If you don’t want to blow a bunch of money on mobile home parks, this is your lucky day.
The staff at MHP Weekly has made a ton of mistakes operating parks and we’re here to share our battle scars for your benefit.
We and our partners have owned 8,000+ pads and managed parks both in house and with 3rd party management. At this point, we feel like we’ve damn near seen it all. Despite the occasional drama, this asset class has treated us well.
Therefore, as a way to give back to an industry that serves an important need (affordable housing), we’d like to help you avoid some of those mistakes and improve your investments - whether you’re a mobile home park operator or passive investor.
Hopefully it will also encourage some owners to run parks the right way (for long-term results), which is both the right thing to do for the tenants and makes the most money. This is opposed to the short term tactics, or high year 1 cash flow + low park appreciation mentality we see from so many new investors.
Now, don’t let the below deter you. Parks are great assets when purchased and operated correctly. But most aren’t magical parking lots where you can sit back and count the mail box money.
Here are 10 mobile home park landmines to look out for.
Myth #1:
MHP’s are cash cows
Can they be? Sure. We’ve invested in parks that have kicked off 20%+ cash on cash returns. However, there are countless stories of park owners that bought a 7% cap rate park in a random small-town market, enjoyed a short stint of double digit cash flow and then watched their profits slowly fade into the distance.
Cash Flow Killers:
Failing infrastructure - due diligence might identify day one problems with water + sewer pipes. But what about year 2-5 problems? If you are buying 40+ year old infrastructure (aka: crusty old pipes) you’re probably going to have major leaks. Don’t even get us started on pin holes leaks or orangeburg sections that were missed in diligence - these still haunt our dreams. Sure, you can get by playing whack a mole on leak repairs. But one day an absurdly large water bill will arrive in the mail and your wife will find you passed out from sticker shock. The upside to leaky pipes, is that you and Marge from City Water Billing are going to become good friends….
Slow eviction process - in most markets, you can evict non-paying tenants in a couple months, but never as quickly as you’d like. In other (cough: socialist) leaning markets, buckle up for big delays. A great process, team and eviction lawyer can speed things up. But a lazy and perhaps underpaid team will let “professional tenants” drag this process out for an absurd amount of time.
Park owned homes - these can work in strong markets with stellar onsite staff & repair crews, but they are DEATH in weak markets without decent a decent economy. A park with a high percentage of old park owned homes in a soft market is going to slowly eat your time, capital, and sanity. The amount of oversight and money to properly rehab homes is substantial. Even then, one day you’ll pay $10K to rehab a 2010 Fleetwood single-wide, which is then turned into a giant litter box by some cat lady.
Small town vendors (lack thereof) - if you buy in a random small town, your selection of vendors is also going to be…random. Finding decent contractors and reliable labor in NoWheresVille USA is a HUGE problem when you have frequent maintenance issues or tenant turnover. You or your team will waste a lot of time trying to chase down willing and capable repair people. Often these vendors are nervous about getting stiffed and want payment upfront (wired) or in cash. They also probably don’t have the right equipment. They often do shoddy work. They might also take all your tools to the pawn shop and your rehab money to Cabo with their new girlfriend (who is also your park manager).
Myth #2:
It’s easy to run a park from 2000 miles away:
Is it possible? Certainly. But a lot of things have to go right.
If it's in a strong market, you get lucky with a great manager, you find decent vendors, your tenant base is reasonable, your collection and eviction systems are great AND you don't have a ton of park owned homes….then you can probably run the park smoothly - remotely.
Some of our favorite parks are far away, in smaller MSA’s and require almost no hand holding. But in the wonderful world of parks, these are unicorns.
When REMOTE oversight goes wrong:
Manager takes the job thinking it’s an easy, couple hours a week gig
Manager is a shut-in that refuses to interact with tenants, won’t knock on doors or post notices
Manager “disappears” for long periods of time and won’t respond timely to owner communication
Manager has a full time job and can only help in off hours
Manager calls himself the “Park Mayor” and has a ton of family and friends in the park
Small park that can’t support enough compensation to properly motivate a manager to do great work (or sell vacant homes)
Manager has a wee bit of a gambling problem
The property manager is CRITICAL for a functioning park. This is especially true for parks you’re not going to see monthly. Find someone reliable that has time to do the work and pay them well. “Overpay” to find greatness.
Myth #3:
Mobile homes once set, don’t move
It’s true that most homes never move. Yet a painful amount of homes can and will move out of your park if you operate in a competitive (high park supply + lower demand) market.
Other mobile home park owners are not above posting flyers in your park with “move-out” specials and 3 months of free lot rent offers. Other park owners (or their birddogs) will scour craigslist ads and jump on any used home listings from your tenants. They might not have $5,000+ to move their home, but a cutthroat investor sure does.
In high vacancy markets, this is war. The two ways to ensure your park doesn’t get raided are 1) don’t invest in a market with a ton of vacancy and 2) have a war chest of capital to outbid and counter attack. Pull a few homes out of a competitor’s park in retribution and they’ll back down. We call this the mutually assured destruction playbook (aka, my nukes are just as big as your nukes so let’s play nice).
Myth #4:
Bad Managers Can Be Reformed:
Some of our favorite managers, on a personal level, have been some of our worst performers. Good people can be god awful managers. Often this is because they are unwilling to have difficult conversations with problem tenants.
We naturally want to give good intentions multiple chances but inevitably the performance rarely materializes.
It’s not fun, but if things don’t change after a probation period, cut ties & find a motivated manager who’s property incentivized to produce good work.
Myth #5:
You can raise lot rents a ton without issue
The MHP gurus are right, lot rents are too low. Many operators and long-time park owners worry about the financial fragility of their tenant base - so much so they mistakenly keep rent flat or far below inflation.
This is especially true today thanks to spiking costs and the crazy apartment rent increases we’ve seen the last few years. Lot rents need to rise in order to keep up with operating costs, property maintenance and to prevent conversion to more profitable uses (re-development). Many mobile home residents are getting outsized value vs. comparable apartments.
This is largely why the supply of parks declined the last 30 years. Real estate tends to gravitate towards its highest and best use. If held down too long, dramatic things happen, like a conversion. This is a nice way of saying a lot of good people get a check, but lose their homes.
Naturally, this low rent issue is not going to be a winning argument with tenants who are facing a sizable increase, but it’s reality.
It’s also true that Mobile home tenants are highly unlikely to move after a rent increase. However - and it’s a big however - that doesn’t mean one should take a $400 lot rent to $700 with 30 days notice.
Just because an operator can, doesn’t mean they should. It’s short term thinking that’s bad for the industry, brutal on the tenants and will probably get the owner’s name in the paper. This isn’t the type of news clipping that’s posted on the family fridge.
Don’t get us wrong, we’re proud capitalists that believe the market is self correcting and will decide what’s fair. If an owner pushes rents too far, one way or another, the market pushes back. Therefore, we think there is better path for everyone: space out the rent increase (within reason) & give tenants ample time to adjust.
Myth #6:
“You can turnaround & infill vacant parks quickly”
Everything takes longer in mobile home park world. This is especially true when you’re trying to infill vacant lots. Homes are often on back order, MH dealer licenses take forever, MH installers are hard to pin down, city officials drag their feet to sign off on permits, electricians no show all the time, etc. This isn’t exactly a Silicon Valley “move fast and break things” type of culture. Often it feels more like a “It’s 5 O’clock Somewhere” type of vibe.
This is worse when you can’t drive down and “harass” the slow poke in person. It’s much easier to be dismissed by someone remotely.
Plus, even in strong markets you can only sell so many homes at a time. You’re probably not going to infill 6-12 mobile homes a month unless it’s an expansion in a top tier MSA and you have a stellar sales + install team.
All of this gets easier if you’re bringing a BIG capital budget to the table. The numbers usually work even if you throw a bunch of money at the problem (see what the largest private equity players do when they expand a park).
So you probably don’t want to fund a turnaround with peanuts or worse, from park cash flow.
Myth #7:
Passing through water expenses is easy year one money and you can recoup 100%.
Billing for water that was previously included in lot rent is a sizable rent increase and should be considered as such. Too many new operators think they can raise the lot rent a bunch day one and also bill for water (which can be another $50-$100 monthly payment increase).
We suggest one at a time. If you push too hard you might get a tenant mutiny. This is not great. Evicting an entire park for non-payment of water is an option, but your lender won’t be thrilled about that.
Also, 70% water bill reimbursement is more likely than 100% so give yourself room in your numbers. Small leaks and faulty sub-meter readings will happen.
And don’t forget about water sub-meter tampering from a few shady tenants. For some reason this is more prevalent in summer:
Myth #8
Used park owned homes are profitable
You can also make money selling your organs, but for how long?
To be fair, I’m assuming most MH gurus also don’t love park owned homes, but what the hell we’re including this anyways.
It’s true that every once in awhile you fix up a used home, sell it on a note for $20K, take a $2K downpayment, tenant defaults, you get the home back then sell it again for $20K and take another $2K.
This sounds kind of awesome, but it’s not. Over the long term, it’s better to just sell the thing for cost (or less) and remove the hassle. Reason being - one surprise remodel can wide out 5 years of used home “profit”.
That being said, newer + well built park owned homes in stronger markets tend to be pretty profitable (for now). They attract higher quality tenants that can afford higher down-payments. This tends to lead to lower turnover or, if they do leave, they probably won’t trash the place.
New homes often pencil to a mid teens return on invested capital. However after years of wear and tear they too can become problematic, so try to get them off your balance sheet when possible.
We get that old park owned homes (POHs) are sometimes a necessary “evil”, but we recommend not going in understaffed or undercapitalized on a heavy POH deal. An exception is if you have a clear plan to infill vacant pads with new POHs and eventually phase them out by helping the renters secure a purchase loan.
Myth #9
You can find deals on the various MHP listing websites.
In a down market, perhaps. Today? Not so much. Yes there are exceptions and we’ve bought a couple parks from stale listings that worked out well. But, if you’re looking to buy your first park, these listing services are better for practicing (looking at & analyzing deals) and for finding MHP brokers that are active in the space. Just reach out to them directly.
Myth #10
Test Ads Are All You Need to Gauge
High demand for affordable housing is almost a universal truth. But, you need tenant demand AND ability to pay over a sustained time frame. Regardless of income most people in a pinch can come up with a few thousand for a down payment (Bank of Mama) and first months rent. You still need these tenants to have sustainable incomes in a functionally local economy to avoid high turnover. Test ads results in stagnate cities can be a false positive. We don’t do test ads because we only want to invest where it’s obvious.
Conclusion
Basically, just avoid shit markets. This is pretty much the major takeaway. In retrospect, we probably could have just sent that as the subject line and saved us all a lot of time. Investing in growing markets is real estate 101 but it’s often forgotten in MHP land for some reason.
2nd major takeaway: invest back into the park
Mobile home park owners get an above average return because they have to deal with…owning a mobile home park! There isn’t an huge supply of people that can or want to pull that off.
But that doesn’t mean squeeze every dime out of land. The nice thing about doing what’s best for the long-term viability of the park is, it’s also what makes the most money (park appreciation and long term cash flow).
Yes, you could buy a 1 star park, barely keep the wheels on and still make solid cash flow today. But this is a tough row to hoe. It upsets the tenants, city officials and exposes you to permanent capital loss if things go sideways.
Reason being - a poorly run park is not going to be very liquid (if you need to sell). This is especially true if you look to sell to private equity. If operations, rents and expenses are all going the wrong direction, it’s unlikely buyers will be be there to bail you out. Buyers of declining parks want distressed pricing.
Milking parks for cash flow worked pretty well for a long time. We think that time has passed. Parks today need substantial investments to improve infrastructure and upgrade the housing quality (at least over time).
The good news: that means there is still a TON of opportunity left in this space for well-capitalized, professional operators and their investors. That will lead to better run properties, newer housing stock and a net positive for a country in dire need of affordable homes.
Happy trails,