What is the typical business model for a MHP?

[Robert Armstrong]

I'm looking into an MHP park that has a lot of potential but has been left to rot for some time now.

I'm a newbie to MHPs and wanted to see if someone could help me understand the most common business model?

Does the owner of the park own most of the mobile home or do the tenants? Also, if it's the latter what is the average cost per month to charge for the lot itself? 

Just trying to get to where I can run some numbers. 

Any more help someone could give would much very appreciated?

Thanks in advance!

Such as:

MHP Owner rents lots for say $200  - and - tenant owns their trailer and has to also pay find

[Jack Martin]

@Robert Armstrong although there are variations to the following strategies, there are two main strategies that park owners pursue. 

The first is one where all the homes are owned by the residents, and the park owner simply owns the land, the roads, the common amenities (like a clubhouse, laundry, pool, etc.) and the lot improvements. The residents are responsible for the maintenance of their home and the upkeep of the lot where their home sits. They pay only lot rent and utilities. 

The second one is where the homes are also owned by the park owner (these are called "park owned homes" or "POH"s) and the tenant pays rent for the home. POH rental amounts are greater than lot rent, but now the responsibility for maintenance falls on the park owner, so the expenses go up as well. So does your tenant turnover, since POH tenants do not have any vested interest in staying. 

What makes mobile home parks such a great investment is the low turnover and stable cash flow that is created by having residents own their own homes as mentioned in the first model.  For this reason, you will find almost all professional park owners focusing on the first model. As soon as you shift to the second model, you lose that key strength and essentially now you have created an apartment style investment, but with mobile homes.  

As it relates to average cost for lot rent, that depends on a lot of factors, starting with the location of the park. For example, a park on the water in Florida might have lot rent of $1500 a month, while a park out in the country in the midwest might have lot rent of $250. Even within the same city, lot rent will vary from park to park, depending on the location within the city.  

Also, the nicer the park is, the higher the lot rent potential will be. The more amenities a park has, the more favorable landscaping (think shade in the summer), the size of the spaces, etc all will have an impact on lot rent potential.  

And of course, along with higher rent will come higher park value.  Assuming parks are generally the same, the park in Florida on the water will cost a lot more than the park in the midwest.

The best thing for you to do while you are performing due diligence on the park in question is to do a detailed market rent and demand survey. Here are some simple steps to complete that:

Start with the apartments in the area. Call them and ask how much a 2 bedroom apartment is. It should be at least double the lot rent at a mobile home park in the same neighborhood. Then ask how many vacant units there are to choose from. If you find that the apartments have a low vacancy, that is a good sign. If you find high vacancy, that is a red flag for the market and you should be cautious. You should always consider apartments as an option for your prospective tenant, because if it costs them more to make payments on the mobile home plus pay the lot rent, they might just rent an apartment instead. Most people might miss this little nugget, but it is a quick way to determine the lack of demand and where lot rent should be in the market.

Next, call the parks within 5-10 miles that are similar parks. Ask them what their current lot rent is and what else is included/excluded? Ask if they have any rentals in the park and how much those rent for. Ask them if they have any homes for sale in the park and what the details are, and how many homes have sold recently. Do they finance? How much do they require down? What kind of credit do they require? Ask them if there are any vacant spaces in the park and what incentives would they offer if you brought your own home into the park. From those calls, you will have learned what your competition is related to lot rent, the sale of homes, how many POH they have, and what incentives you may have to offer as you sell homes.

Next, you can advertise a home for sale yourself as a "test ad". Place ads on every platform you can where home buyers could be looking for an inexpensive home. The goal of these test ads are simply to find out how much interest there is in the market for the homes you will be selling once you purchase the park. Make sure to advertise in all the available channels you can find so you can perform a true test. (craigslist, FSBO, zillow, etc. as well as placing signs on the street corners in the area) You should be receiving a high volume of calls (I like to see 20 calls a week) if you expect to fill a high amount of vacancy at a park. Any less than that could be another red flag.

Take the time to do this right and you will be glad you did. If you get positive signs from all those efforts, then it's possible the previous owner was simply neglecting the park and you could have a good opportunity on your hands. Remember, raising rent, filling vacant spaces and selling POHs is all about market demand. Make sure it is there or you won't be able to execute your strategy to meet your pro forma and you'll end up wishing you had never bought the park.

All the best,

Jack