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This is followed by the recovery phase when unemployment has gone down and GDP has gone up—this is a great time to buy. Then comes the expansion phase – the beginning of which is still a good time to buy. But because it is now a seller's market, prices are going up again. Next comes the hyper-supply phase which is the worse time to buy. Prices are just too high, cap rates are insanely low, but there is an oversupply of units on the market due to new apartment building starts and completed rehab projects.
CAP rates on parks with a high density of mobile homes tend to run higher than pad-only parks. The investor must deal with the maintenance of these homes and a higher tenant turn-over rate. When we finance at 90% LTV, it is almost always on a property with park-owned homes. The additional cash-flow from these homes off-sets the higher leverage and interest rate. These can be great opportunities for the investor willing to deal with the additional demands of this type of park. But despite their returns, only about 20% of mobile home parks in the country are professionally owned, leaving the remainder of the market up for grabs by investors looking to begin or diversify their investment portfolio.
Evaluating Mobile Home Park Investments
Differences in expense ratios, occupancy levels, and space rents can make one park worth 30-50% more or less per space than a similar park down the road. Since the value of mobile home parks is tied to their income, it is significant that lot rents have been growing a pace far higher than inflation for the last decade. Thanks to the decline of the U.S. economy, coupled with stratospheric increases in apartment rents, the affordable housing sector has been able to amass large annual rent gains, and will be able to continue this into the future. It is important to note that mobile home park lot rents are insanely cheap at a U.S. average of $280 per month, and could double and still be cheap. After determining what is an acceptable cap rate you need to rework the profit and loss statements you receive from the seller or broker.
Alternately you can have the owner/tenant pay a nominal down payment and then hold the mortgage on the remaining balance and get paid out over, say 4 years at 10% interest. This guarantees you a good return on your Seller financing, a tenant that won’t leave after having invested in his own home for months or years and steady pad rental income. While demand for quality, affordable housing increases, the supply of mobile home parks is diminishing. With historically high inflation, rising interest rates, and the gross domestic product being down for two consecutive quarters, a recession could be looming around the corner.
Dos and Don’ts of Evaluating Mobile Home Parks
If the seller gets paid in cash, they have to pay income tax and then put it in a CD or Treasury Bill for maybe 1%. If they seller finance, on the other hand, they only pay tax as they receive the payments and they get around 4% to 5% on the debt – that’s four to five times more annual income to them as investors. One of the most attractive and growing investment property types, manufactured housing communities fulfill a much-needed supply of affordable housing. Additionally, it’s a less hands-on investment because many manufactured home park tenants do not move on a regular basis, with 98% of mobile homes remaining in the same location after the second year. On the other hand, apartment tenant turnover can be as high as 60%, which means that investors have to spend money and time finding new tenants on a regular basis, cleaning and repairing apartment units in between tenants, and so forth.
Many mobile home park investors often ask why lenders typically do not use the total cash-flow from a property with park-owned homes. The answer is that the majority of these mobile homes are considered personal property. As lenders are collateralizing their loans with real estate only, any personal property or chattel property is not considered in the value.
How Much Are Manufactured Homes?
So how do you know if you are buying at the top of the market? If there are very few properties for sale in the property class and neighborhood you are shopping in, and almost no new construction starts, this is a sign you are purchasing at the top of the market. It is essential to look at the relationship between low cap rates, low net operating income, and how much time it might take you to raise rents and realize the return on your investment. Manufactured homes, when rented and located in a quality park, often generate high capitalization or cap rates – on average between 7-12%.
Establish a relationship that could then lend itself to future funding. These securities are being offered under an exemption provided by SEC Regulation D Rule 506. Only accredited investors who meet the SEC Regulation D 501 “accredited investor” accreditation standards and who provide suitable verification of accredited status may invest into this Offering. Amenities – you can also have additional amenities such as a meeting hall, a pool, laundromat, additional RV parking and charge rent for all these additional services.
So the normal net income of an average mobile home park space in the U.S. is $2,016 per year. If you multiply that by the number of lots, even a 50 space park makes over $100,000 per year, and a 250 space park can make around $500,000 per year. Those are pretty big bucks, and much higher than most people realize those “trailer parks” are able of producing. The cap rate is an ROI metric that is most valuable when used to compare against similar rental properties for sale. That is, properties with a similar location, of the same type, and which are valued at the same point in time. So before you set out to buy a rental property, make sure you understand how the pricing for rent rates goes and set the appropriate price that will give you a positive cash flow.
However, not all locations offer this type of investment return by way of cap rates. According to Mashvisor’s October 2022 data, the median traditional cap rate in the US is 2.82% . On the other hand, the median cap rate for Airbnb properties in the country today is 4.32%. A look at why mobile home parks are one of the best investments in all of commercial real estate, and how to discover a park worth investing in. Age-restricted or 55+ communities are better insulated as residents depend on pensions and other government subsidies to afford pad-rent.
The quality of construction of these homes are now of superior quality as they are built in indoor temperature controlled environments and government inspections. The size of homes has also greatly increased from the original 1970’s 12’ x 56’ trailer to currently 16’ x 76’ or even double wide homes of (24’ x 60’). In another example, suppose the park has an NOI of $80,000 and is priced at 1 million.
A 2018 report compiled by Harvard’s Joint Center for Housing Studies found that the number of renters who spend 30% or more of their income on housing each month (those deemed cost-burdened) is rising year after year. Since manufactured homes can be built for a fraction of the cost of site-built homes, they are a desirable affordable housing option for tenants. We believe mobile home park investing offers outsized cash flow returns . Experienced acquisition and knowledgeable mobile home park operators such as Park Street Partners, are uniquely positioned to capitalize on this misunderstood asset class. If you are interested in learning more about Park Street Partners and its investment strategies please email us or register with us to receive access to our investment opportunities.
The sales comparison method is also flawed in most cases due to the lack of quality and recent comparables to select from. Mobile home parks have been increasing in value over the last few years as has other real estate. With relatively few sales to draw from, an appraiser will typically use sales from a couple years ago and sales from markets 100 miles or more away from the subject property. Even if there is a similar sale in the same market and in the same condition, one mobile home park can be much more attractive than the next.
It is why you’ll see lower cap rates to be the norm in such neighborhoods. In other words, this is the perfect balance between the rate of return on a rental property and the level of risk that it brings. Cap rate for rental properties is, you first must identify how much risk you’re comfortable exposing yourself to. First, the term “good” is more subjective than it is objective. Thus, the short answer to what is a good cap rate depends on how you’re using the cap rate in real estate. Furthermore, cap rate in real estate has become synonymous with risk.
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