How much to increase lot rents on a newly aquired park

Question

Hello all!

I'm closing on a 8 pad park in South Carolina next month.  Current lot rents are $150 and haven't been raised in years, like over 15 years.  Market lot rent for the area is at minimum $225.  How much do you think I should raise them?

My initial thought is to raise it by $25 to $175, but I'm wondering if I could even go to 190 or 200.  All tenants own their trailers with no payments and all work for a living, so there is no situation of living off welfare or social security.

Daniel Roberts · Answer

I would phase in step increases, while being clear to everyone where you plan to end up, which should be at the area average. By slowly raising the rent, you allow them to adjust and stand a better chance of 'selling' them on your plan and keeping your park full! Come up with something tangible to do in the park to show the residents that you plan to invest money into their neighborhood.

Good luck!

John Arendsen · Answer

In California, and I assume some other states as well, according to the California Housing and Community Development Department (HCD) you are required to give a 90 day notice when you want to increase the rent.

Unfortunately cities/counties without rent control can get away with a rental increase every 90 days and they take full advantage of it depending on demographics and economics i.e. employment and whether or not the home is in the path of progress.

As @Daniel Roberts has so aptly inferred you should proceed with extreme caution. If indeed you've had employed tenants paying their rent's for that long it's because you probably have the best deal in town.

Don't rock the boat. The most important thing there is other than snuggling up to your significant other at night is the confidence and comfort you have in knowing you've got your cost of living under control. Try not to mess with folks' comfort zones.

It may not mean as much to you as it does them. But that's the difference between the worlds you both live it. The most successful attribute for a good landlord is compassion and empathy.

Thomas S. · Answer

Assuming your tenants have had no rent increases for 15 years a jump from $150 to $225 is very little.

Where would they likely go that would be worth the trouble and cost with only a $75 jump. Could they even find a place with rents at $150 to warrant the move.

Push the rents straight to $225 and enjoy the benefits. Doubtful you will lose any tenants as they are all expecting their rents to be raised to market with a new owner anyway. They are not stupid.

In the future keep the rents at market with annually rent increases (or higher if you do improvements).

Derek Robinson · Answer

@Jim Johnson Wow, Jim, that is quite the price hike!  I have a hard time balancing between raising to market rents immediately to capitalize on the investment and feeling bad for the tenants.  That's for sure the largest increase in price I've seen without fallout, but like you say, it's too expensive for most of these folks to move their homes.  It's also still cheaper than they could rent apartments for in the area by half.

Seems like a lot of people in this post have experience and examples of crazy markets.  My market is one where most long term park owners are in their 60's and 70's and haven't raised rents in 20 years.  Raising rents from $150 to $200 or $225 isn't going to break the bank for anyone.  I'm not in California where lot rents are between the $500 and $800 range.

I read an article somewhere pushing for lot increases for the benefit of the tenants.  The main thrust to the article was that owners than don't raise the rents are creating a piece of dirt that has no value to a new buyer once the current one retires.  If you have an acre with 10 trailers getting $80 per lot, that's only $9,600/yr.  Once this owner decides to unload, chances are it will be sold to a developer that can make much more money building something else, be it houses, hotels, commercial building, etc. that will net a greater return.  Sure the old owner 'helped' the tenants by never raising rents, but ultimately they are getting kicked out of their parks when the owner is done managing his investment.  I've seen this in Asheville, a trashy old park in a booming area was sold.  The new developer paid each tenant like $3,000 for the hassle.  Most trailers where too old to be moved.  Now these people are going from spending $150 for lot rent to looking for an apartment at $850/month.

John Arendsen · Answer

I relate totally to @Ken Rishel, I've seen this happen as well. There's a beautiful 400+ space MHC in Carlsbad, CA that was originally owned by 3 partners in the 80's. They were the most greedy owner/landlords I've ever known about.

When they first owned the community the rent was in the $300's. They started jacking the rents up so fast and high that within a couple of years the rents had almost tripled.  So folks did in fact start a mass exodus with their double and triplewides. In fact they a couple hundred of them started two resident owned communities right across the street from these greedy and selfish individuals.

Within a few years the vacancy rates rose so high that the values of these very nice HUD MH's fell drastically. Some as low as 25k. This too forced the owners into a BK and they deservedly ended up losing the park.

Ah, but the story gets much better. The remaining resident/tenants formed an HOA and converted the park into a condo conversion. Today it boasts of a multi million dollar rec center, golf course, multiple swimming pools and a development filled to capacity with MH's from 400-600k and a lot of very happy resident/owners.

Don't get branded as a price gouging owner/manager. It will come back to haunt you as your reputation will follow you like a hanging judge.

Ken Rishel · Answer

Rent increases are always difficult. The better you explain it, the less trouble you will have and the explanation needs to contain reasons why the rent increase is beneficial to the resident. I'm not sure I fully agree with John's statement that people won't leave because of the expense of moving them.

In 1998, I was partnered with a family in a park of 1000 sites. We were at 96% occupancy. We sold the park for almost $40,000,000.00 to another operator. The park, in our mind, was worth 12-4 which is why we sold. Our lot rent at the time was $217 for about 40% of the community and $375 for the rest.

The new owner to meet his debt payments started raising the rents immediately. By 2010, he was at $675. When bankruptcy was his only out, the park was at 41% occupancy. By the time the bankruptcy operator gave up, it was at 32%. Most people just walked away from their homes because they could not afford the payments and because they had a very bad taste in their mouth about land lease communities.

One of our clients bought it for $12,000,000.00, lowered the lot rents to $375 throughout and is now filling it up again.

John Underwood · Answer

Derek,

In SC you need to give tenants eo days written notice of a rent increase.

For a house or apartment I would do modest increases to keep your tenets from fleeing all at the same time.

MH's are expensive to move so I doubt you would have anyone leave.

Still I would do a modest increase every 6 months or 12 months until you get to where you should be.

I would send out letters and explain that rents are severely under market levels and explain where you want to be. I think they will understand.

You could list other Park rents that are nearby to better explain your point.

Jim Johnson · Answer

I purchased a park in the Ft Worth area a few years back and the owner was charging $80 / month. That is not a typo- $80 per month. I moved the rents to $250 / month in one jump and lost zero tenants. That bump was still under the market rents for the property type I had, just a park, no additional amenities, and the tenants were also now going to pay w/s/t. The letter I send out tells the residents we are moving the park to market rents, actually just under the market rents. It also states people are welcome to move homes and I will even supply them with a list of movers. I will also tell them to be careful, as movers prices vary and they should be looking at $x,xxx,xxx to pay for a move and to be sure they do not get taken. No one moves... Every state will have differing rules and regs for adjusting space rents. I repaper the parks when I get them with my lease, rules and regs. Some parks require 30 - 90 days notice. Some require certain info be on notices sent to tenants. Some states require you use the state mandated forms.

Derek Robinson · Answer

@Jason Burr Sure, sounds good.  I'll hit you up when I'm in Spartanburg again.  Not sure when that will be at the moment.

How much to increase lot rents on a newly aquired park

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