has been an investor in mobile home parks for almost 30 years, and has owned and operated hundreds of mobile home parks during that time. He is currently ranked, with his partner Dave Reynolds, as the 5th largest mobile home park owner in the U.S., with around 20,000 lots spread out over 25 states. Some mobile home parks are on the tax assessor’s rolls for a fraction of current value – and after closing that value is going to up. In some states like Missouri (where rates are only 1%) it’s not a huge deal, but in some like Cook County, Illinois (where tax rates can approach 10%) it can derail the deal.
Testing demand for affordable housing
All of these things and more can do a lot of damage without you even realizing it. Some buyers tell me they want at least a 7 cap, some say 10 cap, some say 15 cap. Not every park has all of these expenses and some have additional expenses but this is a good starting point.
If the residents of the park are paying this expense then you can expect the operating expense ratio to be as much as 15% less than the average. I want to know how many lots there are, how many are occupied and paying, what the lot rent is, what expenses the owner is paying, and who is responsible for the water lines, sewer lines, and roads. Another hidden benefit of mobile home parks are the barriers to entry for competition. In most areas of the country, it is difficult to get the proper zoning, meet all the requirements to build a new community and actually make a profit.
Are Mobile Home Parks a Good Investment?
When it comes to owning a home on leased land, the first thing to pay for is the land rental fee. You will have no control over the amount of money you pay each month, and the landowner could add additional fees along the way. On leased land, the owner might charge you maintenance fees each month. Depending on the arrangement, you may have everything taken care of, or it might be up to you to maintain your home. You can bundle your mobile home purchase together with the land if you’re looking to own property. Or if you already own property, you can purchase a mobile home to place on it.
The easiest way to begin with is to consider the total number of occupied spaces, average monthly rent, and vacancies. Without them, your furnace or air conditioner will work overtime to compensate for heat entering and leaving the home, resulting in higher energy bills. In fact, it’s estimated that homeowners lose 25% of heated or cooled air without proper insulation. 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. Other options are to contact park owners themselves through cold calling or direct mail campaigns.
It would value a 100 space mobile home park the same whether it has 100% occupancy or 50% occupancy. Some mobile home parks will purposefully provide you with a cable subscription with hundreds of channels, many that you don’t even watch. If this is the case for you, try negotiating with your park manager for a lower payment option that better suits your needs. You could also request to get a gas, water, and electric meter set up outside of your home if you don’t already have one. Checking in with this daily can help you cut back and alert you when you’re using too much energy.
That said, both parks though different in appearance can provide the same returns at the outset. However, over time the neglected one will have need of much more cost in repairs if not regularly maintained. Another consideration is the service of utilities to the park which is also closely related to location. Most preferred is one that has full city services such as city water and sewer along with garbage pickup, hydro and cable TV. These can be more expensive at the outset but translate into easier management and upkeep.
Other considerations on the value of the park will be the entrances, streets, landscaping, utilities, parking, lights, storage sheds, number of singles versus doubles, swimming pools, clubhouses, etc. The nicer the park typically the lower the cap rate and the easier it will to tap into better financing programs. In addition to the quality of the park considerations many mobile home parks have other factors that need consideration. This includes such things as vacant lots, land for expansion, park owned homes, and seller financed notes. After determining what is an acceptable cap rate you need to rework the profit and loss statements you receive from the seller or broker. Your goal in this process is to determine the actual projected income and expenses for the first year after you take over ownership.
Items like replacing all the water lines or sewer lines for older parks, resurfacing the roads, topping all the trees, are large expenses that can occur in the future and they should be budgeted for. While they are not expensed for income tax purposes they are capitalized and depreciated over 15 years or so, and are therefore real costs. I would include at least 2-3% of gross income as a Reserve for Capital Improvements in your numbers when determining the value. At least 25% of the population can afford no more than $500 per month for housing costs.
A mobile home dealer makes money on the spread between the purchase and sale price and thus needs to have good profit margin to stay in business. As the park owner you can live on a much smaller or even a break even on the home sales and thus save your buyers thousands of dollars. Obviously Warren Buffett believes strongly in the industry as a whole and recognizes the demand and need in this sector of affordable housing. In almost all cases it is much more desirable to have a mobile home park connected to city utilities versus having private infrastructure to service these needs of the park. The main consideration in this regard is the economic impact to the park owner in maintaining and/or replacing private water or sewer systems throughout their life cycle. Also of concern, the liability is greater for the park owner with private utilities as they are responsible for the quality of the water delivered or any sewage contamination issues that might arise.
For example, think about how much you pay weekly for gas in your car or groceries for the family. It might be worth setting up a carpool system with a neighbor or friend. You could also try starting a community garden if your mobile home park allows it.
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