- Buy-and-hold investment strategy (Ideally 15 to 20 years holding period)
- Medium to high risk
- High initial investment needed - Enter the market by purchasing your own land for development or buying an existing park.
- Cap rates higher than other real estate investments (7% to 15%)
- Expense ratio to gross revenue is around 30% to 40% which is lower compared to other investments
- Potential tax benefits due to fast depreciation of property improvements
- High demand for tenants
- Limited competition due to high barriers to entry
HOW DOES IT WORK
Mobile park homes are an affordable housing option for low income earners. Compared to other real estate investments, investors purchase the entire parcel of land where the park lies and lease them out to residents who will either own their homes or rent them as well from you. This investment works well with a buy-and-hold strategy wherein it usually takes around 15 – 20 years to maximize cash flow returns.
Basically, you have 2 options to get into the market:
1. Setup your own from purchased land
If you decide to transform your land into a mobile home park, you’ll need to conduct proper due diligence. Make sure you are aware of local zoning laws and ordinances specifically if your intended location is zoned for mobile structures. You can do this by consulting your county’s tax assessor office. In terms of land size, look for lots that can accommodate at least a minimum of 10 to 50 units depending on regulation. Usually, one sub-lot in a mobile parking home ranges from 960 square feet to 2,500 square feet.
At the same time, you’ll need to work with your local utility company or contractor to setup electricity and plumbing before any mobile homes comes in. Once the basic utilities are up, you can now start leasing the land for tenants – usually through a long term lease. If you opt for developing your own mobiles homes, it’s best to look for a contractor with a proven track record. However, this may increase your capitalization costs which could significantly lower your return your investment. On average, it costs around $30,000 to $70,000 to build one according to the Department of Housing and Urban Development. To recoup this, you can also setup rent-to-own financing agreements with tenants.
2. Purchase an existing mobile home park
One of the most profitable ways to invest in a mobile home park is to buy existing privately owned ones. Accounting for roughly 35% of all parks in the US, these are usually managed by mom and pop operators seeking to cash in for retirement and have rundown/sub-optimally managed parks. Before acquiring the property, contact your contractor to do an initial inspection and assess the costs needed to do improvements, repair damages and replacing aging infrastructure and amenities. Park upgrades generally increase mobile home rental values without big investments needed in the individual homes. These can be in the form of landscaping, signage, clean yards, and organized lots.
After the acquisition and once the park is ready for occupancy, you can hire a park manager to oversee day-to-day responsibilities. This acts as your property manager who manages rentals, keeps vacancies to a minimum, does maintenance and resolves issues between residents. Usually, compensation can be in the form of free housing and they can take home a percentage of the total rentals. For larger mobile home parks, you’ll may need to hire a maintenance worker and a landscaper but ensure that the rent is enough to pay all these personnel. One important thing to remember is that you’re only responsible for mobile homes that were rented from you. Any issues with the mobile homes that are owned by the tenants should be up to them to resolve. Make sure that your park policies and rental contracts have these clear stipulations to avoid any unnecessary maintenance cost.
Generally, there is medium to high risk involved with mobile home parks. There is a huge potential in reducing this risk as you increase the number of units that you lease in your property. This is one of few investment vehicles that allow you to spread out your risk and increase your rental income without incremental costs or huge additional investment.
Potential risk involved that can affect rental income and return on investment:
- Zoning law changes that can affect course of operations. For example, changes in density per acre, legal limits on number of tenants etc.
- Huge amount of money will be tied to capital expenditures (if needed) such as the purchase value of the land and other initial development costs within the property.
- Repairs, improvements, and basic infrastructure costs may be higher than expected
- Higher insurance premiums if land is situated in disaster prone areas
Despite this, high tenant consistency allows for a steady stream of cash flow as compared to other real estate investments. At the same time, tenants are more likely to absorb a 10 to 30 percent rental increase every couple of years since moving costs are more expensive.
WHO IS IT FOR
This type of property is well suited for buy-and-hold investors who are looking for long-term investment horizon (15-20 years). It’s recommended for experienced real estate investors who are keen to diversify their portfolio.
To be able to make this investment work, the investor should have basic knowledge of property management and tenant relations. If you’re looking to develop the property, you should be knowledgeable in contracting, renovations, and basic infrastructure setup. Should be familiar with local real estate, tax, and zoning laws. Background in community developments and developing property subdivisions is an advantage.
EXPENSES & MARGINS & RETURNS
- AVERAGE INVESTMENT: Mobile home parks could go as low as $1,000,000 to $2,500,000 depending on where it will be developed. Parks with at least 300-500 lots could go as high as $20 million which are meant for bigtime professional investors.
- RETURNS: Mobile home parks generate one of the highest cap rates among other types of real estate investments – approximately 7% to 15% per annum.
- EXPENSES: Expense ratio to gross revenue is around 30% to 40% which is lower compared to other investments (50% of gross revenue for apartments, 60% to 70% for single family homes). Minimum ongoing maintenance in capital expenditures is usually around $125 to $300 per month.
- DEPRECIATION: Capital improvements on infrastructure around the property can depreciate within 15 years - faster than other comparable real estate investments (27.5 years for apartments; 40 years for commercial). This offers potential tax benefits once you sell the property in the future.
For example, let’s assume you buy a mobile home park at $2.5 million with 50 lots and the gross average rent for each lot is around $500 per month. If you have 50 lots currently occupied, that equates to around $25,000 in rent per month. To acquire the property, you borrowed 80% of the land value at 5% interest and paid a 20% down payment. In this simplified scenario, you’ll have the potential to earn a net cash flow of $10,000 per month:
PROS / CONS
What are the benefits of investing in mobile home parks?
- Available Seller Financing – Usually, mom and pop operators allow financing that can lower needed down payments, interest rates and improve ROI.
- Limited competition and supply – zoning laws have huge barriers of entry to new park developments thereby allowing mobile park values to continually increase
- Huge Demand – Affordable housing shortage is creating a huge market and high levels of occupancy for mobile homes
- Low Turnover Rate – Costly moving out rates for tenants results to minimal vacancies and makes it easier for you to increase rents without too much tenant resistance
- Few maintenance issues and capital repairs are mostly limited to the park itself
- Recession proof investment as target market are belonging to class CDE
What are the downsides of investing in mobile home parks?
- Huge capital requirement and harder to finance than other real estate investments
- Limited resale opportunities as the investment is not as popular as multifamily developments.
- Less appreciation potential as compared to other developments
- Potential tenants can have lower credit quality
Mobile home parks are an excellent investment for the seasoned real estate investor. You can easily do so by purchasing an existing mobile park or by developing your own land. While there is a medium to high risk, the potential revenue and high returns outweigh this.
- For further learning, you may check out the bigger pockets forum on mobile home park investing. By signing up, you can easily connect with other investors, get regular updates on potential new deals and learn from others who’ve done it before.
- Look and reach out to mobile home park operators within your local communities. If you’re looking to buy, your best first investment in this area is from a mom and pop operator.
- If you don’t have one yet, start fielding and building relationships with potential contractors. These can help you spot deals and make sure you won’t overspend on developing your parks.