There is a lot of talk about Mobile Home Parks and RV Parks in the investing space, especially if you hang around this corner of the internet with me. Generally, they are commercial assets that house families and act like residential real estate. They perfectly blend capturing the benefits of commercial real estate, like capitalization of income, while offering the same economic and societal benefits of residential real estate, like inflation adjustments and affordable housing.
Mobile Home Parks are essentially horizontal apartments or a group of single-family houses grouped in one ownership parcel of land. I always refer to them as tiny little kingdoms where the land is leased to the townsfolk and ruled over by the landowner, who sets laws and settles disputes.
Let us take a moment to understand these communities and all that really matters when trying to determine if a specific deal being presented is a good investment or not.
Mobile Home Parks Categories
Park-Owned Models (POH):
- The owner of the park owns the actual mobile home on the land.
- They rent the home with the land to a tenant.
- They are responsible for all repairs to the home.
Tenant-Owned Models (TOH):
- The owner of the park does not own the mobile home.
- A tenant owns the home and parks it on a lot in the park.
- The park owner leases only the land to the tenant.
- The park owner has no responsibility for repairs on the home.
Size of Parks
Small (up to 29 Lots):
- Parks of this size are difficult for virtual or larger investors as the property is not big enough to provide sufficient cash flow for on-site management. One repair can easily ruin a year’s worth of cash flow.
- Local Investors: Could be a starter park for them or an upgrade from single-family rentals into commercial.
- Hub and Spoke Model: Larger investors operating in the area add smaller parks surrounding a larger one, using resources from the larger park to create economies of scale.
Medium (30-50 Lots):
- This is a sweet spot—not too big, not too small. You can operate it from a distance and have some on-site management.
- Minor to medium issues can be handled without ruining the monthly or yearly cash flow.
- As you approach 50 lots, more competition comes into play, as more operators can buy and run the park from a distance using the cash flow to support a more robust on-site management team.
Large (50-100 Lots):
- This is the ideal battleground for many large but non-institutional investors. Large parks with great scalability and excellent opportunities for efficiencies provide investors with great returns and stabilize well.
- At this size, vacancies and medium to large repair issues do not significantly hurt monthly or annual cash flow.
Institutional (100+ Lots):
- This category is the most sought after by large and institutional investors. Funds offering cash or investors coming in with agency lending will be battling it out for these.
- They often yield the least return on an as-is cap rate basis due to high desirability.
- The larger you go, the more tenants, repairs, and infrastructure you must deal with. The operator at this scale must have a great operational team.
Infrastructure
The larger the park, the more infrastructure there is that must be dealt with by the operator. During the due diligence period of a possible MHP purchase, the operator should check the condition and type of each infrastructure component. Understanding what you have in your investment is crucial to proper budgeting. No particular infrastructure type is a no-go. Different operators have different capabilities and specialties. Personally, I love private systems like wells and septic systems. However, there are some I won’t touch because I believe the risk is too high versus the reward.
Private Utilities vs. Public Utilities:
- Private utilities offer more control and can keep operational costs low. Often, you can bill the tenants back for the service and maintenance on these. However, with ownership comes responsibility. You must maintain them, service them, and sometimes have utility operating permits to stay in compliance with the government.
Roads
Understanding who owns the roads is essential for estimating monthly expenses and capital expenditures. Not all parks have city/county-owned roads. Many are private, requiring the park owner to care for them.
- Dirt Roads: These are the worst roads to have in a park. They should be converted to asphalt paved roads.
- Gravel Roads: Nicer than dirt roads and can provide a good base if the operator decides to pave the roads later on. Gravel roads can be easier to maintain but can get washed out easily in a rainstorm, requiring ongoing re-graveling by your maintenance staff.
- Paved Roads: Asphalt paved roads are the standard for a mobile home park. The biggest issue we find when buying a value-add park is the roads. Potholes, cracks, crushed edges, and patches make a horrible first impression for investors, banks, and prospective tenants. A freshly paved park will do wonders for the park’s curb appeal and value.
- Concrete Roads: Much more expensive than asphalt. They take longer to install but have higher durability. However, they can also be more expensive to repair when issues arise.
Adding Curbs & Stripes:
- Adding curbs and stripes can make an older park shine. Curbing on the roads is more expensive, as is striping, but the curb appeal can be worth it. Not all parks can add curbs without extensive work due to drainage and slope.
Water
- Well: Well water is a huge responsibility. Monthly and often weekly testing is required by the health department to keep the water clean and safe. The electric bill will eat at the park income, as will maintenance of the water system. Pump replacements and parts can be costly, especially on an old system.
- City: Is it master metered, meaning the city bills the park and then the park owner bears the cost? Or is it direct billed to each tenant with a meter at each home?
- Pipe: Usually, the park owns all the piping underground up to the mobile home. Unless the park is on city water with individual meters at the front of each home, then the park is only responsible for the pipe from the meter to the home.
Pipe Types:
- Black pipe, PVC, grey pipe, or galvanized pipe. To make this easy, if it is not PVC, you will need to replace it at some point, or you will be playing patchwork during your entire ownership.
Sewer
There are many different materials used in sewage lines: clay pipe, ABS, PVC, Orangeburg, cast iron, and galvanized pipes. A good due diligence process will uncover the material and age of the sewer lines. We all hope for PVC, but often we get a mixture of lines, depending on the age and location of the park.
Sewer Systems:
- Septic Systems: Best private system if maintained properly.
- Waste Water Treatment Plants: Can become expensive to repair and costly to replace when needed. Specialized vendors are required.
- Lagoons: Large ponds collecting sewage. They need specialized operators.
- City Sewer: Ideally, the best option but often private systems are encountered.
Electric
Most parks are individually metered at each lot and direct billed to the tenant. Very few are master metered to the park.
Underground vs. Above Ground:
- Electric service can come either above ground, on poles with wires overhead, or underground, lines laid below the surface, with pedestals coming out of the ground at each lot with a meter and service box.
Park Components:
- Lots (aka Pads or Sites): The most important part of a park, the lots, sometimes referred to as “sites” or “pads,” are the main basis for valuation of a mobile home park.
Lot Types:
- Occupied Lots: How many lots in the park have homes physically sitting on them. This is important, as even vacant homes help claim the lot in the eyes of many municipalities.
- Developed Lots: Fully developed with road access, water lines, sewer lines, and electric meters.
- Undeveloped Lots: Extra land, verbal approvals, drawings, and plans for more lots. These should be considered a bonus but not an essential component of the investment.
Occupancy
Economic Occupancy:
- This can be looked at how many units are currently producing income vs. what is possible. For example, if you have 100 developed lots with 90 homes on them, but only 50 of those homes are occupied and paying rent, you would have a 50% economic occupancy.
Physical Occupancy:
- This can be seen by how many physical units you have sitting on the total developed lots. For example, if you have 100 developed lots with 90 homes on them, but only 50 of those homes are occupied and paying rent, you have a 90% physical occupancy.
Management
Onsite Management:
- Community managers typically live on site. In smaller parks, there may be an unpaid tenant or someone who receives free lot rent to “keep an eye” on the property. Mid-size to large parks will have a paid community manager with limited roles and responsibilities, often handling move-ins and move-outs, meeting vendors, and handling leases and collections as needed.
Virtual Management:
- The general partner will have a property management team in-house or a third-party management company operate the park. They will not live in the park but will run the operations from their home office.
Blended Management:
- Many parks run a blended management team with an on-site community manager and a virtual general partner management team, splitting duties and systematizing operations to make the park run efficiently.
Legal
Zoning:
- Legal Conforming: These are rare, but newly developed mobile home parks fall into this category, and you will find most RV parks here as well. The park conforms to current local zoning codes and is legal to operate.
- Legal Non-Conforming: These are grandfathered in. Most mobile home parks fall into this category. They are allowed because they have been there for a long time, but still may come with restrictions on local building codes. It is essential to research the zoning status of any park and have conversations with local authorities during due diligence. Understanding what restrictions or requirements exist when improving your park can make or break a deal. For example, setback rules may hinder the size or placement of new homes, and new codes may prevent certain aged mobile homes from entering the park. These restrictions can drastically affect your infill and proforma expectations if not accounted for.
- Illegal Non-Conforming: This park is not approved to be operational, and there may be nothing you can do about it. Research is needed to understand why and if anything can be done. Often, if the park is not shut down, they may not allow you to make any changes to the park as it is, resulting in a slow death as the park ages.
Operating Permits:
- Water: Local authority may require a permit to operate a well for public use by your residents. That permit lapsing can cause you to have to connect to city water, which can be costly and reach into the six figures easily, depending on the park layout and location.
- Sewer: Depending on your location, you may be required to have a permit to operate your waste system. Similar to the water permit, verify its existence and intact status before investing. Changing over an entire sewer system from private to public service can be costly.
- Operational Permits: Some local municipalities and states have requirements for parks to register and pay for a license or a permit to operate. Others just require a business license locally. Lapsing of these licenses or permits could cause a park to be shut down in areas where parks are frowned upon.
Financial Factors
Portfolio Package
When an investor owns multiple parks in one centralized location, they will package them together and sell them at one higher price. For example, a 20-lot park on its own might only sell at an 8% cap or a 9% cap depending on market conditions. Whereas if you put five 20-lot parks together and maybe even a larger 50-lot park, you can sell them as a package for a higher price.
Cap Rates:
- As-Is Cap Rate: Also known as the “day one cap rate,” this can be misleading when buying value-add parks. Not everyone operates a park the same way. Rather, there should be a stabilized as-is cap rate, which is what the day one cap rate is when considering the new operator’s expenses, systems, and average rates for a park like the one being bought.
- Stabilized Cap Rate: The goal cap rate, often shown in the pro forma, is what the general partner’s business plan is striving to achieve. Once all rent, operational, and infill initiatives are complete, the property should provide a higher income level and hopefully a lower expense ratio. This will result in a much better capitalization rate or rate of return for investors than the “as-is” rate when purchased.
- Sale Cap Rate or Exit Cap Rate: This is the rate of return the deal is expected to sell at. If the operator believes the market will be at a 7% cap rate at the time of exit, they will take the expected revenue at that time, multiply by (1-expense ratio), and then divide by the exit cap rate to get an expected valuation.
Equity Multiple:
- Deal Multiple: This shows how much the deal returns on money given in total. For example, if the capital put into a deal was $100,000, and with all cash flow distributions, loan, or sale proceeds returned to investors the deal in total returned $100,000, giving a total cash return of $200,000, that is a 2x equity multiple (for every $1 given, you get $2 back).
- Limited Investor Equity Multiple: This is the same concept but with the fees and general partner return taken out. It shows how much the actual limited partner receives back on their money. Although the deal itself may be a 2x multiple, the general partner gets a portion of the cash return over the life of the deal and at sale. The limited partner should look at their specific equity multiple on the money they invested, post-GP split & fees.
Expense Ratios:
- These can be tricky to generalize as they heavily depend on the park’s specific situations. An expense ratio in the 20%-29% range indicates a larger park that is highly efficient, with direct billing everything to the tenants, or it is a mom-and-pop operation where they do work themselves that does not hit the books. Most parks will fall into the 30%-39% category if they are predominantly tenant-owned homes. They aim for the higher end of that range if they have private utilities and are not direct billed to tenants. The 40%-50% ratio is where we get into park-owned home parks. When you have a majority of POH, you will have up to a 50% expense ratio. The older the homes and with private utilities, your Operator should be estimating a 50% expense ratio.
Why do we bring this up? When analyzing a general partner’s offering, you want to look at how realistic their projections are. Looking at how they predict expenses can help you see where their experience and conservatism fall on your comfort level. If you see a POH mix TOH park with private utilities and they are estimating a 30% expense ratio, either they do not know because they have not experienced it before, or they are trying to pad the pro forma to make it look good for the limited partner capital raise.
Net Operating Income (NOI):
- For the purposes of determining performance, we measure the cash flow available after paying all operating expenses but before any debt payments or other non-operating expenses. The idea behind this is that the NOI could be expected to be achieved by another investor operating the park; however, their debt payments may be drastically different. Therefore, the measurement is on NOI and not net income.
Management Fees:
- These fees only refer to the direct operational property management fees run either by the general partner’s in-house team or a third party. A max rate of 10%, with many falling into the 8% range. On larger investment deals, the general partner may offer as low as 3%-6% property management fees. Often, this is because the park itself has on-site staff that carry most of the load and are being paid directly from the mobile home park entity. It may seem like they are charging less; they are, but they are doing less of the work and just more oversight. There is no right or wrong; it is deal-dependent. Make sure you are comfortable with what your general partner is charging and why.
Bill Backs:
- Will the operator or can they do bill backs? When operating a mobile home park, certain utilities or maintenance items that the park owner takes on may benefit the tenant. When this happens, they will often choose to “bill back” the tenant for the cost. This can help improve the NOI, increasing the overall value of the mobile home park.
Billing Methods:
- Bill by Usage: Adding water meters to each home can help determine usage, and then bills can be sent to each tenant for them to pay.
- Flat Fee: A flat fee for the services or costs will be placed on the lease at a monthly rate. For example, lawn care might be billed at a flat rate of $20 per month added to the monthly rent payment.
Keep in mind with bill backs, the total rent is important to remember, along with overall electric and utility costs for that unit. A tenant can only afford so much; overbilling can reduce the monthly rent amount you can procure from the open market.
Taxes
Home Registration & Tax:
- Although not permits, there are often tag registration requirements and taxes owed on any park-owned homes.
Park Taxes:
- There is also an overall tax on the land the home sits on. These taxes are often recalculated at the time of sale, so ensure the pro forma adjusts for a higher tax rate and not just the current amount at the time of purchase.
Insurance
Insuring the park can be a challenge. Depending on location, there are many considerations: flood zones, condition, park-owned homes, infrastructure, and natural disasters. There is also liability and loss of income insurance to consider.
Each park and operator will choose the insurance that makes the most sense for the park being purchased. It is okay to ask about those considerations and why or why they aren’t being obtained.
Rates are going up, and it is difficult to insure, so make sure the investment is quoted during the due diligence period and considered in the pro forma being presented, not just a placeholder number.
Final Thoughts
This was only a quick overview of some terms and information regarding common terms and components when starting your Mobile Home Park journey. The best way to learn is to ask more questions and discuss them with the Operator or General Partner Team. Although it is tough for a General Partner to outline all of this in a pitch deck or Offering Memorandum, they should be more than willing to discuss these items with you in detail. Communication and openness are always good signs. No one component, method, or infrastructure system is necessarily good or bad. Rather, each one needs to be considered in the context of the investment as a whole, the Operator’s specialty, and the compensation for any increased risk.
If you want to discuss in more detail Mobile Home Parks, this article, or how these may affect your Journey in Passive Investing, please use this link to schedule a call with me.
-The MHP Operator
