3 No-Nos of Owning Mobile Home Parks

Owning Mobile Home Parks can be terrific addition to the real estate portfolios of individual commercial investors, especially now with the increased demand for mobile homes due to the affordable housing crisis. However, mobile home park ownership mistakes can be very costly! Here are the top 3 “No-Nos” of owning mobile home parks:

 

Mobile Home Park Ownership No-No #1: Excluding Bank Rejected Parks

There are many reasons why a bank would reject lending money on a mobile home park. Park lenders have requirements that must be met or they will not lend against such properties. Examples would include something physically wrong with the property, the debt coverage ratio is too low or the owner has legal problems like unpermitted improvements. When lenders reject a property, subsequently, mobile home park owners tend to exclude them too.

Perhaps the most common bank rejection issue is when there are too many park owned homes. Many mobile home parks available for purchase include both the park/land itself as well as some of the mobile homes themselves. However, many lenders will not lend money against the mobile homes, but only the land underneath, and if the park owns more than 20% of the homes, the bank may not do the loan at all. The reluctance of banks to lend against the mobile homes themselves is because mobile homes do not appreciate in value and are constructed with inferior materials so they don’t last as long and fall into disrepair faster and easier than a regular stick built home.

However, what others reject can be a great opportunity for you! How? First, it allows you to easily negotiate creative financing since the property doesn’t qualify for traditional mobile home park bank financing. Creative financing is easier and better than having to go through the hassles of originating a commercial loan because your credit and finances are not a factor. Second, you can actually increase the profits of the deal by selling the park owned homes to the tenants. This will transition the maintenance responsibilities to the tenants while either increasing your cash flow (if you sell it to them on a high interest owner financed note) or putting money in your pocket (if they can qualify for a mortgage from a mobile home lender like 21st Century, Vanderbilt Mortgage and Manufactured Nationwide).

Therefore, rather than excluding bank rejected parks, own them!

 

Mobile Home Park Ownership No-No #2: Avoiding High Vacancy Parks

High vacancy (also referred to as low occupancy) is very concerning for the average mobile home park buyer because most assume that the park has low demand or is in a bad location and therefore the vacancy issue cannot be fixed. In today’s affordable housing crisis environment, if a park has high vacancy, than you can be certain that it is a management/ownership problem, not a demand/location problem.

As the old saying goes, “if you build it, they will come.” Since the cost to move a mobile home onto a park lot is so incredibly high, waiting for a mobile home owner to move a unit onto your vacant space is a pipe dream. Instead, fill the vacancies yourself by adding mobile homes to the vacant pads. Then, you can either rent them to tenants, sell them on a rent to own plan or outright sell them.

The easiest way to fill your own vacancies is to get brand new mobile homes from a leading mobile home manufacturer like Titan or Clayton Homes. Those manufacturers offer lines of credit to mobile home park owners so you don’t have to pay cash for them upfront. Then, they will ship the homes from the factory direct to your property. Next, you can either lease them or better yet, sell them and have the new buyer payoff the line of credit. Now your vacancy is filled with almost no money out of pocket!

Therefore, don’t avoid high vacancy parks. They can be among the most profitable. The issue is not demand or location, it’s the failure by the existing management/ownership not filling the vacancies. And the way you do that is by getting new homes direct from the factory.

 

Mobile Home Park Ownership No-No #3: Not Having an Exit Strategy

Begin with the end in mind. Every park owner should have a clear and concise exit strategy that describes the plan of how their original invested capital will be returned and how they will earn a profit. There are basically two exit strategies, either to sell the park at some point in the future or to do a cash out refinance. Both strategies must also include a plan for increasing the Net Operating Income (NOI) so that the property value increases and therefore you not only get your original investment back, but you also get a profit as a result of your ownership. Increasing the NOI may involve filling your vacancies, reducing expenses, raising rents or all three.

Most park owners do not want to sell but would prefer to do a cash out refinance and continue to own the park as long as they can. Government agencies Fannie Mae and Freddie Mac have specific mobile home park financing programs that allow you to purchase a property using creative financing and then later refinance it into their long-term 30-year loan. These manufactured housing community loans are fantastic for several reasons:

• They can be up to 80% LTV, meaning that they require 20% down.
• You only need a 660 or higher credit score, so you don’t need perfect credit.
• You can do a cash-out refinance
• There are no tax returns involved

If you have a very good plan, or exit strategy, on how you are going to improve the NOI and what loan program you are going to refinance with, then you are well on your way to accomplishing your goals.

Biggest No-No of Owning Mobile Home Parks

Whether structuring creative financing, filling vacancies, increasing NOI or planning and executing an exit strategy, the biggest non-no of owning mobile home parks is not having a mentor and going it alone! Therefore, get a mentor! And you can get the best mobile home park owning mentor right here: Mobile Home Park Investor Mentor