MH Park vs Apartment Building

[Vikram C.]

Guys, how does a mobile home park compare to an apartment building as an investment? I was wondering about the following:

1. ROI. I have seen Jim do an MH park valuation with a 12% cap rate whereas Jon H has done some apartment valuations with a 7% cap rate. I know both were just examples, but the difference in numbers makes me wonder if MH parks offer a much better return based on prevailing valuations.

2. Management. If I were to buy an apartment complex, I would have a property management company run it. Are similar companies avaliable to run a mobile home park professionally or do I have to hire the park manager as an employee? If the latter, how do you manage situations where the manager quits and the park is out of state, etc?

3. Additional Income. What percent of the return from owning a park comes from trading in mobile homes? (I noticed Jim mentioning that he buys homes to fill vacant lots and then sells them on a monthly payment. This can't be done in an apartment building because you already own both the land and the improvement.)

4. Crime, etc. I have never seen a MH park except in movies. Since I watch a lot of action movies, the scenes in the MH parks are usually "interesting!" How are the parks to run in real life compared to an apartment complex?

5. Rent increases. With an apartment complex, I would guess that rents would increase over time to keep pace with inflation. Do lot rents also increase at the rate of inflation? (Over time)

I would love to hear from Jim, Jon (both!), Rich and other experts on this subject. Regards, Vikram

[Jim Johnson]

1: First off, there are MHP's that also sell in the 7 CAP range, but they tend to be very large, and are big money with private financing through pension funds, very strict institutional lenders and the like. So while I could site examples of these, not many of us play in that sand box, and for sure not me. That said, I have friends that do... The CAP rate is really a function of the difference between a prevailing interest rate and the investors expected return on NOI. It is adjusted for the risk factor, or in some cases the higher CAP is really an effect of the sheer number of buyers willing to invest in a particular type of property. Because mid sized parks are not investments in the main stream, they are not 'sexy' investments... they trade on higher CAPs... I can also add value much quicker on a miss managed MHP...
2: Management- While there are some management companies out there... I would say your best off managing the manager. I am operating 4 parks, it will be 5 before the month is out and I spend only a few hours per month in contact with my managers. I site visit my parks every 6-8 weeks if it is in some sort of turn around operation, if it is pumping on all 8 cylinders... maybe once a quarter... maybe less... If the manager uits, you head to the park, put ads in papers, craigslist and send notices to the tenants your looking for a new manager... 50 applications and a few days later your back in business... I just removed a manager at a out of state park, a very complex operation and I was there three days...
3: I run all my mobile homes through another company I have and the income is nominal. The real value is in the parks income being capitalized. That is a 8 or 9 for 1 trade up... So a $1,000 increase in yearly income equals a equity bump of 8 or 9 thousand in the world of 11 and 12 cap parks... there is a expense adjustment that really needs to be made... but we will keep it simple here...
4: Some parks have lots of crime, some less... you will probably get a feel for that on the buy side... I tend not to buy parks with working meth labs, visible drug dealing etc that can exist. I would say, parks that are very poorly managed you need to really watch on the buy side, and inner city parks... they are not all bad, but have a higher level of mischief...
5: Rent increases tend to follow the lead of the apartment buildings...
Tax: Well, your spot on about no buildings to depreciate like apartments have... but I do have infrastructure. Also, the value of a MHP is largely based on the pads being full, which one could demonstrate by showing the sales price of an empty park verses a full one... back to the point though... I have power poles, gas lines, sewer lines, streets, sidewalks etc to value... and they depreciate over a 15 year period... so things are not all bad...

for the record... I also own multi unit housing in Denver... and single family rentals... and I like them as well... but I really like MHP's...