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In the first chapter of my book, “The Encyclopedia of Commercial Real Estate Advice” I discuss the four phases of the real estate market cycle and the best time to buy. Winners are the sellers that sell at the top of the market. If the property every sold, the investor would be subject to 25% recapture taxes on the cash flow sheltered via depreciation.
Conversely, multifamily apartment properties in this recession have been going up in value pushing cap rates way down. First, this started with residential property values skyrocketing and many multifamily sellers waiting for prices to go up substantially before they put theirs up for sale. Secondly, it is thought to be due to an increased need for housing with vacancies averaging just below 3%, and rents rising at over 8% which theoretically should push prices up. Thirdly, because of the stress the coronavirus put on the economy, almost all apartment starts were either delayed or canceled. Fourthly, to compound this further, banks tightened underwriting and are still shy about lending on new commercial construction today due to the uncertainty of market rents, rental concessions, rental collections, and the time for absorption.
Mobile Home Parks: An Overlooked Gem in Real Estate
The latter, renting the mobile home may stay for less than a year, have junk and old cars in their yards and may do little to maintain the home and landscaping. Despite being a new concept to many investors, rented manufactured homes in quality manufactured home parks can be an excellent way to invest in the real estate market in a profitable way without large capital requirements. Manufactured homes typically generate higher near-term returns on investment than a comparable rented residential home rental investment does. With historically high inflation, rising interest rates, and the gross domestic product being down for two consecutive quarters, a recession could be looming around the corner. Unlike the great recession where vacancies and delinquency on rent payments dangerously increased due to high unemployment, the opposite is the case now. And most sellers today have savings plus good incomes and can afford to wait to get the prices they want.
Another telling factor is that multifamily starts (5 Units +) increased by 18% year to date through June in 2022 according to the National Association of Home Builders and will add 300,000 new units to the market in 2022 according to CBRE. The next thing to do is to come up with the anticipated expenses based not only on how the park is currently operating but also based on how the park will operate with you as the new owner. For example, if the current owner is managing the park, then you need to plug in an amount for management and payroll taxes and workers comp. If the park has vacancies and there is no advertising expense, then you need to plug in an amount for advertising. As you will read in any appraisal handbook there are 3 basic valuation methods. However, with mobile home parks two of those methods, the cost and sales comparison methods, have some flaws that skew the results.
DON’T: Apply Cap Rate to Mobile Home Rent
I knew I had to laser focus on one asset class and one asset class only if I was to have the highest possibility of success. So, I looked at as many real estate asset classes as possible and looked at real life profit and loss statements for each of the main asset classes and noticed an unfair advantage that MHP’s had over other asset classes. Due to the incomparably high cash flow while owning a MHP, and the exciting proportionality-large equity payouts at the end of a MHP investment cycle it became clear very quickly that MHP investing was a wise move. When purchasing a mobile home park that has vacant lots which are ready to be occupied, what value, if any should you place on these lots?
If regularly maintained these can all function very efficiently and possibly at lower costs. The one i'm looking at is a space rent only and does not own any of the homes. There is also a 1,400 SQ ft stick built home on the property. Of the many benefits to mobile home park investing, one of the most prominent is operational flexibility.
Investing in Mobile Home Parks
There are other similar type programs available with other lenders too. This general business model does not work in all markets as not all markets can support the financial requirements of tenants to pay the needed monthly payments to make these programs work. For the majority of markets it works in, this is certainly a major bonus to the park owner. The end of the recession phase, when distressed commercial properties are foreclosed on is a good time to buy. This is followed by the recovery phase when unemployment has gone down and GDP has gone up—this is a great time to buy.
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.
Approximately 26% of American households earn $25,000 per year or less , which allows for roughly $500 per month in total housing costs. The average apartment rent is over $1,000 per month and is smaller than a typical mobile home. Our mobile home park investments offer tenants a superior combination of quality and price than comparably-priced site-built homes or apartments in that area and provide families with a sense of community. With Cap Rates for Multifamily Apartment properties holding at historical lows, value Add Acquisitions are priced at an all-time high averaging a 5.5 cap. This is what a quality C Class property went for just over a year ago, so be wary of overpaying for a property that needs major repositioning or rehab. Unless you can buy it at a very good price per unit, this is not the best time to go this route.
All he has to do is raise the rents 60% to market rate and he will hit a home run. Low Construction Starts – in March of 2020, the corona virus pandemic scared most lenders from making construction loans on projects already in the works. About 6 months later these lenders were eager to lend again. But by then, the supply chain calamity increased the cost of materials and labor making it economically prohibitive to build.
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.
It’s not that I didn’t like education, in fact, I’m obsessed with growth and education. It’s just wasn’t a fan of traditional schooling which I felt held me back from my creativity and full capabilities. I wasn’t excited about option #2 either, although that seemed the less of 2 evils, so I chose one of the top paying blue-collared professions, steel fabrication & welding. For example, there may be a pad minimum – commonly 15 pads or more are required to be eligible for financing.
Once they are assembled at their home site, manufactured homes are often indistinguishable from traditional site-built homes . Parks come if many sizes in terms of land base and numbers of rentable pads. A rule of thumb, any park with a minimum of 30 pads can afford to have an onsite manager. The manger is usually paid with free monthly pad rent in exchange for general management duties.
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