How to Analyze a Mobile Home Park — Essential Investment Criteria

Looking for a profitable mobile home park is like looking for a partner. Surprised? Don’t be. Both searches start by defining detailed and specific purchase criteria.

We want to know when we’ve found precisely what we’re looking for. That means selecting specific, actionable criteria. When you’re looking for a partner, you think beyond, “They have to be cute and friendly.” Our criteria also include things like, “They should be adventurous, spontaneous, playful, and supportive”—or whatever you’re seeking.

You may need to search further, wider, deeper, and longer, but when you finally come across them you will know precisely that they’re ”the one.”

Some goes for the mobile home park (MHP) space. We only want to acquire “the one” (so to speak) that meets our purchase criteria.

Here are the mobile home park acquisition criteria we use at my company, PropertyWorkz.

Quick disclosure: Before we dig in here, it’s important I point out that I’m simply sharing our criteria for educational purposes. The aim of this article is to equip you with some key considerations to ponder while you ultimately create your own MHP purchase criteria based off your specific circumstances, needs, available resources, and confidence/experience level.

Market and location

“Location, location, location” as a generalization may ring true, especially in the single family, retail, and short-term rental spaces. In my opinion, as long as there is strong demand for affordable housing in a market that has the capacity to provide enough employers, tenants, and contractors to confidently and successfully complete your business plan, then location is otherwise not as critical to a mobile home park as other asset classes may be.

Having that said, location is important so let’s begin with macro locations and then work our way down to the finer details.

Midwest

We really like the Midwest as we are still seeing the best bang for our buck there, with generally higher purchase cap rates and more spread in the deals.

Pros

We find deals here with larger spreads/larger upside.
There is generally a solid demand for affordable housing in this region.
There are many mismanaged parks in this region, which gives us more value-add after purchase.

Cons

Mismanaged parks require more work (as opposed to stabilized parks), and although we like value-add, not all investors do.
The winters can be cold and snowy and as MHP owners, we want to make sure we are comfortable with staying on top of snow plowing, winterizing mobile homes, and underground water leaks in the dead of winter. We have systems in place to stay on top of things, but dealing with cold weather is not for everyone.
Exit caps can be higher in this region.

Southeast

We are bullish on the Southeast as there are many sound metro areas with generally higher-quality parks and higher demand on resale.

Pros

We find good deals here with decent spreads.
Many solid metro areas.
High demand on resale.

Cons

Good deals are fewer and father between.
Costal markets can be exposed to natural disasters (we avoid these high-risk markets).
Some markets have low demand for affordable housing.

Southwest

Similar to Midwest, though with different weather conditions and deals are fewer and father between.

Pros

Still can find good deals here.
Generally good demand for affordable housing.
Has favorable state laws for landlords and business owners.

Cons

Deals are fewer and father between.
Hot weather causes wear on exterior of homes and cooling of park-owned homes can cause higher maintenance costs. It’s also harder to make a park “pop” with such dry landscape.
Many parks are in more remote locations.

Mountain West, West Coast, and Northeast

MHPs are typically higher priced and we rarely see deals that pencil out in this region. Cap rates are low. Many states have rent control. However, if you do find a good deal in this region, there will typically be very high demand on resale.

Evaluating cities and metro areas

As previously mentioned, we are looking for a market with strong demand for affordable housing and the capacity to provide enough employers, tenants, and contractors to confidently and successfully complete your business plan.

Minimum city population

First off, it’s important to know where to collect data. We use BestPlaces as that’s what our lenders use when they are underwriting. Simply type in the city and state name in the search bar, then press enter, and basic stats for your city will pop up.

We want our city population to be 30,000+ people. Anything less and we typically don’t have enough tenant base to pull from to fill vacant homes.

Additionally (and in my opinion, more importantly), we need to have enough contractors to pull from for all our construction projects. There is nothing worse than being stuck with only one plumbing contractor in town that can handle underground water leaks. Not a good position to be in, and the potential of being charged more than customary pricing is high.

Both these points are especially important if your business plan requires a significant amount of construction, which is typical of value-add deals.

We also want to feel comfortable that our city has sound anchor employers that are generally reliable and stable. Hospitals, government, Fortune 100 companies, universities, and schools have historically been good categories of top employers.

That said, with us switching to digital more than being in person, universities and schools will likely not have the horsepower they used to. We want stable and reliable employment options that can employ our tenants and keep the market strong.

Of course, we are currently seeing very high unemployment due to COVID-19 lockdowns and many businesses’ consequently slowing or shutting down, so we want to feel comfortable that we are not in a high unemployment environment comparative to the national average. It’s hard to collect real-time data on this, so a little extra due diligence will be needed in the foreseeable future.

Minimum metro population

If our city metro population is over 30,000 people, then typically we like to see our metro area population at or over 100,000 people for the same reasons we want 30,000+ in our city.

If our city metro is under 30,000 people, then the deal still may work if it’s in a metro close to or above 1,000,000 people. In this case the city is weak, but the metro is strong, which can compensate.

One additional layer is how far the park is from the metro. Sometimes we can technically be included in a metro, but physically a three-hour drive away. We can use the metropolitan area stats for financing, which is a bonus, but in all practicality, we want to be within one hour’s drive from the metro to be able to draw from that market in any reasonable capacity.

Evaluating different types of MHPs

Family vs. senior parks

There are two main types of tenants at any given MHP: family tenants (no age restriction) or senior tenants (55+). Typically, a park is categorized as one or the other. You can still have a small percentile of under-55s in a senior park, but the vast majority need to be 55+.

Both types of parks work for us.

There are typically fewer delinquencies at senior parks, but more restrictions in who qualifies due to age restrictions. Senior tenants are typically fussier than family tenants, so the quality of senior parks is usually a little better, and they generally want to communicate with management more often than family tenants.

Affordable housing vs. five-star MHPs

Regardless of whether the park is a senior or a family park, there are two main types of parks—and this is a very important distinction.

MHPs use a five-star rating system. One star is very low quality and five stars is top shelf. Typically, under-three-star parks are considered “affordable housing” and four- or five-star parks are for people who chose to live at the park for reasons outside of the need for affordable housing.

Four- and five-star parks typically have curbed gutters, clubhouse amenities, and even security within a gated community. Lot rents can be higher than $1,000 per month. One- to three-star parks have fewer bells and whistles. They rarely have amenities other than a basic playground and typically have lot rents in the vicinity of $300 a month.

We only focus on “affordable housing” parks that are in the two- to three-star range.

Four- and five-star parks rarely pencil out, as they are very overpriced compared to affordable housing parks. Large private equity funds (who often provide single-digit returns to their investors) are major players in this space, and they often run these parks so well that there is little to no upside in the deal.

We find much more upside and significantly better pricing in the affordable housing space. The supply and demand is astronomically in favor of MHP owners, as there is limited supply of MHPs and an ever-expanding need for affordable housing (which in my opinion is the largest real estate problem in America).

When I’m talking MHPs, I’m always referring to affordable housing MHPs with lot rents around the $300 a month mark.

Testing demand for affordable housing

Next, we need to test our market to confirm there is indeed high demand for affordable housing. There are a few checkpoints we use to determine this.

Apartment rent comparables

We want to see at least a 1.5x spread between rental costs in a mobile home park vs. rental costs at comparable apartments in the area. This is at least one indicator that the demand for affordable housing exists in this market.

If you have mainly two bed/one bath mobile homes at your park, then you want to find out what two bed/one bath apartment comps are. The quality of your park compared to your comparable apartments is also important for accuracy. You’ll likely be looking at lower-quality apartments as comparables.

If, for example, you have an all-in cost of $550 a month to rent one of your mobile homes ($300 lot rent + $250 home rent), then you want to see comparable apartments in your market at $825 or above.

Single-family home comparables

The second affordable housing indicator is comparable single-family home rentals (SFR). We want to apply the same 1.5x multiplier as above.

In addition, we want to see SFR median house pricing at $100,000+ (with lot rents increasing each year, this is trending close to $120,000+). Again, we want it to be an unreasonable step up from the alternative housing options, which confirms the need for affordable housing. Make sure to check the median house pricing in both your city and your metro.

Test advertising strategies

Finally, we want to wrap a bow around our exploration for affordable housing demand by running test ads to gauge response levels.

All we need is a simple ad with one image of the outside of a home in the park and a description of rent amount. You need to list the lot and home rent amount combined (i.e. $300 lot rent + $250 home rent = $550 to rent one of the homes).

Then use the Burner app which has a one-time $5 fee to purchase the app. Burner will produce a temporary phone number with the area code to match where the park is located. Include this number in your test ads (don’t answer any calls) and you can track the amount of people who display interest as Burner tracks the call log.

Then we want to run these ads on Facebook Marketplace, Zillow, Craigslist, and the major newspaper in the metro. We are considering dropping newspaper ads, as most responses we get are online and newspaper adds can cost $200+.

Run these ads for about ten days covering two consecutive weekends and the week in between. If you get more than three calls a day (30 calls over the 10 days), then you are usually looking pretty good. It’s often much less or much more than 30, therefore the demand (or lack of) will be obvious.

Understanding your basic park requirements

Ideal number of sites

We like to see parks that are above 40 lots. We prefer 75+ lots. We love parks in the 200+ lot range.

The smallest park we’ve owned is about 40 spaces, but we’d go as low as 25 lots if we owned another park in the same area. Anything under 25 spaces means if a few tenants don’t pay in any given month, you likely won’t even cashflow. This is too risky for us!

Another thing to take into consideration is that it takes close to the same amount of time to manage a 20-space park as it does a 200-space park, yet we make 10x the profits on the 200-space park.

Can you do deals of less than 25 lots? The short answer is yes, but you’d have to change your criteria.

RV sites

Sometimes a MHP will come with RV lots. We don’t like RVs as they are transient and cause wear and tear on the lot and utilities from driving in and out. There are ways to mitigate these factors, but we find them too management-intensive for the ROI (especially when compared with mobile homes).

Even though we prefer 0% RVs, we would consider less than 10% RVs maximum in any given park.

Minimum occupancy

This category is more subjective to your specific business plan and appetite for project management.

We like value-add deals, which often means occupancy is below “stabilized.” A MHP is considered stabilized at either 70% occupied or 80% occupied depending on who you are talking to. Some lenders will consider 70% occupancy as stabilized and some need 80%.

Stabilized parks generally provide better loan terms than non-stabilized, so by choosing one or the other you can dramatically impact your cashflow. Stabilized parks can still have a value-add component to them if the park is big enough (or if it’s significantly below market rents or has large utility bill back options), so a stabilized park can still make the cut for us if it has enough upside.

The reason we go for value-add deals is that we syndicate our MHPs, where investors join us for the ride. Therefore, we have to make sure we can provide returns to our investors that meet their needs, and this is very hard to achieve unless we either have a decent value-add component or if our investors only require single-digit returns. Because our investors have larger expectations of ROI than single-digit return, we need to have solid value add in our deals for them to pencil out.

The downside to parks that are less than 70% occupied is that loan terms are typically less attractive, with higher interest rates, shorter amortization terms, shorter balloons, and larger down payments. Although the financing is less attractive in lower-occupancy parks, if we have enough upside in the deal it still seems to pencil out better than getting better financing with less value-add.

There is also less cash flow out of the gate with lower occupancy parks. If it’s really low, you may need to defer cash flow distributions to investors in years one and two of operations. On the flip side of this coin, investors can receive much larger equity payouts on the back end, which more than makes up for the delay in receiving distributions.

I’m fortunate to have a 20-year background in construction and construction management, so we’re not scared of a park that needs a ton of work. If you are just starting out, or don’t have a solid background in construction/construction management, then I’d suggest you start out with a stabilized park so you can sink your teeth into a project that’s easier to manage until you feel compelled to up your game.

Park-owned vs. tenant-owned homes

Similar to above, this is subjective to your business plan.

Our philosophy is we’d much prefer to have 100% tenant-owned homes (TOHs). In this case we are a glorified parking lot and, for the most part, all we are responsible for is collecting rents, maintaining common areas, and handling underground water leaks or sewer backups. Tenants are responsible for their homes and they generally have a high pride in ownership and are less transient.

Park-owned homes (POHs) on the other hand have a higher turnover rate and tenants take less pride of ownership, as the park is usually responsible for repairs. The park has to manage the repairs, plus remodels between tenants, and then we have to find, qualify, and sign tenants on a lease. POHs can very quickly become very management intensive. Sure, it’s still profitable, but not really worth all the management that comes with it, so in most cases we much prefer to have 100% TOHs.

We will take a park that has up to 100% POHs for the right price. Our general plan with POHs is to turn them into TOHs in about three to five years on our home ownership program. We still deal with the high management and turnover, but it works out well in the long run. It’s also easier to resell the park on the backend with fewer POHs, as it’s easier to finance.

Lenders often either won’t lend on a park that has 10%+ (and sometimes 20%+) POHs or will offer much less favorable terms. That changes our operational numbers, so we have to reduce our purchase price to accommodate. Plus, some MHP investors only want TOHs, so a high POH count on resale can reduce the number of eligible buyers.

Again, your appetite to take on POHs is up to you. Just make sure to work this in with your business plan and come up with a min/max criteria so you only take on parks that will work for you.

Utilities

There are two main types of utilities in a MHP.

One type is when utilities are public. Nothing is owned by the park and tenants are directly billed by the utility company. The park owner still is responsible for underground water and sewer lines in the park, but apart from that, it’s pretty risk-free.

The other type is when the park owns a particular utility system, in which case the park is not only responsible for maintenance and repairs of that system, but there are also additional health risks (like water contamination or sewer leakage). Plus the park can become a glorified utility billing company, which comes with additional risks.

Our basic philosophy here is that we much prefer public utilities and for the right price we are open to taking on water wells, septic, and lifting stations (the latter pushes sewer waste uphill). These systems often run in the tens of thousands to repair, which is palatable for us.

Other private systems like packing stations, lagoons, electric, and gas systems come with much higher price tags if the worst case happens. You could be looking at hundreds of thousands of dollars in repairs, up to and over $1 million in repairs in some of these systems, so that needs to be accounted for in your underwriting and enough capital needs to be set aside to safely handle any emergencies should these systems fail.

Remember, if a utility system fails for a long enough time and the park owns it, then the park is responsible for providing an alternative utility source in the interim.

For example, if your park is all electric and you own the electric system and your system fails in the dead of winter in a cold climate region, then you need to figure out how you can get hot water, heating, and cooking abilities to each home. This is manageable if it’s precalculated and budgeted for, but if it catches you by surprise and you don’t have a plan or funds to handle the situation, then it could be enough to wipe out the deal by squashing all profits.

Many newbie MHP investors overlook this critical part of their purchase criteria and fail to adequately compensate for it in their purchase price, capital expenditure numbers, and business plans.

Understanding your financial capabilities

The remaining portion of our criteria will be based on our financial capabilities. This is a very personal topic as each investor will have different amounts of cash or investors to bring to a deal; varying levels of credit and net worth for signing on loans; and different cap rate, cash flow, and ROI requirements.

Without going into too much detail here, you will be limited by the abovementioned metrics, so if you have no investors and only $200,000 to put towards a deal, then at 35% down you can only buy a park that’s worth around $550,000, as you will need a little for closing costs above your down payment. This is not including any capital expenditures, so that needs to be taken into consideration too and added on top of your loan, down payment, and closing costs.

If, for example, we know we can only buy a $550,000 park, at $300/month lot rents, with a 50% expense ratio (this ratio varies depending on size of park and who pays utilities) and an 8% capitalization rate, we can afford about 25 occupied lots maximum.

Capitalization rate

I cannot tell you what cap rate you should apply to any given park for two main reasons. Market cap rates vary from market to market, and your personal appetite for cap rates will vary based on what financing you can obtain (if any), what return your investors need (if any), and what returns you need for your efforts to make the deal worthwhile.

We are currently seeing cap rates between 5-7% as a generalization across the U.S, though it varies market to market. We are still currently acquiring parks in the 8% cap rate and above range, although we have to evaluate many parks that we pass on before we come across a park in the 8% or above range.

At 8% and above, we still seem to be able to meet our investors’ needs as well as our own, so this is the rough gauge we use. We can decrease the cap rate when our financing interest rate decreases (and increase cap rate when financing interest rate increases), although there is a point when adjusting the cap rate too low becomes too risky and massively decreases the ROI available in that deal.

Worst case scenario, we’d buy in the 7% cap rate range if we can increase that cap rate (based off purchase price) to 8% or more by the end of year one of our operations.

Also, if we buy at an 8% cap, our general business plan is to double that cap rate (based off purchase price), or as close as we can get to it, by the end of year five of operations. This seems to meet our investors’ needs and our own, and it’s why we heavily lean towards major value-add deals with tons of upside. This gives us enough wiggle room to still hit our numbers even if we have a few risks (that we pre-evaluated during our due diligence) come to fruition in the deal over our ownership period.

Do your homework and make sure you select a cap rate that works for you and your business plan. Exploring current cap rates in your market is a great place to start.

Cash-on-cash return

In my opinion anything less than 10% cash-on cash return straight out of the gate is not worthwhile unless there is significant upside somewhere else in the deal to compensate later (like a large equity distribution on the tail end). It’s not uncommon to have 20% cash-on-cash if you’ve priced your deal right on purchase.

Financing terms and purchase cap rate play a big role in our cash flow evaluation, so if something gets adjusted, then it typically needs compensation elsewhere. For example, a higher financing interest rate means we often have to increase our purchase cap rate to compensate and still have the same spread.

Wrapping it up

My biggest advice is don’t bring your criteria from other asset classes over to MHPs, as MHPs are their own beast with specific criteria that differ from other asset classes.

It’s very rare that we hit 100% of our criteria on any given park. Generally, if we meet 70% or more of our criteria, then we will look deeper into the deal and see how we can make it work. As risk increases, purchase price must decrease to compensate, and there is a point when a purchase price is low enough that you can take on the risk and still come out on top. Your risk and comfort levels are up to you, so ultimately how you compensate risk is up to you. Just make sure you add additional risks into your calculations.

The aim of this article is to equip you with some key considerations to ponder. You will ultimately create your own MHP purchase criteria based off your specific circumstances, needs, available resources, and confidence/experience level.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.