Another important point is that being a landlord or owner of a mobile home park is not like owning or managing apartments or rental houses. You are responsible for the big things, like plowing the snow off the park roads and keeping the park looking nice. Toilets and light bulbs and broken doors, on the other hand, are never your concern. The tenants own the home and just rent the lot. This makes for simpler landlording in general.



Of course you do still have the issues of collecting rent on time and dealing with problem tenants. But look at the leverage you have. If they don't pay, or if they cause problems, they can effectively lose their home. You decide which homes are allowed in your park, and if they have to take their home out of the park, it is expensive. In fact, if they want to sell it, it may be worth $15,000 in your park, but only get them $4,000 from a dealer.

In other words, the tenants have a lot to lose if they don't follow the rules. This makes it easier for an owner to deal with the occasional problem. I recently spoke to an owner of a mobile home park in Arizona who had to evict a tenant with the help of the sheriff. He left without his mobile home, and under the law, the owner will soon be able to file for an abandoned property title, and then sell the place to recover lost rent. It's nice to have these options.

Cash Flow With Mobile Home Parks

Many mobile home park owners have such great cash flow because they have owned the park for a long time. They may have paid off the original loan for the property, and in any case have certainly raised the rent over the years. It may not be so easy for a new buyer to get decent cash flow at the prices that sellers are asking.

However, it may be easier than with many apartment buildings or rental homes. This is because mobile home parks are not popular investments. Investors invest for income, but prestige also plays a role in what they buy. It is more fun to say you own an apartment building than a mobile home park, so many will take a lower rate of return from the former.

Suppose you are looking at a mobile home park that has 42 spaces, and all but two are rented. The lot rent is $260 per month, although some pay more for pets or an extra parking space. Some income is also derived from the laundry facilities. The current annual income is about $130,000.

The owners pay taxes, insurance, electricity for common areas, advertising when spaces are vacant, maintenance on common facilities, legal expenses, and maintenance for the road through the park. This came to a total of $33,000 the previous year. Income before debt service was $97,000.

They are asking $800,000 for the park. You talk to a banker, and do some other homework, and make an offer of $720,000, explaining that you need to hire a manager, and although he'll live on site for free in the home that the owners currently occupy, you still need to pay him. You have to have cash flow after all expenses, or the deal doesn't work for you. You have already found that you can probably get a manger for free rent and $12,000 per year.

You also make the offer contingent on obtaining a loan for 80% of the total, and on the sellers providing financing for another 15%. This means you will need enough cash for a 5% down payment and closing costs, plus a contingency fund for any surprises. They counter back.

In the end you agree to $750,000. A loan from the bank for $600,000, at 9% interest, with a ten year balloon, but amortized over 30 years, will cost you $4,828 per month, or $58,000 per year. The sellers agree to carry back a note for $120,000, due in total in ten years, but with interest only payments each month, at 12% annual interest. That means $1200 monthly, or $14,400 per year.

That means you'll need $30,000 down, plus about $10,000 in closing costs. You also intend to spend $5,000 in improvements. Your total investment will be $45,000.

Expenses will go up because the new insurance policy costs more. The property taxes will also rise, because the property was under-assessed. You figure that the total expenses, with your new manager, will be around $49,000. Adding that to your loan payments, you project a total annual outlay of $121,400.

Based on the previous years income of $130,000, you'll make about $8,600 on your $50,000 investment. That's a cash-on-cash return of 17% or more. Not too exciting, but then you will also be building equity. You also have an ace up your sleeve.

In the course of your research, you found that lot rent in other comparable parks is averaging $285 per month. After you spruce up the place with the $5,000 you allocated for that, you will raise the rents to $290 as the leases expire. There is no reason for anyone to go to the expense of moving over a $30 increase that is in line with what other parks are charging.

That $30 times 40 spaces is $1200 per month, or $14,400 more income annually. Add that to the $8,600 and you'll have $23,000 net income by the second year, on an investment of $50,000.

Furthermore, you arranged to close on the 5th of the month. 90% of the rents are collected for the month, a total of around $9,000. Since rent is paid in advance, you are credited for the remaining 25 days of the month. This amounts to $7,500, reducing your cash needs at closing by that much. In other words, you really only have to invest $42,500 to get that $23,000 in annual cash flow.