The Good, The Bad, And the Ugly of Mobile Home Park Investing
Most Americans only know about “trailer parks” based on what they see on television or the movies. The problem is that if we only relied on the entertainment industry for our investment facts then we would all bet our money on things that Hollywood cherishes, like stocks of companies that manufacture evening gowns. Besides a fair and balanced approach to information it’s also important that we also look at both sides of any investment because one pitfall can ruin a perfectly good path to prosperity. With that in mind, here are the factual “good, bad and ugly” realities regarding mobile home park investing.
The Good
Mobile home parks have some amazing attributes that have made them a highly profitable investment sector over the past half-century:
- They have the largest “moat” of any American real estate sector. Warren Buffett has long talked about the necessity of a “moat” to protect your investment – in fact, he only invests in industries with a “moat” – and mobile home parks have one of the largest in America. That “moat” is the simple fact that you have not been able to build a new mobile home park in the U.S. for over a half-century. Virtually all of the mobile home parks in America were built in a narrow range of the 1950s to the 1970s. Then city governments completely turned off the spigot.
- They have the highest rates of return of any real estate sector in the U.S. The normal target of most mobile home park buyers and owners is a 20% cash-on-cash return. No other segment of real estate can even remotely touch that number.
- The customer base is incredibly stable. The average tenancy of a mobile home park resident is around 14 years. But most mobile homes never actually leave the park because it costs $5,000+ to move one, so while the residents may come and go, the homes never do.
- The demand is off the charts. Affordable housing is one of the hottest sectors of American demand, thanks to single-family home prices averaging around $300,000 and $1,600/mo. apartment rents.
- Financing is relatively easy to obtain. Banks love mobile home parks due to very low loan default rates. There are four sources of lending: 1) seller carry 2) banks 3) CMBS and 4) Fannie Mae/Freddie Mac.
- Every single U.S. megatrend is favorable for this industry. Whether it’s the 10,000 Baby Boomers retiring per day or the population moving from urban centers to suburbs and exurbs, that’s all good news for mobile home parks.
- The “stigma” against “trailer parks” works in your favor. The very fact that most Americans have a negative stereotype against mobile home parks actually works to the benefit of buyers as it keeps competition down.
The Bad
Despite all of the items named above, mobile home parks also have some negative attributes to consider:
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- “Heavy lift” turnarounds require a strong constitution. When you buy a mobile home park in terrible condition and try to bring it back to life, there is always an initial unpleasant period where people will blame you for ruining their lives (residents have to be evicted for rules violations and non-payment of rent) and you will seem to have no friends, but that period ultimately passes and things calm down. But it can be shocking if you’ve not done it before.
- Bringing old properties back to life can have significant capital costs. As part of the process to bring old parks back to life you will often have to write big checks to fix items like roads and utility lines. You must plan accordingly.
- There are many mobile home parks that are not worthy of bringing back to life. Just because a mobile home park exists doesn’t mean that it’s worthy of being resuscitated. Most mobile home parks were built 50+ years ago and some markets have changed since then.
- Collections can be tough until residents learn the system. Collecting money from mobile home park residents requires a tough stance called “no pay/no stay” and you must not waiver on this.
- Rules violations require constant monitoring. Just like collections, residents must know their limitations on the rules, which were designed for the common good. You have to play the “bad guy” until residents understand the necessity of acting like neighbors.
- Competition is high in a few states. While mobile home park competition is far lower than any other real estate sector, there are a few states in which competition has been fierce for decades, and these include most notably California, Washington, New York and Florida.
The Ugly
There are also some huge pitfalls you need to know, that can destroy your entire investment in short order and include:
- Environmental contamination. Every property – whether it’s a mobile home park or not – needs a Phase I environmental report to confirm it’s free of pollution. If you fail to get this report, and the property is contaminated, you could be on the hook for clean-up costs which might be in the millions of dollars. If the property does not get a clean bill of health, then move on.
- No operating permit. Every mobile home park will fall into one of three categories: 1) legal conforming 2) legal non-conforming (grandfathered) or 3) illegal. The first two are fine, but the last one is a deal killer. There’s no exception.
- A lagoon sewer system. This is a type of private sewer system in which the entire park’s sewage is dumped into a pit where the liquids evaporate. Virtually every state in the U.S. is trying to shut these down. However, there are occasions where the lagoon is OK for the moment, if you have a plan to replace it in the future. But you better be extremely careful.
- Severe floodplain issues. Mobile homes actually fare better than most of the other real estate sectors when it comes to flooding, mainly because they are on stilts by design. However, those “stilts” are only around 3’ high and the power of the water may destroy your park, in addition to the mobile homes. On top of that lenders hate this.
- Extremely high density. Mobile home park lots are like parking spaces for cars – the customer rents the space and pays a monthly fee. However, if the parking spaces are too small for modern cars, you won’t be able to keep the parking lot full and, over time, your revenue will die.
Source: Real Estate Investing Today
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