You ever look at a mobile home park investment that promises a 20% IRR and think, “How the hell are they pulling that off?”
You should. Because the truth is, some Sponsors are making those numbers up—not with lies, but with overly aggressive assumptions that fall apart the second reality kicks in.
Most Limited Partners don’t lose money because of fraud. They lose money because they trusted a spreadsheet full of assumptions that had no business being there.
In this article, I’m pulling back the curtain on how the numbers get ‘creative’—and what every Limited Partner needs to start asking before wiring a single dollar.
If you’ve reviewed a dozen MHP syndication decks, you’ve probably seen a common theme: high IRRs, fast returns, and a hockey stick of projected cash flow.
But what if I told you the biggest risk in those deals isn’t the market or the tenants—it’s the spreadsheet itself?
The rent raises were too fast. The infill timeline was too short. The expenses were too low. And the exit cap rate? Pure fantasy.
Here’s how aggressive underwriting really works—and how to spot it before you get burned.
Overestimating Rent Increases
Rental income is one of the main levers of revenue in mobile home park investing. Whether it be lot rent or home rent, the amount and how fast you increase it will drastically affect the projections on the pro forma and estimated distributions.
A $50 increase across a 50-lot park is an additional $2,500/month. A $100 increase is $5,000. Over the course of a full year, that can be $30,000 to $60,000 of revenue the deal is expected to receive.
Many of the mobile home parks being syndicated are value-add investments where rents are 25%-50% under market rates. How aggressive the Deal Sponsor is in projecting the increases and the time to get to market can be an indication of how they underwrite the entire deal.
Assuming tenants will pay much higher rents without factoring in resistance, turnover, or the cost of improvements.
Rental income is often the most overestimated figure. Every operator has their own business plan and method for increasing rents. I’ve seen pro formas projecting rent increases of hundreds of dollars in Year 1. That’s aggressive and usually unrealistic.
Year 1 is typically a partial year. It takes months to transition the community, let leases expire, and implement rent increases. This delay is rarely accounted for.
Rents should be raised gradually. If additional charges like water, sewer, or trash are added, the overall monthly increase can double. A $50 rent bump is typical for existing tenants. Sponsors projecting $75 or $100 risk major pushback, vacancies, and collections issues. You have to know what your tenant base can afford. Just because someone can’t move their home doesn’t mean you should squeeze them. Protecting the integrity of the industry matters.
Higher rent raises can lead to higher vacancy, late payers, or legal action. A gradual increase throughout the hold period is a more sustainable approach.
Lot rents may be uniform, but POH rents should vary. Size, bed/bath count, porches, and amenities all matter. Pro formas with flat POH rent rates across all units are a red flag. Ask to see the per-unit breakdown.
If the business plan includes RTO or home sales, compare the payment to market rents. We like to price our RTOs slightly below market rents—say, $800-$850 when rent is $900—to encourage ownership and remove the home from our books.
Vacancy Expectations
Rent increases and new rules lead to vacancies. Operators often assume a 5%-10% vacancy rate. At Realovative Asset Management, we do the same—but Year 1 is different.
New rules, leases, and changes cause friction. Many residents don’t like change. It’s human nature.
POH-heavy parks lose more people at takeover. We use a 1/3 rule: we expect to lose up to one-third of POH tenants in Year 1 on top of standard turnover. We adjust rent projections accordingly.
TOH tenants are more stable but may still leave over time. Some move a year after takeover because they can’t reconcile the rent hikes and new rules with what they had before. Long Term RV renters are also quicker to move with drastic rate changes. A higher RV occupancy could result in larger vacancy rates.
Plan Implementation
A syndication for a real estate deal like a mobile home park involves a business plan. This plan includes raising rents, streamlining operations, improving the community and infrastructure, fixing homes, leasing up vacant units, and bringing in new or used homes to fill vacant lots. Some plans also involve expansion, development of vacant land, or applying for a variance to add more lots.
The issue with being too aggressive isn’t what they plan to do—but when and how much. Since returns are tied to cash flow and revenue, the most aggressive assumptions usually show up in the rent increases, home rehabs, and infill plans.
Front-loading major projects can drastically affect KPIs like IRR. Early-year distributions are the biggest hurdle in value-add deals. There’s pressure to generate cash fast, but it’s easy to say something will be done quickly and another thing entirely to actually do it. Sometimes, delays stretch into months or even years.
Key Points to Consider:
- How many homes need to be rehabbed or demoed?
- Is this a market where the operator already has vendors?
- Do they have a traveling rehab crew in place?
- How many rehabs do they expect to complete in Year 1? Or annually?
- What percentage of rental income in Year 1 is tied to these rehabs?
Hiring crews and getting accurate estimates takes time. Sure, you can find people—but will they hit your budget, show up, and do quality work? Often, finding all three (budget, speed, and quality) takes months of trial and error.
Infilling Vacant Lots
Bringing in homes is one of the best ways to add value—and one of the most complex parts of any plan.
Let’s say there are 50 vacant lots and the plan is five years. That’s 10 per year. But Year 1 is usually a partial year. And then there’s the question of whether those lots are even ready. Are water, sewer, and electric hookups in place, or do they need work?
Will the homes be new or used? Used homes may be cheaper but harder to find and often don’t meet municipality age requirements. New homes are easier to source but cost 4–5x more and have longer lead times. They don’t just magically show up. You need to order, wait for delivery, set them up, advertise, and lease. Expecting full-year revenue from new homes placed in Year 1 or 2 is a red flag.
Ask These Questions:
- How many homes do they plan to bring in each year?
- Have they done this before?
- Do they have a retailer’s license?
- Are they connected with a manufacturer for inventory?
- Have they used them to ship homes in the past?
We assume a slow ramp-up:
- Year 1: No infill.
- Year 2: Fewer than 5 homes.
- Year 3–4: 5–10 homes per year.
- Year 5: Maybe 15 if the process is dialed in.
If someone says they’ll infill 20 homes in Year 1, you better see proof. There’s no one-size-fits-all number, but prior experience matters. Without it, those claims are unrealistic.
Sales vs. Rentals
Are they renting or selling the homes they bring in? Rentals are faster but saddle the park with debt payments. Selling reduces the debt and brings in capital, but overestimating sale prices, down payments, or volume can massively overstate available cash for distributions—and inflate IRR. If the sales don’t happen, neither will those projections.
Same Logic for Rehabbing Vacant Homes
If there are 20 vacant homes, could they all be rehabbed in one year? Maybe. But in a new market, finding crews and materials takes time. Depending on the scope, each rehab might take 3–4 weeks.
We assume 1–2 rehabs per month for medium-to-full rehabs. Some parks get one crew, others two. That helps speed up the work, but in Year 1, we still assume a lower output as we get vendors onboarded.
At one park, we had 15 homes to rehab. That should be doable in a year—but we budgeted for only 5 in Year 1 and the remaining 10 in Year 2. Why? To stay conservative. If we go faster and outperform the pro forma, great. But if the deal only works because all 15 are done and rented in Year 1? Then the deal doesn’t work.
Plan slow. Execute fast. Never the other way around.
Underestimating Expenses
Not accounting for real-world maintenance, payroll, or insurance hikes can wreck your projections.
We’ve talked about capital reserves and budgeting for plan improvements—but what about your operating expenses?
When taking over a community, the seller’s expenses will often be way different than what you’ll actually incur under new ownership. One of the fastest ways to check if a pro forma is grounded in reality is to look at the operating expense ratio.
- 30–40% is realistic for a tenant-owned home (TOH) community. You’ll be at the lower end if all utilities are direct-billed and you’ve got minimal overhead. The higher end applies if the owner pays for water, sewer, or trash.
- 40–50% is realistic for all POH or mixed TOH/POH communities. Factor in the ratio of POH to TOH and who’s responsible for utilities.
For our communities with a heavy POH mix, we underwrite 45–50% and aim to improve to 42–43% over the hold period.
Now, let’s go deeper than utilities:
- Evictions: Are they accounting for legal costs and labor in Year 1? If rents are low and there are lots of late payers, this should be higher upfront. Most sponsors account for vacancy, but few account for legal costs.
- Management & Admin: Property management fees are usually baked in—but what about on-site staff or admin costs? Larger communities come with more overhead: offices, electric, internet, equipment, payroll.
- Marketing: Bigger parks, especially with RV lots, need a real marketing budget.
- Landscaping & Snow Removal: Even if tenants mow their own lots, the park is still on the hook for common areas and roads. Did they get bids or is it a filler number?
Maintenance Costs
On top of capital improvements, you need to budget for day-to-day maintenance. Here’s how we approach it:
- Park-Owned Homes (POH): Start with 20% of gross rent and taper to 10–15% as homes are improved or sold.
- Tenant-Owned Homes (TOH): Even with TOH, we budget 10% for infrastructure issues (septic, wells, water lines).
Budgeting is about understanding the blend of your home types and the age/condition of those homes. If the park is full of older POHs, you better see 15–20% in the pro forma.
Insurance & Taxes
- Insurance should be a layup. Sponsors should get quotes from providers during due diligence and use those real figures.
- Taxes take a bit more work. Too many Sponsors just use the current tax bill and increase it a couple percent each year. But when a sale happens, many municipalities reassess the property and jack up the rate.
During due diligence, a Sponsor should:
- Call the municipality
- Ask how often they reassess and formula for determining taxable value.
- Confirm the millage rate
- Calculate taxes based on the new purchase price
Ask how they arrived at their estimate. If they just rolled forward last year’s bill and marked up 5%, it’s a red flag. Cross-check it against public records to confirm whether they did the legwork or just guessed.
Optimistic Exit Assumptions
Assuming you’ll sell at the best possible cap rate or refinance at the highest possible LTV is a classic sign of overly aggressive underwriting.
It’s easy to juice a deal’s projected returns by assuming a low exit cap rate. But just because today’s cap rates are 6% or 7% doesn’t mean they’ll stay that way in 5–7 years. If the Sponsor is basing their exit on best-case assumptions, ask for the rationale. Is there any factual basis?
Larger, higher-class communities with 100+ lots may sell at lower cap rates. But smaller parks? Not as likely. Exit cap rate depends on:
- Community size
- TOH vs. POH mix
- Public vs. private utilities
- Local comp sales and market strength
Too many Sponsors buy during good times and assume they’ll exit just as smoothly. If they lack experience or aren’t conservative, they may project selling at or below their purchase cap rate—assuming the good times will keep rolling. But implementing a full business plan takes time, and markets shift.
We saw this play out from 2020 to 2023. Interest rates were low (3%–5%), lending was easy, and capital was cheap. Deals worked at tighter cap rates. But as rates rose in 2022 and 2023, operators who bought during the boom couldn’t get the interest rates—or exit values—they expected.
Refinance Assumptions
A common aggressive move is assuming a 75–80% LTV on a refinance. That’s doable in a hot market, but not guaranteed if the economy softens. We underwrite refis at 65% LTV to ensure a conservative return of investor capital. If we get more, great—but the deal still works if we don’t.
The LTV assumption plays a major role in how much capital you can return:
- Paying off the original loan
- Returning investor capital
- Distributing any excess refi proceeds
An aggressive LTV can inflate the projected return profile and make a deal look better than it is.
Here’s a simple example:
- Assume a park is worth $7M at sale.
- At 75% LTV, you’d get back $5.25M.
- At 65% LTV, that drops to $4.55M.
That’s a $750K swing just from a 10% difference in assumption. That affects your ability to repay loans, return capital, and make distributions. And that difference can slice projected IRR in half.
Bottom line: if the exit plan only works in perfect conditions, it’s not a plan—it’s a bet.
Overestimating Timing
How fast does the Sponsor assume they’ll get everything done? Rents raised, homes rehabbed, lots filled—but when and how quickly?
First thing to check: Is the syndication fully subscribed at closing?
Deals are typically structured with a 5-year business plan. That timeline includes assumptions about when improvements will happen and when those changes will start affecting the bottom line. As a rule of thumb, I want to see gradual progress. If too much is packed into Year 1, that’s a red flag.
Taking over a community in Year 1 is already a heavy lift: rent raises, new leases, tenant transitions, evictions, home rehabs, infrastructure repairs, infill, and tenant relationship building. The real question is—how much is realistic to get done that first year?
It comes down to operator size and capacity.
- Large Sponsors with dedicated departments can handle more at once.
- Smaller operators may be nimble, but there’s a cap on how much they can handle in Year 1.
A good timeline shows gradual implementation across major categories:
- Rents raised $50 (maybe $75–$100 if the community can handle it)
- Infill starts in Year 2
- Infrastructure projects spaced out
Front-loading these items sounds great in a pro forma but is much harder in practice. Hiring contractors, gathering bids, ordering materials, dealing with permits—all of that takes time.
Real Example: At one of our parks, connecting to city water took nearly 6 months. Why? We had to:
- Work with the water company
- Get municipal approval
- Wait for installation of meters and taps
- Deal with weather delays (a hurricane pushed us back 2 weeks)
- Order materials, schedule crews, complete install, pass final inspections
It took twice as long as expected—and that was just one project. Now imagine five projects with similar hiccups. The Sponsor’s time and bandwidth will get eaten up fast.
Some delays won’t directly affect cash flow—but they will slow progress and divert attention. And if the capital raise isn’t complete at closing, everything slows down. Often, but not by choice, Sponsors raise just enough to close, then keep raising for the CapEx budget. That leftover $500K–$1M might take months to raise—and delays the business plan.
This isn’t always a deal-breaker, but it’s something LPs need to know:
- What’s still left to raise?
- How does that impact the timeline?
- Is there a backup plan?
When it comes to infill and leasing, no plan goes perfectly. Homes don’t always rent as fast. Sales come in lower than expected. Prices get adjusted.
If a Sponsor says all vacant homes will be rehabbed and rented in Year 1, I’m skeptical. Same with aggressive infill projections. Delayed deliveries, unavailable inventory, and trouble scheduling movers/setters can all slow things down.
That’s why we spread our projects out over the hold period. It might not make Year 1 or 2 look “sexy” on paper, but it gives us a cushion for the unexpected. If we rehab and lease faster? Great—we get to surprise investors with better returns.
But if the deal only works assuming flawless execution from Day 1, we won’t contract it.
Plan slow. Work fast. Outperform expectations. That’s the better bet.
How to Protect Yourself
Ask for a sensitivity analysis. What happens if rents grow slower? If expenses rise? If interest rates don’t cooperate? Good operators stress-test their deals.
Don’t just compare deals you’ve seen before to the one in front of you. One of the biggest issues I see isn’t just aggressive underwriting—it’s that LPs expect the Sponsor to be aggressive. That assumption alone skews how deals are evaluated.
I underwrite conservatively. I assume slow rent increases. I don’t count on cash flow from selling homes—it’s too unpredictable. I assume it’ll take time to implement the business plan. Because let’s be honest: what can go wrong, will go wrong. So I plan for the worst and aim for the best.
But when I present deals, LPs still ask questions based on the assumption that I’m being aggressive. And then I get compared to other deals they’ve seen.
If they’re seeing 2.2x multiples and 20% IRRs elsewhere, and I show them a deal at 1.85x and 14% IRR, mine looks worse. But the devil is in the underwriting.
Just the other day I presented a deal we’re closing partway through the year. An LP asked, “What’s Year 1 cash-on-cash?” I said, “2%.” They didn’t like that.
But I was honest. I always assume Year 1 is going to be rough in a value-add deal. I even put that in our pitch deck. Why? Because it’s true. Nothing ever goes perfectly.
And there’s a logical reason: I’m raising capital upfront for a business plan that will take me three years to fully spend. But I’m paying a return on the full amount from day one. So the early years won’t reflect the full benefit of that capital. It takes time to rehab homes, fill lots, and raise rents.
But if LPs assume all Sponsors are aggressive, it becomes a self-fulfilling prophecy. Conservative deals look bad next to flashy ones. If LPs aren’t asking the right questions—or don’t have experienced advisors—they might choose the deal that looks better, not the one that is better.
That’s why it’s important to dig into the numbers. Understand the assumptions. Ask hard questions.
Because most LPs don’t realize that aggressive underwriting isn’t just a different style. It’s the difference between getting paid—or not.
If a deal only works under perfect conditions, it’s not a good deal.
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Lock N’ Load
–The MHP Operator
Disclaimer: The information provided in this article is for educational and informational purposes only. It is not intended as financial or legal advice. I am not a licensed financial advisor, lawyer, or CPA, and you should consult with a licensed professional before making any legal or investment decisions.
