Mobile home parks are some of the best investment options today. Consistent monthly income and lower maintenance costs, as compared with other investment properties, make them an ideal investment.
I have visited numerous mobile home parks in recent years that had amenities as nice as many country club resorts with numerous pools, fancy clubhouses, mini storage facilities, adjacent condominium units, RV or Motor Home spaces, putting greens, lakes, and tennis courts.
In some cases, the mobile home parks were located in prime locations directly on the beach.
Due to more stringent zoning laws in many regions of the USA, it is more challenging to develop mobile home parks today. With less new supply of these parks, the demand from buyers should increase too.
Mobile, Manufactured, and Modular Homes — What’s the Difference?
Many times people use the generic phrase “Mobile Home” when describing these types of housing. There are some key differences though between all three of these property types:
Mobile Homes were built in 1976 or earlier.
After June 15th, 1976, HUD (U.S. Department of Housing and Urban Development) required that all “mobile homes” meet new safer construction installation and quality guidelines for all homes built in a factory. Mobile Homes may be located within a mobile home park or on an owner’s property if permitted by local building codes and zoning ordinances. These homes usually have steel I-beams which run along the underside of these homes, and rest on top of concrete or wood blocks, metal stands, or concrete foundations.
Without the HUD approval, mobile homes built prior to June of 1976 are much more challenging to finance today as FHA, VA, and other governmental agencies and lenders do not usually lend on these types of properties. Due to the lack of readily available financing options, some mobile home parks own many of these mobile homes “free and clear” as rental units. In other cases, mobile home owners may structure seller financing options for prospective buyers of these mobile homes.
Manufactured Homes are built to the Manufactured Home Construction and Safety Standards (HUD Code).
And they display a red certification label on the exterior of each section which is transportable. These homes are built at a manufacturing plant. As a result of having met the more stringent construction guidelines set forth by HUD, these homes are eligible for FHA (Federal Housing Administration), VA (Veterans Administration), and even Rural Housing Services (RHS) under the Department of Agriculture.
Modular Homes are built and designed to meet the same state, local, or regional building codes as site-built homes.
Modular Homes are the fastest growing segment of the U.S. home building industry today. The costs to build these Modular Homes may be just one-half the costs as compared to the standard on-site constructed home, due to the efficiency of the building process at a manufacturing plant.
Valuation Methods for Mobile or Manufactured Home Parks
The Income Comparison Approach is the best method to use. A prospective buyer may calculate the income generated by the pad rents based upon current occupancy rates first. Then, subtract the operating expenses to establish the Net Operating Income (NOI). The NOI, in turn, is divided by some acceptable capitalization (CAP) rate to better calculate the value based upon current income.
Many of the parks that are selling today have cap rates in the 7% to 12% range.
Average operating expenses for a mobile home park are usually around 35-40% of the gross income as compared to apartments, which can be in the 50-60% expense range.
Mobile home parks also have a much lower turnover ratio as compared to apartments. When people are ready to move, they will just resell the home in the park, and the park owner will have a new homeowner. The biggest reason for the low home turnover is that it costs so much to break down, move, and set up a home.
When the park owner raises the monthly rent by $10 to $20 in a mobile home park, it doesn’t make much sense for a tenant to spend several thousand dollars to move their home in order to save $10 or $20 per month.
Another reason for the lower operating expense ratio for mobile home parks is that the park owner is not responsible for painting, cleaning carpets, or appliances. The park owner is usually only responsible for the area up to where the home connects to the utilities and the maintenance of the common areas.
Financing underwriting options to purchase or refinance entire mobile home parks today include some of these guidelines:
- High owner occupancy rates
- 70% + LTV 1st mortgage options
- 10% minimum cash down required from the buyer–15% to 20% + down is preferable
- Maximum 20% 2nd position seller carryback mortgages.
- Interest rates in the 4% to 6%+ range, depending upon the quality of the park.
Financing for mobile or manufactured home parks is largely based upon cash flow from the current rent roll combined with the quality of the borrower and the underlying asset.
Historically, newer parks with paved roadways and amenities are far more easily financed (typically 3-Star parks or higher). Additionally, doublewide tenant-owned coaches are also greatly favored over park-owned coaches.
Few real estate investments today generate more net cash flow than mobile home parks. Visit some parks in your region to better see firsthand the quality of these communities.