Would you build a mobile home park from scratch ?

Question

Hello everyone and I hope your having a productive day!

I have contacted a seller that has 25 acres for sale with 4 mobile homes in Eastern North Carolina. The land was previously zoned for a mobile home park and I have spoke with county zoning department (they are double checking to see if the zoning is still applicable). The previous zoning does not utilize the entire 25 acres.

The previous zoning approved 10 lots:

Water supply: well

Sewage: separate septic for each lot (connected to county sewage)

Electrical: distributed by the Utility Company

The seller is asking $250,000

Lot rent in the area range between $150-$200

Mobile Home rentals in the area range from $500-$700 for a 3 bedroom 2 bathroom.

The land already has 4 septic systems, power poles, and a well (needs a new pump).

In your opinion, would you take the opportunity? Any advice is greatly appreciated. Thanks in advance.

Frank Rolfe · Answer

This deal will not work. Here's why. The lot rent of $150 to $200 means that each occupied lot is worth (using the high number of this range)

$200 x 12 x .6 = NOI $1,440 which at a 9% cap rate = $16,000 of value.

It costs $15,000 to $20,000 per lot to build a mobile home park, not including engineering, land or the dirt work.

So you would lose money on every lot you build.

You can't even consider building or expanding mobile home parks until the lot rent is closer to $300 to $400 per month. Here's how it works at $400 rents, for example:

$400 x 12 x .6 = NOI $2,880 which at a 9% cap rate = $32,000 of value.

That means you would make money on every lot you built and filled.

The bottom line is that the rents are just too low for this to be profitable at this time.

Brittney Anderson · Answer

@Jason Shackleton

This would be my first mobile home park, if I do take the opportunity. I’m getting a lot of advice to run.

Although I was inspired by your comment “development loan”. I have spoke with a gentleman before that developed manufactured home communities in Georgia. Each half acre with a brand new home went for $150k. This strategy with a partner such as the gentleman may be more profitable. Thanks for your insight.

Paul Moore · Answer

Hi @Brittney Anderson. You may be disappointed at @Frank Rolfe’s response, but he is 100% correct.  And it’s even harder than he’s saying to make this work.     At this point in the real estate cycle I would recommend you consider a small subdivision on this land or frankly almost anything else. Farming, cell tower lease, hunting.  There are powerful reasons that only a handful of new mobile home parks are built in the US every year. Good luck!

Jason Shackleton · Answer

@Brittney Anderson That sounds like a really interesting deal. I have not invested in a mobile home park personally before. However as with any real estate investment if you can bring a property to it's highest and best use there is value to be created. If you are properly capitilized and the zoning is what you hope for this sounds good to me. I am interested to hear what others that invest in this space have to say.

Also I am curious as to how you will finance this. I would assume private money but even then most look at the performance of the asset and it is not performing yet. If you can close on the deal you may be able to get a development loan to build out the plots. Maybe seller financing would be a good fit or grow slowly over time.

Jake D. · Answer

@Frank Rolfe could you go into this a little bit more. If I build a site for $15,000 and bring in a home for $35,000, before I sell the home, I am into the lot for $50,000. If I can sell the home and the buyer gets a mortgage, great, I see that I will get my money back ($35,000), and now have a basis of $15,000. So based on your valuation of $32,000 per lot, I created equity of $17,000. That I understand - but now, if I need to put the home on a rent credit system - does the math still work like this? Will I actually get my money back over time? Under the rent credit system, the park owner is still responsible for repairs and the home is technically a park owned home. And aren't park owned homes not profitable? Can you touch on profitability and getting money back under rent credit if you can't sell homes outright? Thanks so much!

For instance, if lot rent is $400 and home rent is $400. The the rent I would receive under rent credit is $800. If the park pays water/sewer, my operating expense ratio is 40%, so $400*.6*12=$2,880 of additional Lot Rent NOI. If the park owned home is technically not profitable, my ROI here is 8.2% on the home ($2,880/$35,000) and it's less once I include the cost to build the lot ($2,880/$50,000=5.76%). Now, if my homes can be profitable and has an expense ratio of 50%, I can now get $400*12*.5=$2,400 in additional income. So $2,880+$2,400=$5,280 which is 15% return on the home itself or ~10.5% return on the home+lot cost. Both of these are good ROI today. But can you touch on profitability of getting money back on homes under a rent credit system?

Brittney Anderson · Answer

@Eric Schultz

It is not the most “popular tourist destination”. Although it is very conveniently accessible to a few other growing cities.

Brittney Anderson · Answer

@Frank Rolfe

Thank you for breaking that down. So considering what you said, I would have to get the property at a significant discount with owner financing and slowly grow for it to even make sense a little. I have read quite a few places that the best opportunity is an existing park with space for growth. I will be taking heed to these warnings.

Ronald Hollis Jr · Answer

Great Information

Justin Hoggatt · Answer

I might be a bit confused, but I'm looking at the numbers a little differently so let me ask a couple questions.

You mention it has 10 lots - are there 6 rentable lots and 4 mobile home rentals?  So, is the monthly income then 6 x $175 and 4 x $600?  Then that equals $41,400/year income.  Take out 40% expenses (like Frank was saying) and you end up with NOI of $24,840.  At purchase at $250,000 then you're at about a 10 cap.  Perhaps the value of this deal isn't all about development opportunity right now, but does seem to have pretty decent cash flow on the purchase.  Do you see that the lot rents could be increased?  Are the mobile homes in good shape?  I'd have the pump replaced in the deal - don't have that up to you after closing.

Eric Schultz · Answer

@Brittney Anderson

Is there potential for turning it into an RV park?

That could be a higher cashflowing business if in the right location.

Would you build a mobile home park from scratch ?

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