Real estate investing has become a bit of a theme at LMM lately. Today we’re joined by Jefferson Lilly to discuss mobile home park investing.
You might be considering investing in real estate, but you’re probably thinking of buying single family homes or perhaps a duplex. But maybe you should consider investing in a mobile home park. Our guest today explains why.
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Supply Is Shrinking
We are building more of every kind of housing except trailer parks. A lot of places have a NIMBY attitude towards trailer parks, they’re dirty, the people who live in them are criminals. So, many towns are changing zoning laws and building requirements to prevent more parks from being built. Because of these change and some parks being plowed under altogether, the supply is decreasing at a rate of about 1% a year.
The people getting kicked out of parks that are closing have to go somewhere and because of the shrinking demand, remaining parks can command higher rent for their space.
What Is A Mobile Home?
The mobile home industry expanded after World War II. Despite the name, “mobile” home, the homes aren’t meant to move around a lot the way an RV is. Most homes come straight from the manufacturer to the park. A lot is meant to be more or less a permanent home for a trailer.
The home is tied down, but it’s not on a foundation, rather it’s up on blocks with skirting around the bottom. Most people who live in mobile homes own them. This is great for an investor because none of the maintenance for things like roofs and toilets is the investor’s responsibility.
Jefferson prefers to invest in parks where every home is owned by the resident. If that’s not the case, they will arrange a rent-to-own agreement. People tend to take better care of their own things than someone else’s so again; this puts less burden on the investor.
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Property Owner Responsibility
The owner is responsible for things like road, sewer, and lawn maintenance. The owner just owns the park in most cases, not the homes. For every $1 in rent, the owner keeps about .70, giving them about a 30% expense load which covers everything, including taxes and maintenance. For an apartment or single home landlord, that split is around 50/50.
To buy a home and get it market ready costs about $20,000 and it will rent for around $700, grossing close to 4%. You can make money buying and renting the homes, but owning the park is more lucrative and less hassle.
Jefferson buys most of his parks in the Midwest, places like Tulsa and Dayton, where he can get a cap rate of around 10%. Parks in California, where he’s based, have a cap rate of closer to 5%. Cap rate is the yield. If you buy a park in California that makes $50,000, it will cost you $1 million. In the Midwest, a park earning $50,000 will only cost you $500,000.
Jefferson typically borrows 75% loan to value. On a $2 million property, $500,000 is the downpayment, and $1.5 million is borrowed. Many banks won’t go below 80% loan to value, though.
Some properties could be bought for cash, but the company is borrowing at around 5% for 20-25 years. That means they’re investing it in the deal at 10%. That $2 million property, with $500,000 in equity, earns 10%, or $50,000. The amount borrowed was $1.5 million at 5% interest but earn 10%.
Even after paying some principle, there will still be about $100,000 in cash flow from the borrowed money plus $50,000 in cash flow from the down payment, so earning back $150,000 on a $500,000 investment. That gets you to a 30% cash on cash rate of return. If they had paid up front, the return would only be about 10%.
I Have $1000
If this is all sounding good, but you don’t have enough money to buy a whole park, there are ways to get involved. You can buy old homes, repair them and resell them. You could also buy a single home on its own land, a land home deal. You might get that for $10-20,000. Now you can sell the land and home or just sell the home and charge rent for the land.
Some park owners who are looking to retire will do a seller carry deal. The seller provides the debt. You put some money down and then rent to own through monthly payments.They often won’t even make you sign any paperwork. They’re already running it, if you stop paying, they just take the property back and try again with someone else.
A deal like this happens much faster than a bank loan, typically within a few weeks rather than months. There often isn’t even an appraisal other than making sure the park is not a toxic waste site and perhaps a land survey if there hasn’t been a recent one.
Tax liability is a reason that some sellers will agree to a seller carry deal. Because they’re receiving installment payments, their tax liability is spread out over the life of the loan, so it’s a much smaller tax hit.
Because most banks won’t do a 100% loan, the company needs to raise capital for down payments, that’s what the investors are for. Each deal is typically 25-30% cash on cash which leaves plenty of profit to split.
They pay out an 8% preferred rate of return and don’t charge management fees. If the company earns 24%, 8% goes to the investors automatically and the remaining 16% is split 50/50, another 8% to the investors and 8% to the company.
This investment is kind of like a REIT but is private, not publically traded. To invest you must be willing to make a longer-term commitment, the money isn’t super liquid. Investors are sent quarterly checks. If an investor wants out, often another investor will buy them out.
The 2007-2008 housing crisis was a non-event for many park investors. Because Park Street invests in places like Oklahoma City and not cities like Las Vegas or Miami, who were hit hard, things continued largely as they had before the crash.
In Oklahoma, homes continued to appreciate, but at around 1% and not the usual 3-4%. No matter what happens to the economy, there will always be a market for affordable housing.
Risk To Mobile Home Park Investing
It’s kind of an old joke, but it’s true, parks do get hit by tornados and floods, and that’s a major risk. You can’t ensure things you don’t own, so you can’t insure a trailer that might get blown away. Those events don’t do much damage to what you do own, the land, so you can’t file a claim. You can get business continuity insurance but it might not be enough to put a park back together. If a disaster is big enough, FEMA may step in and pay out to the homeowners who then buy new homes and move them to the old space.
Something To Consider
I have been interested in all this real estate talk like many of you have but never even considered this kind of real estate investing. It certainly seems to have some interesting advantages that traditional real estate does not.
Merry Monks: A Belgian-style Tripel.
Park Street Partners: Mobile home park investing.
How to Find, Buy, Manage, and Sell a Manufactured Home Community: A book Jefferson recommended.
Deals on Wheels: How to buy mobile home parks.