Are mobile homes the solution to affordable housing? We have had several posts about these time-tested abodes and recently came across this short piece in the Knowledge Base of the Rental Property Owners Association, a chapter of National REIA located in Grand Rapids, Michigan.
Mobile Home Investing
Real estate investing is a broad term that most people associate with “buy and hold” of either single-family or multi-family residences, commercial office spaces, or rehabbing units or houses to sell. While these are great strategies for investing, they are the traditional methods and are highly competitive. The real estate market ebbs and flows, requiring investors to adjust to each season and be creative in some seasons more than others to remain profitable. One of the best kept secrets that lends itself to the more creative side of real estate investing is that of mobile home park investing. To the investors unfamiliar with this niche, it may sound like an unwise investment; however, the benefits of mobile home park investing are sizable enough to draw more attention and investigation when pursuing your next investment.
Three different types of mobile home ownership exist:
- The investor owns the entire mobile home park, which includes the lots underneath the individual homes and the land surrounding the lots such as the streets, utility systems, club houses, swimming pools and other amenities. In this form of ownership, the tenant owns their home and pays only for the right to occupy the land (i.e. lot rent) where their home is located plus the use of the facilities.
- The investor owns not only the land but also the actual homes. In this scenario, the tenant is paying for both the use of the land in addition to renting the home, which is like renting an apartment unit within a multi-family residence.
- The investor owns the mobile home, only, not the land underneath it. In this scenario, the tenant is renting the home like any single-family residence, but the investor must also pay the lot rent to the mobile home park itself. However, this option is not always feasible since not all parks allow for non-owner occupied mobile homes.
While the first type of ownership is generally not an easy strategy for a new landlord to manage, it’s a great goal to own a mobile home park one day. They generally need to be purchased with cash (e.g. private money or some degree of creative purchase terms to control the property) as many mobile homes do not meet lending requirements. Despite these hurdles, many benefits exist in owning and operating a mobile home park, and below we’ll focus on four of them.
First, investing in mobile home parks allows the investor to acquire more units for less money than one would in acquiring large multi-family properties or single-family homes. Furthermore, the investment is generally only for the land, not the homes themselves.
Second, costs are generally lower when managing the entire park as opposed to being a landlord of single-family residences. Since the investor owns the land and not the homes, the investor is responsible for the expenses involved in the upkeep of the park, whereas the mobile homeowner is responsible for the upkeep of the homes. Also, turnover is less common since the tenant owns his or her home and the cost to move a home is significant.
Third, the demand for mobile homeownership is increasing. Home prices continue to climb to historic levels and baby boomers on fixed incomes are retiring, which increases the need for affordable housing as their incomes are not increasing at the same rate. Also, many families living in mobile home parks see them as a better alternative to low rent apartment living.
Finally, mobile home park investing has limited competition from new mobile home park developments because of the significant barriers to enter the business, including obtaining proper zoning and acquiring the necessary permits and licenses. It also takes longer for mobile home developers to generate cash flow since they need a substantial amount of homes on the lots to pay the rent, which deters many investors from entering this niche of the industry. Additionally, as this type of real estate investing is a niche, one does not compete with new investors, homeowners, and institutional investors looking for the traditional real estate investments.
If you are interested in pursuing an investment in a mobile home park, it’s important to ensure you have established a strong team and systems to be successful and profitable. Furthermore, make sure you can obtain accurate data accounting for the park’s income and expenses. Some of the best investments are purchasing those businesses that are operated inefficiently so you can make the necessary updates to increase income and decrease expenses. However, these parks may not have very good accounting records, so as with any investment, make sure you can get a good return.
The second and third types of ownership are different as they require the investor to own the mobile home itself. Owning the mobile home itself, whether or not one owns the park as well, puts one in a similar situation to a traditional landlord with a different type of residence. As a result, differences will result in both the pros and cons of being a landlord of these properties.
First, generally the cost to own a mobile home is significantly lower than owning a single-family residence; however, rental income can be comparable. Therefore, your income in comparison to the cost to own the property is often much higher than a single-family residence. While you will have to consider the amount of lot rent to be paid to the park as a fixed expense, the income generated is often sufficient to cover these expenses and provide a healthy return.
Second, in instances where the tenant does not have ownership of the mobile home, you will likely be dealing with tenant turnover on an annual or biennial basis, similarly as you would with a single-family residence rental property. Consider these costs in your rate of return calculation.
Third, when it comes to making repairs on the home, you will want to ensure you retain a contractor familiar with mobile homes as damages and repairs to mobile homes are unique. A contractor unfamiliar with mobile homes may not know common issues or how to most efficiently and effectively make the necessary repairs or upgrades.
Finally, the value of a mobile home rarely increases. While they regularly function well for many years, you often won’t be able to sell the home for more than what you bought it for as the market value of single-family or multi-family residences does not translate to mobile homes. The value of the home is largely based on the year the home was built and its condition, including any upgrades that have been done.
Entering the mobile home niche market is more affordable when purchasing one home at a time as opposed to the entire park, and as mentioned, it has some unique facets when comparing them to owning a single-family residence. All three strategies of getting involved in the mobile home industry provide a unique and unusual way to invest in real estate, but as with other methods, it is profitable if you design it the right way. Investing creatively can be risky, but can also prove to be very rewarding.