Mobile home purchase (on rented lot) for single family home investment

[Jeff Ryan]

Hello,

   I recently partially inherited a mobile home, along with two siblings.  This is a 'nicer' mobile home, double wide, 1998, shaped / looks more like a 'house', attached garage, on a very beautiful private lot.  It has a value of approximately $120k, to be confirmed with an appraiser yet.  I would need to buy my two siblings out, so my approximate purchase would be $80k.  I have talked to the park management, and they said current owners do allow renting out as a rental, but the tenants would need to be approved by them.  They did comment that the previous owners did not allow that, and I know through some research of my own that many parks don't.  This park changed ownership about 1 - 2 years ago.

In the metro-G.R. area where this is, I am, it is difficult to purchase anything that cash flows to rent otherwise, and it is a very hot market yet. rentometer.com says 3 bedroom , 1.5+ bath (this is 2), is about $2,300/month. With furniture in there we'll need to do something with, I could offer it furnished too. The lot rent is $700. If I pay for it initially with my primary residence HELOC , currently at 8%, the interest only payments would be $640, so $1,340 monthly expenses mostly. I'm unsure if I would use property management at this point, and there would be some insurance. There is some sentimental value I need to be wary of based on the inheritance, but it is a very nice home on a very nice lot, and it would be nice to own another rental in this area.

   I know there has been some other forum posts on this topic, but I was hoping to note my circumstances here.  For some others in the Bigger Pockets community, is there anything else to consider, what do you think, 'do it'?  Thanks to this community as always.

[Drew Sygit]

@Jeff Ryan 

What was the purchase price of this MH?

How are you arriving at the $120k value?

Unless a MH is put on a permanent foundation on an actual privatley owned lot, the majority of mobile homes depreciate in value over time.

As @Greg Scott mentioned, you can find cashflowing deals if you know HOW to look. You may be looking only for "low-hanging fruit" type deals, which are far & few between these days.

Read copy & paste info below:

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The Real Estate Crash of 2008-2010 caused real estate prices to crash across the country - but didn't affect rent amounts. This caused a historically unique opportunity for investors - they could buy Class A properties and immediately cashflow when renting them out.

This couldn't last forever, and it didn't, as excited new investors drove up prices.

Eventually, Class A property values increased to the point that even increasing rents didn't allow them to cashflow upon purchase.

So, the flood of new investors switched to buying Class B properties.

COVID created a chaotic spike in both the sale & rental markets, attracting even more new real estate investors. According to CoreLogic, in December of 2023, almost 30% of home sales were to investors!

Investment also spiked in Class A Short-Term Rentals (STR) and investors started paying higher and higher prices based upon anticipated STR rental rates, that exceeded sustainability based upon Long-Term Rental rates (LTR).

Now we're seeing investors pouring money into buying Class C rentals - but, many are getting burned.

In our experience & opinion, the main determinant of property Class is not location or even property condition, those are #2 and #3. The #1 determinant is the Tenant Pool.

If you don't believe us, try putting several Class D tenants in Class A apartment buildings and watch what happens. Or try the reverse - rehab a property to Class A standards in a Class D neighborhood and try to get a Class A or B tenant to rent it.

Unfortunately, many newbie real estate investors are jumping into buying affordable Class C rentals - expecting Class A results. In our opinion, Class C tenants have FICO scores from 550 to 600 - where their chance of default/nonpayment is 15-22%. See the chart from Fair Isaac Company (FICO) below:

FICO Score	Pct of Population	Default Probability
800 or more	13.00%	1.00%
750-799	27.00%	1.00%
700-749	18.00%	4.40%
650-699	15.00%	8.90%
600-649	12.00%	15.80%
550-599	8.00%	22.50%
500-549	5.00%	28.40%
Less than 499	2.00%	41.00%

Source: Fair Isaac Company

According to this chart, investors should use corresponding vacancy+tenant-nonperformance factors of approximately 5% for Class A rentals, 10% for Class B and 20% for Class C.

To address Class C payment challenges, many industry "experts" are now selling programs to newbie investors about how Section 8 tenants are the cure. If only it was that easy. Yes, the government pays the Section 8 rent timely, but more and more tenants are having to pay a portion of their rent. Then there are the challenges with Section 8 tenants paying utilities and taking care of their rental property.

Investors should fully understand that Section 8 is not a cure-all for Class C & D tenant challenges, it's just trading one set of problems for another.

We see too many investors not doing enough research to fully understand all this and making naïve investing decisions.