You’re tired of working for money and have decided you want money working for you. You want a monthly income stream that doesn’t require you to be anywhere on a schedule. You want the income stream to be safe, dependable, tax-free, in your control, grow in value over time, and be something real you can touch and feel–unlike digits in a bank account or pieces of paper that claim to have value.
You want to buy a mobile home park because it fulfills all those desires. And you want to buy it with little or no money down.
But how to finance it? Most banks today require larger down payments, shorter loan terms, and tougher qualifications for approval. Their over-reaction to their self-caused real estate bubble has eliminated most buyers from gaining bank financing. Their loss.
Banks are just one source of financing, and not nearly the best one. Here are other ways to fund a mobile home park purchase without using a bank.
Get Seller Financing
In my reading and experience, over 30% of all mobile home parks are owned free and clear. The seller of a mobile home park is familiar with its cash flow. He knows the park is profitable and will continue to be if operated well.
He’s used to paying little or no taxes because of park depreciation and other business deductions. He certainly doesn’t want to sell the park for cash and face a giant capital gains tax. He just wants to retire from park responsibilities but keep the monthly income stream.
What a coincidence! You want to take over his responsibilities and pay him a monthly payment that will minimize his tax liability and earn him a fair interest rate. So you just have to convince him you’ll make that payment and operate the park well.
Here’s How It Works
I bought a park with 28% cash down (I’d just sold another business) and the rest financed by the seller over 14.3 years. Why 28% down? The seller demanded it, and I wanted my cash in something I could control. Why 14.3 years? The seller needed a certain amount of income per month, so we set our monthly payment for that and let the amortization work itself out with the balance we owed.
Our monthly payment is a bit higher than a loan amortized longer, but the park easily affords it, it made the seller happy to do the deal and, as a bonus, the park will be paid off pretty quickly.
When we asked the seller how he established his asking price, he told us his financial planner told him that’s what he needed in cash to invest in mutual funds to earn a high enough return to get the monthly income he wanted.
When we showed him the park’s net operating income (NOI) and how 10 times that was the normal sales price for mobile home parks, it showed he had listed the park for $300,000 more than it was worth. We then offered to make our monthly payment the exact amount of income he wanted and offered to pay the full 10 times NOI even though the park had a few issues.
We also reminded him how many mutual funds had lost money. He’d have no security if he lost cash investments, but his investment in our 6.5% mortgage was secured by a mobile home park he knew produced good income. If we didn’t pay, he got his park and income stream back. If his mutual funds tanked, he’d get nothing back.
He accepted our offer, which gave us a $300,000 price reduction and seller financing. No appraisal was required because no banks were used. He was happy, we were happy, and the deal closed quickly without all that ponderous bank paperwork.
Spread the Down Payment Over Time
What if you don’t have 28% down payment in cash? Everything is negotiable. Motivated sellers may not require a down payment. Others will allow you to pay your down payment over time. Just negotiate the lowest possible amount and then spread it over 12, 24, or 36 months. Make quarterly payments in addition to the monthly mortgage payment you negotiated.
Obviously the park has to pencil out to afford both payments. You may work for 1-3 years earning equity only, but that equity will still be worth many, many thousands of dollars. Once the down payment goes away, you earn equity AND monthly income.
Trade Something for the Down Payment
Sellers want something up front to get an immediate payday and to make sure you have enough skin in the game to stick with the deal. This doesn’t have to be cash. Do you have an RV, ATV, car, boat, time-share, vacant lot, cabin, second home, small business or other asset to trade? Do you have skills to trade? The more you learn about what the seller plans to do with the proceeds, the more you’re able to give him what he wants within the limits of what you have.
Lease the Park
Most park owners just want to be free of the tenants and park responsibilities. If you can’t convince them to sell you their park, try for a lease option.
You agree to a future purchase price at a future date. But you take over the park immediately. You make a rent payment to the owner each month and take over all operations of the park and pay all the bills. You also collect all the income.
If the park penciled out correctly, you’ll easily pay your rent and have monthly income left over. If you negotiate well, a portion of the monthly rent will be applied to your down payment at the purchase date. Lease the property for 1 to 5 years and you’ll earn enough income to pay any reasonable down payment at closing.
Many investors say, “If you can’t touch it, you don’t own it.” Mobile home parks are one investment you can not only physically touch, you can physically control.