Analyzing mobile home parks

[Tim Woodbridge]

Hi all-

I'm looking into purchasing mobile home parks here in South Carolina.  How does one analyze these?  Do you treat it as a commercial property and base things off gross and net operating income?  

Thanks in advance for your help.  

[Jack Martin]

@Tim Woodbridge just to help you understand where the disconnect is, I will share some perspective.  The most important item to gain clarity on is that the stability of cash flow from mobile home parks is created when the homes are owned by the resident.  They pay monthly rent for the “space” under their home, but they own and make repairs to their home.  Because of that, they have a mindset of a homeowner and tend to move less. This results in low turnover, which creates higher stability of cash flow. Understanding that, our goal as owners of parks is to aim toward 100% resident ownership.  

With park owned homes (POHs) which is described in the listing you shared, you will own the homes and be responsible for all the maintenance and repairs.  On top of that, you have residents that can leave anytime they want, just like an apartment.  If they decide to move on a Friday, they can easily be gone on Saturday.  Their mindset is "this is temporary" and they tend to behave like that.  

With that general foundation, there are two ways to analyze that property. Let's look at how it is running today with all POHs. Add the 5 rental amounts, multiply by 12 months, and you have annual gross of $52,200. The listing claims NOI of $41,040. That is hilarious!! A 22% expense ratio on a park with 100% POHs. The only way the would even be remotely possible is if you moved into the park and did all the repairs to the homes, management, bookkeeping, and park maintenance for free. A more appropriate expense ratio for a park with 100% POHs would be well above 50%. 55% would even be generous, giving the park NOI of $23,490. But keep in mind, you will have resident turnover, so those numbers will need to be adjusted down for that. AND, you will need to put a heavy capex reserve in place to accommodate for the more expensive repairs to the homes. When you consider if you lose one resident and it costs you $5,000 to renovate the home, plus the loss of income between residents, it doesn't take a rocket scientist to see the impact to your NOI.

If you want it to run like a MHP should run, you would plan to sell the homes to the existing residents (or new ones if necessary) and charge rent for the space. In addition to that, if you are paying for utilities or services that are not individually metered, you can pass those on to the resident as well, pro rata. As an example, if you charged $400 per month for space rent and $50 per month for utilities/services, you would have annual gross income of $27,000. A park like this with all resident owned homes would run in the 35-45% expense range, depending on things like utilities, roads, landscaping, and maintenance requirements. If we use 40% to be conservative, your NOI would be $16,200.

As you can see from the two examples, there is a drastic difference between how the park will behave with park owned rentals vs resident owned homes.  You have to decide how you want to approach it, but as an experienced park owner, I would advise against 100% POHs. That comes with more brain damage and is really just another version of an apartment, but with mobile homes, which require a lot more maintenance.  Plus, you don't get to experience the best part of a MHP, which is the stability of cash flow.  

All the best,

Jack