How to Finance a Mobile Home Park Investment

You’re about to discover how to finance a mobile home park investment. While the cash flow and forced appreciation from mobile home parks can be incredible, financing can be much different than multifamily or other commercial real estate. In this training, you’ll learn what every investor needs to know about the different ways to obtain funding for mobile home park investments:

Why Invest in Mobile Home Parks?

Mobile home parks have emerged as one of the last hidden gems in commercial real estate. Their popularity is growing due to their hidden potential and unique set of advantages that make them highly appealing to investors:

Consistent Demand: As cities hesitate to sanction new parks, existing ones become even more valuable.
Affordable Housing Solution: With demand for affordable housing skyrocketing, mobile home parks provide one of the last affordable housing solutions.
High ROI: The right park, purchased at the right price and in the right location, can yield substantial returns.

Mobile home parks also provide substantial financial benefits:

Long-Term Cash Flow: Mobile home parks offer consistent, long-term cash flow.
Tenant Occupancy: Prolonged tenant occupancy ensures steady income.
Lower Operating Costs: Compared to other commercial real estate investments, mobile home parks often have lower operating costs.
Tax Benefits: Investors can take advantage of attractive tax benefits.

Next, we will explore the financing options available for a mobile home investment. We’ll cover three areas: small park financing for loans under a million dollars, aimed at beginners; creative financing for parks with challenges like high vacancy or poor condition; and large park financing for loans over a million dollars, suited for more experienced investors.

Small Park Financing

Investing in smaller family-owned mobile home parks can be a great entry point for beginner investors. These parks, typically under a million dollars, offer a chance for beginners because financing options are more accessible. In fact, most of our students find success here without prior experience. When buying their first mobile home park, all they needed to get financing was the down payment, good credit, and a performing property.

Local Bank Loans

Financing options for small parks often involve local lenders and community banks because local lenders have a directive to lend within the community. Although these loans are more accessible to beginners, the lender will mitigate their risk by charging you a higher interest rate. Also, these smaller loans are recourse loans, meaning that you personally guarantee the loan. The key components of lending terms for small mobile home park financing are usually similar, although they can vary.

Loan-to-Value Ratios (LTV):
- Typically range from 70% to 80%.
- This means you’ll need a 20% to 30% down payment.
Balloon Payment:
- Loans often have a 5 or 7-year balloon structure.
- During this period, you make regular payments (amortization).
- At the end of the term, a balloon payment (remaining principal) is due.
Amortization:
- The loan is amortized over 20 or 25 years.
Prepayment Penalty:
- If you pay off the loan early, there’s usually a penalty.
- Commonly 1% or 2%, or a step-down structure (decreasing penalty over time).

Creative Financing

For parks with challenges that make traditional financing difficult, creative financing solutions come into play. These financing techniques can be used for properties that might not initially qualify for traditional loans due to high vacancy rates, inconsistent income, or the need for repairs. They are also helpful for investors who may not have the down payment or don’t qualify for a bank loan. Techniques such as master lease agreements, seller carry first mortgages, hard money loans, and bridge loans can give you alternative pathways to acquire mobile home parks that are high risk to the lender but have great potential.

Master Lease Agreement

A master lease agreement is a powerful and creative financing technique that we have used on some of our best deals, with our most distressed properties, and with some of the most unqualified buyers. Let’s break down its key components:

No Banks Involved:
- No need for an appraisal, loan application, credit check, or origination fees.
- The absence of traditional bank involvement streamlines the process as you work directly with the seller.
Seller’s Down Payment:
- The seller typically receives a down payment.
- This down payment can be low or even nonexistent, depending on the agreed-upon terms.
- The deal structure revolves around the seller’s motivation.
10-5-5 Offer:
- Typically structured as follows:
  - 10% down payment
  - 5% interest-only payments
  - 5-year term
High Return on Investment (ROI):
- With only 10% down, your deal can yield a significant ROI.
- In contrast, traditional financing often requires 25% to 30% down.

For further study on the master lease agreement, go here: Creative Financing Commercial Real Estate: Master Lease Agreement

Seller Carry First Mortgage

Owner financing, also known as seller financing, is a creative financing technique where the seller acts as the lender, and you, the buyer, become the borrower. This approach is particularly useful when dealing with distressed mobile home parks. By structuring the deal creatively, you can address the property’s distress while minimizing risk. Here’s how it works:

Scenario:
- You find a mobile home park with great potential but in a distressed condition and a traditional lenders view it as too risky due to its condition.
Process:
- Purchase Price: Let’s say the purchase price is $400,000.
- Seller’s Requirement: The seller wants 25% down payment.
- Down Payment: You provide the seller with $100,000 as the down payment.
- Seller’s Mortgage: The seller holds a mortgage for the remaining $300,000 (in first position).
Advantages:
- No Banks Involved: No need for appraisals, loan applications, credit checks, or origination fees.
- Flexible Terms: You can negotiate terms directly with the seller based on their motivation, allowing you to tailor the terms to suit both parties’ needs.

Hard Money Loan

A commercial hard money loan is a loan secured by the equity of the property, known as “Hard Money” because it’s backed by a tangible asset, which in this case is real property. This approach is often utilized for value-add deals that don’t qualify for a conventional loan, such as the acquisition of a mobile home park by our student, Gilda. She leveraged a local hard money lender to purchase her first small mobile home park and you can learn from her from her approach in this case study: How to Buy a Mobile Home Park.

Hard money loans come with certain trade-offs.

Interest Rate: Hard money loans typically have a higher interest rate compared to conventional loans.
Down Payment: The down payment requirement is also usually more substantial.
Value-Add Parks: Hard money loans a best suited for mobile home parks with potential for improvement (e.g., increasing occupancy, enhancing amenities).
Paying Off the Loan: Despite the higher costs, the goal is to pay off the loan using the increased value of the park. This strategy works well for investors who can execute value-add strategies effectively.
When to Use Hard Money: Hard money should be used selectively, and considered only when the park has significant upside potential.

In summary, while hard money loans are expensive, they can be a strategic choice for specific situations where conventional financing isn’t an option.

Bridge Loans

This leads us to the topic of bridge loans. A commercial bridge loan serves as an interim financing option that paves the way to a more stable financial arrangement. It transitions from a high-interest rate payment to a long-term, more affordable one. For instance, let’s say you want to purchase a distressed mobile home park. The lender agrees to provide a bridge loan, which, although temporary and with a higher interest rate to offset their risk, gives you the opportunity to improve the property. Once the property is stabilized, you can refinance into a more permanent and affordable loan.

For an in-depth training on hard money loans, go here: How to Get a Commercial Hard Money Loan

Large Park Financing

As investors gain experience and scale up their operations, they enter a highly competitive mobile home park market. Pricing for these parks spans from 2 million to 50 million and when it comes to larger mobile home parks, the financing landscape changes. Loans exceeding a million dollars require a different approach, involving regional lenders, government-backed loans through Fannie Mae and Freddie Mac, and CMBS loans.

Regional Banks

Regional lenders have branches in several states and are larger banks when compared to your local lender.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac mobile home park loans are government insured loans. This means that the federal government backs or guarantees the loan, even though your bank or loan broker is the lender. The advantage of this is that the government will pay off the loan if you default. Fannie Mae and Freddie Mac also have a mandate to create more affordable housing, so they have more loan dollars available and the best loan terms. They offer a fixed interest rate for five or ten years, amortized over 20 or 30 years.

CMBS Loans (Commercial Mortgage-Backed Securities)

A CMBS loan is a type of financing that involves securitization, where a lender bundles multiple loans from various borrowers into an investment package. These loan packages are then sold to investors on Wall Street. While CMBS loans are especially popular in multifamily properties, they also apply to mobile home parks. Rates for CMBS loans are comparable to those offered by Fannie Mae and Freddie Mac.

Loan Requirements

Large park financing can be more complex, especially for loans exceeding a million dollars. Here are some key points to consider:

1. Stricter Terms and Experience Requirement:
  - High Net Worth: Lenders often require a substantial net worth to secure large park loans. For all three of these financing options, your net worth needs to match the loan size.
  - Experience: Being an experienced investor is crucial for accessing certain financing options.
2. Non-Recourse Loans:
  - Fannie Mae, Freddie Mac, and CMBS loans fall into this category.
  - With non-recourse loans, you’re not personally liable for the debt. If you default, the bank can’t seize your personal assets.
  - While most lenders prefer experienced investors, there are exceptions to this rule; many of our proteges were able to overcome this requirement and there are ways to get around this, but for the most part, if you’re coming in off the street without our help, you won’t be able to utilize these loans.
3. Liquidity Requirement:
  - Loans over a million dollars often come with a cash requirement at closing.
  - Lenders want you to have 9 to 12 months of PITI (Principle, Interest, Taxes, and Insurance) in savings after closing to cover contingencies.
4. Park Ownership and Loan Approval:
  - If the park owns more than 20% of the homes, some banks may decline the loan.
5. Assumable Loan:
  - You can transfer loans to a buyer or investor.

3 Challenges to Financing Mobile Home Parks

Handling Parks with High Vacancy Rates

Financing parks with high vacancy rates requires creative solutions such as master lease agreement or seller financing, where no lender or appraisal is required. Alternatively, you could get a bridge loan or hard money loan to revitalize the property and attract tenants, and then transition into a long-term loan.

Financing Parks with Park-owned Homes

When a mobile home park has park-owned homes lenders are hesitant to provide financing and if the park owns more than 20% of the homes, the bank may not do the loan at all. This poses a unique challenge because many mobile home parks available include both the land itself as well as some of the mobile homes themselves. But what others reject is an opportunity for you! Rather than discounting these parks, you can use creative financing options to secure funding or implement other strategic approaches like separating transactions for homes and land.

Getting Started

For aspiring investors looking to invest in mobile home parks, starting small and seeking mentorship is key to success. By learning from experienced mentors and gradually scaling investments you can avoid costly mistakes.

Every Successful Mobile Home Park Investor Has a Mentor

Whether it’s through creative financing solutions or understanding the nuances of larger investments, we’re here to guide you through. Apply to our mentorship program here: Commercial Property Advisors Protege Program

If you have any questions, post a comment below or text PETER to 833-942-4516.