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Rates on the 10 year fixed mortgage have spreads of 2.45% to 2.75% over the 10 year US Treasury Yield. Freddie Mac Mobile Home Park Loan – Rates ca be fixed from 5 – 10 years and are tied to corresponding US Treasury Yields with spreads of 2.45% – 2.85% over the 10 year treasury yield for a 10 year fixed, 10 year term, 30 year amortization mortgage. Although mobile home parks are capable of achieving high returns, while simultaneously maintaining low vacancy and management liabilities – most do not. For many owners, higher cash flow alone is enough to combat the fears of mobile home park investing, and they trust Zell’s expertise.
Ultimately, the two phrases refer to different iterations of the same concept and in many cases they are used interchangeably. I have worked as a commercial mortgage banker for the past 25 years and have encountered many surprises. But nothing that equals the call I got last week from a client that was making an offer on a 36-unit, C Class property in Greenville, South Carolina.
Risks of Investing Manufactured Home Parks
MHP’s already perform well, and in a recession, typically perform better. This is something to take into heavy consideration given the current and near future state of the economy. Due to this, I know a whole niche of investors that are geared towards recession resistant investments only.
For those investors that seek immediate cash flow returns, mobile home parks are likely to be an attractive option. It was common that there would only be one buyer putting an offer in or negotiating to purchase a specific park. You could buy a park for up to and exceeding a 15% purchase cap rate.
How Much Are Manufactured Homes?
The same old tricks that used to work prior to 2018 do not apply today. Section 8 vouchers Used Towards Purchase of Mobile Homes – for those of you familiar with section 8, essentially the government pays a landlord rent on behalf of low-income tenants. This has been used to pay rent in the apartment and mobile home park space in the past, although now section 8 can pay towards the purchase of a mobile home. This is win-win for the park owner and for section 8 tenants. In most cases when you review a sales package for a mobile home park for sale it will not mention any reserve for capital expenditures. This really should be addressed in your evaluation of the park and in the due diligence phase.
We’ve established that manufactured homes represent a viable investment opportunity, but what are the benefits of investing in an actual manufactured home park? Recently reportedthat the home price index for manufactured homes shows an average annual growth rate of 3.4% as opposed to 3.8% for site-built homes. The mobile home park is an industry that is not overly visible and seems to be somewhat uncommon as part of one’s investment portfolio. Don’t let this fool you since I have come to learn that major corporations and wealthy individuals are now buying as many of these parks as possible. It has many advantages and the following information will explain some of them to you.
Manufactured Housing
Many of the parks where in the need of professional management and needed much love an attention to improve curb appeal and NOI. There were not as many mobile home park financing options, so seller financing was not uncommon. The people selling mobile home parks were moms and pops that generally lacked tight operations & professionalism, giving professional park buyers the upper hand in purchase & negotiations, leaving much more meat on the bone for the buyer. Basically, MHP’s were abundant, buyers were few and there where many well priced MHP’s in need of physical and financial improvement all of which was possible to big financial advantage to park buyers. So how do you know if you are buying at the top of the market?
(it’s more like when, than what if. Some type of financial correction in the U.S is inevitable, and much closer to us than we may think!) Think about it. In that scenario, when you can no longer afford $500 a month in monthly accommodation costs, where are you going to go? Unfortunately, you’d be led to live with family or friends, perhaps you’d sleep in a car or god forbid, you’d be homeless. Point being, there not many options if you can’t afford to live in a mobile home park.
LOAN RATES
Mobile home parks provide a unique array of revenue streams. As we’ve seen in recent times, even during bullish markets, consumers are in a constant search for affordable housing. This may even contribute lower occupancy volatility during a variety of market climates down the road. Part of this resilience may be attributed to EGI’s large stake in mobile home parks. This is because, unlike multifamily and commercial, a majority of mobile home park value comes from land improvements. These land improvements include things such as roads, utility infrastructure, and park design.
It took a while to create a solid, rinse and repeat history of successful mobile home park investing. Albeit, there was enough of a track record for Warren Buffet to join the mobile home industry in 2003. Not too long after came 21st Mortgage CASH program, FANNIE & FREDIE financing for MHP’s, Section 8 Mobile Home purchase ability, and numerous large institutional buyers. Consequently, many investors from other asset classes have jumped fence to join the MHP Investing craze. Most buyers are indeed paying too much for commercial properties when cap rates are historically low, rationalizing that rents can be raised over time.
Experienced acquisition and knowledgeable mobile home park operators such as Park Street Partners, are uniquely positioned to capitalize on this misunderstood asset class. If you are interested in learning more about Park Street Partners and its investment strategies please email us or register with us to receive access to our investment opportunities. Lenders are not as excited about RV parks as they are mobile home parks, so the interest rates are higher and cap rates are an extension of interest rates. Fannie Mae and Freddie Mac, for example, do not do loans on RV parks as they are not residential in nature, even though they do over 50% by dollar volume of all mobile home park loans and at extremely low rates.
Mobile home parks typically incur less than 20% of the annual tenant turnover that an apartment complex experiences. After a half a century of combined years in the real estate business, RVParkUniversity.com is the only place that will give you the good, bad and the ugly details on RV Park Investing. In my opinion the sweet spot in MHP’s is buying 2-3 star parks and turning them into 3-4 star parks. We just don’t see that many attractive deals in that sector. Deciding at these crossroads was easy for me, as the thought of continuing schooling was daunting with the illusion of extreme boredom and dissatisfaction for me.
Choosing more luxurious manufactured homes is obviously more expensive up front, but it allows you as the investor to charge a higher rent and the units will be more desirable for renters. In many metro areas where manufactured homes would be most desirable, the land is hard to come by and/or prohibitively expensive. In some areas, local or state laws only allow for site-built homes, and manufactured homes are prohibited. Additionally, if you invest in a manufactured home park, you will be managing many units and therefore spreading the risk across your entire portfolio. That way, if you have one problem tenant and/or unoccupied unit, the loss is offset by the rest of the occupied units in your park, which makes the entire investment less risky.
This accumulates year on year, then at a sale event, investors get paid their pref in full before other profits are split between them and the operators. Similar set ups exist in the MHP space, although it’s much easier and more common to not only hit our pref each year, but to exceed that due to the high cash flow. I’m going to touch on “forced appreciation” below, which not only increases equity, it also increases cash flow. Annual Lot Rent Increases – it’s expected in the mobile home park space that lots rents will increase annually. It’s common to see 5%-15% annual lot rent increase and sometimes you’ll need to increase rents up to or exceeding 20% to come close to market rents . If cap rates and occupancy stayed the same, just by merely raising rents each year for 3+ years, park owners can create handsome profits at refinance or sale with little effort.
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However, one of the most important factors in the performance is the management style. The management evolution began with first, the traditional self-managing owner who managed the operation on their own. Then the professional property manager emerged where manual processes were put into place to gain efficiency.
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