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When purchasing a mobile home park where there are park owned rentals, rent-to-own homes, and mobile home notes it is important to break out the income and expenses from this portion of the business from the lot/space rental portion. Manufactured homes are relatively affordable to buy since they cost so much less to build than traditional homes. As a result, commercial real estate investors can build larger manufactured homes while still keeping costs low, making them a great option for first-time investors especially. Additionally, due to the low cost, sellers are sometimes able to provide direct financing to investors.
Since most RV park sellers are moms and pops, the door is often open to seller financing. If the seller gets paid in cash, they have to pay income tax and then put it in a CD or Treasury Bill for maybe 1%. If they seller finance, on the other hand, they only pay tax as they receive the payments and they get around 4% to 5% on the debt – that’s four to five times more annual income to them as investors. Then in a subsequent blog article I’m going to teach you how to navigate profitable mobile home park investments in today’s market. Tons of new and experienced investors are jumping on board to take advantage of this previously misunderstood asset class. MHP’s have proven to be one of the highest yielding and reliable investments, especially when compared to similar-kind investments (i.e. self-storage & multifamily apartments).
How the business models are different
There are guidelines that an investor must adhere to, but a 1031 Exchange is one way to defer capital gains tax. Finally, it’s easier to finance the purchase of a mobile home park than it is to finance the purchase of mobile homes themselves. But, there are still some common requirements that your mobile home park must meet in order to obtain financing. In order to keep manufacturing efficient and therefore costs low, there are very few customizable design options when it comes to manufactured home layouts, so from the outside they all appear similar. Any exterior additions to the homes must be approved by the local building authority and/or the mobile home park operator. When evaluating a park the overall condition and often ‘first impression’ is important.
In exchange for management their pay is usually free pad rent and depending on the size of the park they may also receive an additional monthly salary. It seems evident that multifamily sales prices have reached their peak. Sales for multifamily properties started dropping in May 2022 due to increased interest rates according to the National Multifamily Housing Council.
Replacement Cost vs: Existing Park (Zoning)
Spreads range from 2.45% to 2.75% over the corresponding treasury yield. With a self-made net worth estimated at over $5.5 billion, built by real estate, Zell is no stranger to choosing profitable commercial real estate investments. #2 is affordable housing MHP’s that people live in mostly due to economic reasons.
Firstly, to obtain land that will be granted zoning for this purpose will be most challenging. The cost of developing every new pad is somewhere in the range of $25,000 to $40,000 per pad, consequently a 50 pad park would require at least $1,750,000 in development costs, excluding the land cost. You must also build in the cost of borrowing during construction and all the way to when the park is fully occupied. Due to this fact the existing parks are much more appealing. Traditionally, Mobile Home Parks have some of the highest cap rates (7-10% National Average) across all of the asset classes.
Manufactured Home Park Investing Guide
Yes, the homeowner can lose their home to the mobile home park if they are often in default for more than one month. Therefore they have a large incentive to pay their rent on time. Large Potential Equity Payouts at Sale of Asset – MHP’s have historically had high purchase caps in the double-digit range. This means those who purchased at 15% caps could later sell at 12% caps, those who purchased at 12% caps, could later sell at 9% caps and so on. Manufactured housing parks boast consistently higher tenant occupancy rates than multifamily investment properties like apartment buildings.
The Securities have not been, and will not be, registered under the Securities Act, or the securities laws of any State of the United States or other jurisdiction. Learn more about how our real estate analytics software can help you become the next Zell, check out our previous blog The Need for Asset Management Analytics in Commercial Real Estate. Take advantage of STRATAFOLIO’s innovative software, and operate your portfolio like a modern-day Zell. With a team of analysts, accountants, and managers that work for him, Zell is able to read the summary data from his investments regularly. Reduce your management responsibilities You are also no longer responsible for the interior capital expenditure liabilities .
Other considerations on the value of the park will be the entrances, streets, landscaping, utilities, parking, lights, storage sheds, number of singles versus doubles, swimming pools, clubhouses, etc. The nicer the park typically the lower the cap rate and the easier it will to tap into better financing programs. In addition to the quality of the park considerations many mobile home parks have other factors that need consideration. This includes such things as vacant lots, land for expansion, park owned homes, and seller financed notes.
Items like replacing all the water lines or sewer lines for older parks, resurfacing the roads, topping all the trees, are large expenses that can occur in the future and they should be budgeted for. While they are not expensed for income tax purposes they are capitalized and depreciated over 15 years or so, and are therefore real costs. I would include at least 2-3% of gross income as a Reserve for Capital Improvements in your numbers when determining the value. Manufactured homes are built using high-quality insulation, which helps with both heating and cooling the space efficiently as well as minimizing sound transference. You can consider the possibility of your park being rezoned for redevelopment at a future date. This has become popular with old parks built in town centers that now have land values far in excess of the cash flow value.
If you’re interested to learn more about manufactured home park investing, whether that’s in the homes themselves or in a manufactured home park, we are here to help. Contact our team today for an initial client consultation or to grow your investment portfolio. The exact requirements vary by location and lender, and some lenders will only consider financing your park if you have detailed financial reports for past years, which can sometimes be hard to acquire if past owners were not diligent. The cap rate can also help indicate how long it will take to recover your investment. For example, a 10% cap rate would indicate a 10-year investment recovery period while a 12% cap rate would indicate a recovery period of 8.3 years. The first critical point is that your Manufactured home be located in a well-managed, well-maintained Park with an experienced operator.
This cap rate refers to the rate of expected return on a real estate investment property which is calculated by dividing the net expected income by the property value to find a percentage. For investors, the low per-unit price means that it’s more feasible to purchase several units at once, thereby spreading the risk between multiple units and tenants. As a matter of fact, manufactured homes have the lowest cost per unit of any real estate asset class. But what’s happening now is an anomaly due to the four factors in play below.
Zell began his career with residential property management, then moved into multifamily, and finally settled into the mobile home park niche. Mobile Home Park investing has helped billionaire Sam Zell become a commercial real estate investing legend. You can cut through much of the management hurdles of owning an RV park by self-managing it. While this is not required, many owners find they really enjoy replacing their day job with a career as their own boss, with a varied schedule and both outdoors and indoor assignments. Only select RV parks that are “destinations” and not “overnighter”.
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