I have been an active investor in mobile home parks (MHP) for the last five years having bought, operated, and infilled eleven mobile home parks consisting of 700 lots. People often ask me, “Why do you invest in mobile home parks?” Here are my Top 5 reasons:
1. Sticky resident base – While the average self-storage tenant rents for nine months and the average apartment dweller stays for 12-14 months, the average MHP tenant lives in a mobile home for seven years, and the average home lasts in the park for 23 years. So, when the tenant leaves in seven years, they are selling it to the next tenant who may stay for another seven years!
2. Economic “moat” – New MHPs are simply not being built because communities do not want them in their backyard. Municipalities also don’t love them because they do not generate much tax revenue.
3. Under-market rents – Charles Becker, a professor at Duke University, did a study a few years ago and found that lot rents across the country were ~40% under market because mom-and-pop owners have not raised lot rents as they should have over the years. This gives a lot of runway for most new owners after they purchase a park.
4. Unit multiplier – Having multiple units is incredible for value creation. If you only have one park with 100 lots and you do a typical $20 increase in lot rent per month once a year (which is usually standard), you just increased the value of the park by $342,000 (at a 7% cap rate). So, by holding onto a 100-lot park for 5 years and bumping up the rents by $20 each year, you will increase the value of the investment by $1.7 million. MHPs are one of the least expensive costs-per-unit options in real estate.
5. Recession resistant – During a downturn, some people in the nicer, A-class apartments cannot afford them anymore so they move to B-class apartments; B-class tenants may need to move to C-class apartments; and former C-class tenants may opt to move into mobile home parks. Unfortunately, there are not many more affordable places someone can go, which is why, historically, MHPs thrive in recessions.
Now that you know why MHP’s are a good investment, here are the four things I look at to determine if a deal has a higher likelihood of being a solid investment.
1. Market Criteria
Metro population of at least 40,000 people and growing. We have learned the hard way that investing in mobile home parks in metros of less than 40,000 people is extremely tough so we now only buy parks that are in metros larger than this and have a growing population. The easiest way to verify whether or not your syndicator followed this “rule” is by researching the metro on www.bestplaces.net. This website will give you the population and the other important metrics below.
Average home value higher than $140,000. Brand new mobile homes nowadays cost ~$70,000 all-in, so if your average home value is much lower than $140,000, the operator will have a hard time infilling the MHP lots.
Median, three-bedroom rent greater than $1,000. Most mobile homes will be sold with financing through companies like 21st Mortgage. If the average apartment or house rent is above $1,000 per month, we have found that the demand will be there for mobile homes as they are more affordable.
2. Pricing
The general rule of thumb is that you want to have a 3% spread between the purchase cap rate and your loan interest rate. Cap rates are in flux right now with interest rates going up in the foreseeable future. In early 2022, we aimed to buy parks at a cap rate of 7.0% or higher since our loan interest rates were in the low 4%’s. If interest rates keep climbing, I imagine cap rates, in turn, will go up to 8-8.5% by the third or fourth quarter of 2023. We view rising cap rates as a good thing for the reason that if you can purchase parks at higher cap rates and the interest rates go back down like most people think, you can lock into long-term financing with a solid cap rate-to-interest rate spread that should provide stellar returns.
You can calculate the cap rate of a mobile home park by using the following formulas:
- Total Annual Revenue = number of occupied lots X monthly lot rent X 12
- Annual Net Operating Income (NOI) = total annual revenue X 0.65% (assuming a typical 35% expense ratio)
- Cap Rate = annual NOI / purchase price
3. Park Infrastructure
This is one of the more important factors in the long-term profitability of a park. The nice thing about mobile home parks is that there are relatively few big-ticket items that can put a drag on annual revenue. Pay attention to these items:
Roads
What are the roads made out of and what condition are they in?
If roads need to be repaved, it can easily cost $150,000-300,000 which can quickly turn a deal sour. While parks that are unpaved and have gravel roads require less maintenance, they are more unappealing and typically the price is reflected with a 1% cap rate.
Water
The general rule of thumb is that you want public water and public sewer.
These minimize the risk of the investment and high costs of operation. The risk with private well water is contamination or a water shortage. There was a park in rural Kansas several years ago that ended up having contaminated water from their well which sent a majority of their residents to the hospital the day before Thanksgiving. The fines and repercussions from this ended up shutting down the park. If the park does have private water, just make sure they have licensed operators overseeing the treatment.
Are they billing back the water currently or are there plans to bill it back?
This can be a nice, value-add generator if the current owner is not billing back the share of water usage to the tenants. This not only conserves water usage by about 30% but also increases NOI significantly.
What are the water lines made out of?
Galvanized water lines are a concern because they can corrode and rust on the inside and can end up leaking. We ended up passing on a park due to this because the bid to replace the water lines in the park was $750,000!
Sewer
Is the current sewer system public or private?
Typically, there are four options for sewers in mobile home parks: public sewer, septic system, wastewater treatment plant, and lagoons. This can be one of the most expensive items that can sink a deal, so you will want to make sure the operator knows what they are doing. The riskiest systems are wastewater treatment plants and lagoons.
- Public sewers are the safest bet with little to no risk to the park because they are operated by the city.
- Parks with septic systems typically have ~4 homes per septic tank. The main concern here is if there is available land space in the park to replace the leach fields when they reach end of life (~30-40 years).
- Wastewater treatment plants can have a life expectancy of 40-50 years, but the replacement cost can be $500,000 to $1.2 million. This can make a good deal turn bad in a hurry especially if the treatment plant is in its last years of service.
- Lagoons are the other big risk you can run into. They may have a low cost of operation, but there may be a high risk of the EPA coming in and shutting it down. The EPA has put in strict requirements and will revise testing standards on lagoons every few years. Without the proper aeration systems, it is becoming more difficult for lagoons to pass these standards thus putting them at risk of being shut down. If this happens, the park owner is left with the only option – putting in a wastewater treatment plant at a cost of up to $1.2 million.
Is the sewer bill being billed back to the tenants? If not, this is another opportunity to force appreciation in the park.
What are the sewer lines made of? One of our biggest deal breakers is Orangeburg pipe. If a park has this, then run! If you can envision your sewer line made of paper towel tubes, that is essentially Orangeburg. It collapses easily and is a money pit.
Trees
How many trees are in the park and how overgrown are they? We have learned the hard way that if trees have not been touched in a while, the trimming costs can be as much as $50,000 for a 70-lot park.
4. Operators
The last leg of the “MHP stool” is the operator. Here are some considerations to think about when evaluating the operator for your next deal.
Experience
What experience do they have in the industry, and how many parks have they brought full cycle? Being plugged into the industry over the last five years has been eye opening for me to see how many operators came onto the scene and started raising funds for syndications with only one or two small parks that they have owned for less than twelve months.
Strategy
What kind of park is the operator buying? In the mobile home park world, there are three main types.
Turn-around parks (high vacancy with heavy infill needed). The upside of these is that operators can usually 2-3X the value in a short amount of time by raising lot rent and infilling vacant lots. The downside is that they typically require substantial capital for the turnaround. You need a good operator with experience with these projects as they take a lot of work and oversight to maximize the value.
Stabilized parks (parks that are 80%+ occupied). These parks typically sell at a lower cap rate and have less upside. They require less oversight (with only an on-site manager and maintenance person) and can be run from across the country. The upside in these parks is through utility billbacks, under-market lot rents, and the typical $15-20 increase in lot rents annually.
Age-restricted communities (55+ communities). These are the most stable of all parks, but value creation is limited due to the age of your residents. Typically, they are on a restricted budget and can only afford minimal lot rent increases. They are a sticky tenant base as they usually stay in the park until they pass away.
Areas
The last consideration is what areas is the operator investing in? Traditionally, mobile home parks in Florida and California sell at extremely low cap rates and are tough to make profitable. The Midwest is a very stable market and is very desirable. I would be cautious with operators who have a heavy concentration of parks in blue states because of the higher possibility of “headwinds” like rent control and eviction limitations.
I hope this has helped give you an idea of what things to look for when you are evaluating MHP operators and their syndication deals. If you have any questions or want to jump on a call to learn more, shoot me a message and I am happy to help!
Brady Hanna is a mobile home park operator and a passive investor. Brady retired from the corporate world at the age of 40 after helping grow a financial services company from 4 employees to 130. He has been in real estate for over 10 years owning 12 SFR’s, flipped dozens of houses/year, built new construction subdivisions and turned around mobile home parks. He can be reached at brady@midlandparkproperties.com.
This article is for educational purposes only and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision. All investments involve the risk of loss, including the loss of principal. Past performance, and any performance results reflected in this article, is not an indication of future results.
