When I hit my forties, I figured my wife and I had better start building a retirement account. I figured I'd start with mobile homes because they are inexpensive and provide fast pay-off. I love the idea of someone else paying for my property, in effect giving it to me free of charge.
I'd visited CRE Online, read many success stories, and studied Lonnie Scruggs' books [Deals on Wheels and Making Money with Mobile Homes].
As someone who always looks for ways to do things bigger and better, over the next three years, I practiced penciling out mobile home parks. (Available parks are rare in my area.)
I actually made several offers, but for one reason or another, the deals never came together. This process, however, was only calibrating the timing, so I'd be ready when the best deal became available.
I had my Realtor watching for available mobile home parks and sure enough, she called me the day her firm got a new listing--several days before the park was advertised to the public. Better yet, it was the one park we'd wanted more than any other.
The 32-unit park was located five minutes from our house, situated on five acres of riverfront property, 100% occupied, and included 24 single-wide homes, one double-wide, and seven cabins.
To us, the five wooded acres on the river alone were worth a big chunk of the $450,000 asking price. All those dwellings were a nice plus. Further investigation revealed the park was a major fixer-upper:
The mobile homes were 1970s models
The grounds were littered with 20 years of junk
The tenants were on month-to-month leases
Dozens of stray cats prowled the park
The septic system was failing
Appliances were old
Yards were unkempt
The park's dirt roads were rutted
The whole place needed to be painted
We were the first prospects to meet with the sellers who had owned the park for 20 years. We toured the park and learned what ownership problems they wanted to solve. They'd been energetic when they bought the park, developing it from an old campground into a fully-filled mobile home park.
They'd done a lot of work to develop it, but then ran out of gas. They were nice people who had just tired out over the years and were ready to cash out the fruits of their labor and retire.
The beauty of the property was that it was throwing off large amounts of cash. Rents provided $8,100 in monthly cash flow, and these rents were by far the lowest rents in town. For example, the seven trailers owned by tenants paid lot rents of $130 per month while the market average in our area was $185.
Park-owned mobile home and cabin rental rates showed similar opportunities. The owners knew the place needed lots of work, so they compensated by offering under-market rents. In addition, the park paid the water bill for the tenants, which ran anywhere from $950 to $1,400 per month.
My wife and I are not handy people, so we knew we'd have to pay professionals to do most of the repair and upgrade. The heavy cash flow looked like it would cover it. So we made an offer, which was rejected. We let it sit for a month and made another offer that was accepted. Here's our deal:
Sales price $400,000. We scheduled closing to fall on the 6th of the month, so 25 days of rents would be turned over to us at closing. In addition, all the security deposits would be turned over.
We paid $1,000 cash as the down payment. At closing, we received $6,500 in prorated rents and another $2,500 in security deposits. In effect, we ended up getting paid several thousand dollars to take over the property.
The sellers carried $149,000 in a second mortgage amortized over 20 years at 6.0% interest with a five year balloon. We did not have to make the first payment for 90 days so we could generate more cash for repairs. The seller also paid for a new property survey, and we split the cost of the appraisal the bank required.
Our bank provided a first mortgage of $250,000 at 6.25% AND gave us $50,000 held in reserve to handle the septic system replacement when we determine what's needed. No interest was payable on the reserve until we used it.
The sellers were happy because they sold the park and received two-thirds of their money in cash. They were also happy to know they'd have the rest of their money within five years.
The bank was happy because they had first position on a property that was very likely to increase in value. Better yet, their entire loan only represented 75% of the property's value, so they were covered if they ever had to take the property back.
We were happy because we bought a riverfront property that generated large positive cash flow for just $1,000 of our own money.
Total monthly payments look like this:
First mortgage: $2,240
Second mortgage: $1,083
This was easily payable from the monthly rents of $8,100.
After taxes, insurance, and park utilities, we were left with $3,000 per month to apply to repairs. We immediately installed water meters (using some of the septic system reserve fund) and identified and fixed numerous water leaks, knocking the monthly water bills from a high of $1,400 to an average of $500.
And now the tenants pay this $500, so we've eliminated water bills, increasing our initial cash flow by $1,000+ per month.
A year after purchasing the park, the positive cash flow has paid to repair and paint nearly every dwelling. The place is cleaned up; the cats are gone; the roads are repaired; and the old septic system is still hanging in there. We'll replace that as needed in the next year or two.
The bad tenants have turned over, and the new tenants are on six-month and twelve-month leases. As vacancies opened we raised the rents in those units, and monthly rents have now climbed to over $9,000--without having to raise rents of current tenants.
We've hired a park manager, and the property still throws off about $4,000 monthly positive cash flow. We'll continue to massage rents up toward market value over the next couple years, so this project will only get better.
We figure the park has already appreciated at least $100,000 in the past year through our improvements, and when it's paid off in 20 years, it should be worth well over $1 million. There's that retirement account we wanted. We can either sell the park at that time or just keep it and live very well off the rents.
I can't tell you how good it feels to know that our financial security is now assured. Not bad for $1,000 cash and some mental and physical elbow grease. And this was just our first deal. I can't wait to close the next one.