Mobile home investing is popular because of high returns, low competition, and low maintenance. In America, mobile homes are a popular housing option. More than 17 million people live in mobile homes, trailers, or manufactured homes.
Mobile home investing is an alternative to traditional real estate investing. It is a fairly low-key type of real estate investment vehicle. Unlike single-family home investing, you don’t own the individual mobile homes. Instead, you invest in the mobile home park. You own the land, and tenants pay you to park their mobile or manufactured homes on your land. The tenants own the mobile homes and pay rent for the space and use of facilities on your property. Often mobile home park tenants are older, retired folks who want a safe place to live.
Mobile home park investing isn’t the most popular form of real estate investing. Investing in mobile home parks isn’t the top priority of large commercial investors or hedge funds. If you cannot afford to invest in more traditional real estate deals, mobile home investing can be a viable option for you.
What is mobile home investing?
Mobile home investing can be part of a diversified real estate investing portfolio. Many people ignore mobile home investing and think that real estate investing ends with single, multi-family residential or commercial real estate. But for some, mobile home investing may be the best option.
Although mobile home investing is a lesser-known form of real estate investment, it can be quite profitable. Often snubbed by real estate investors. But mobile home park ownership is a profitable investment vehicle.
Mobile home park investing and ROE: Return on Equity
Investing in mobile home parks comes with a certain level of uncertainty. It is impossible to know exactly how much you will need to spend on a particular property, how much it will cost to maintain, how the neighborhood will change in the future, or whether your tenants will be reliable. Investing in a mobile home park takes a leap of faith. It’s not only risky, but it can be considered speculative.
As long as you focus on the hard numbers, you can reduce the risks. Fortunately, there are proven methods to evaluate the merits of a mobile home park investment. All of them center on the same concept: what are you, in fact, earn in return for your investment?
A few effective numbers to evaluate are “cap rate, “cash flow,” and “net rental yield.” The bottom line is that only two data points are critical: cash flow and return on equity.
How to evaluate mobile home investments?
Buying at a great price can make a mobile home investment enticing. The right price is an excellent opportunity for someone who wants to break into mobile home park investing. But, before you join the ranks of mobile home investors, make sure that you understand the industry. A clear grasp of the financial details of your investment can make the difference between success and failure.
Here are eight mobile home investing numbers you need to consider as you evaluate a potential investment opportunity:
- Loan payment – The lender will base how much you can borrow based on appraised value, the down payment amount, and the income the property is expected to generate.
- Down payment – Contrary to what some people would like you to believe, there are no “no documentation” zero down loans in mobile home park investments. As an investor, you will have to have the capital for a down payment. Expect the downpayment to be somewhere between 25 and 35 percent of the purchase price). Of course, you need good credit.
- Rental income – To make your mobile home park investment work, your tenant’s rent payments need to cover your loan payments.
- Gross rental yield – You can calculate the gross rental yield for a property by dividing the annual rent revenue by the total property cost. Then you need to multiply that number by 100 to get the percentage.
- Price to rent ratio – This is a calculation that compares median home prices and median rents in a specific market.
- Price to income ratio – This ratio compares the median household price in a particular area to the median household income.
- Capitalization rate – This figure, also known as the cap rate, includes the mobile home park’s operating expenses. To calculate the capitalization rate, starting with subtracting annual expenses from the annual rent. Then you need to divide that number by the total property cost. Next, you need to multiply the resulting number by 100 for the percentage.
- Cash flow – An mobile home park investor who can cover the insurance, taxes, mortgage principal, and interest with the monthly rent, is in good shape.
How much can you make investing in a mobile home park?
To generate $50,000 in cash flow investing in a mobile home park, look for a mobile home park with about 40 lots. You can expect to invest about $400,000 in a mobile home park with 40 spaces. Your investment will require about $80,000 down. To make this investment work, your mobile home park must have city sewer and city water services. And the park should be located in a community of 100,000 or larger.
This type of deal requires seller financing. Generally, investors will put 10 or 20 percent down with a non-recourse note. A note length of seven years or longer should work. The seven years will provide enough time to refinance before your loan comes due. If you cannot arrange seller financing, you will have to deal with a larger down payment of 25 percent. Also, bank loans will only give you recourse debt – secured by collateral.
Is investing in a mobile home park right for you?
Mobile home parks are an excellent investment. Before you decide on investing in a mobile home park, you need to determine if it is the right investment for you. As you explore this investment opportunity, like with any other type of investment, do your due diligence. If you invest in the right mobile home park, it could be a resilient cash flow generator within your investment portfolio.
How to invest in mobile homes?
There are two different ways to invest in mobile homes:
- Invest in mobile homes – Many mobile home investors own mobile homes. They rent their mobile homes to tenants. The tenants pay you for living in your mobile home, and they also pay the park owner for the space and use of facilities.
- Invest in land under mobile homes – One type of mobile home investing is to own lots under individual homes. It involves owning the land surrounding the homes, such as the pool area, amenities, streets, clubhouses, and utility systems. In this form of ownership, the tenant owns their mobile home. The tenant pays only for the right to occupy the land where their mobile home is located. Besides, they have the right to use facilities on your mobile home park. This type of investing is about owning mobile home “parks” vs. mobile homes.
As a mobile home investor, you may decide to invest in either the mobile homes themselves or mobile home parks. You could also invest in both.
Are mobile home parks an easy investment?
If you are new to mobile home park investing, you might think it’s about owning multiple mobile homes. But owning a collection of mobile homes as an investment would require a lot of ongoing maintenance. Does that sound like an easy investment to you? Investing in mobile home parks means owning multiple individual lots that are rented out to mobile homeowners.
You are investing in the mobile home park itself, not mobile homes. As an investor in mobile home parks, you don’t have to worry about answering calls from tenants about maintenance issues. Mobile home park investors lease the land for the mobile homeowner to use. The tenant or homeowner has to take care of all maintenance and repairs inside the home. They are also responsible for maintaining their own landscaping.
When you invest in mobile home parks, you must maintain common areas, such as the pool, clubhouse, picnic or park areas, and roads. Maintaining common areas is much easier than having to maintain a large group of individual mobile homes.
What makes mobile home parks an excellent long term investment?
Because very few new mobile home parks are in development today, there is a limited supply. That isn’t because of a lack of demand. Local municipalities are generally against new mobile home park development. In many areas, buying vacant land to develop a new mobile home park is impossible. Thus, the mobile home park market is no likely to become oversaturated.
If you invest in a mobile home park, you don’t have to worry about a new mobile home park development next door. Currently, the total number of mobile home parks is shrinking. Some investors choose to invest not just in the mobile home park, but the mobile homes too. The challenge with this is that mobile homes require a lot more maintenance than mobile home parks. As mobile homes age, they begin to fall apart and require a lot of ongoing maintenance. And because mobile homes have a limited life (the life expectancy of a mobile home is 30 to 55 years), they need to be remodeled or replaced. If you want to invest in mobile homes, you must set aside significant reserves to replace or refurbish them. If you fail to maintain your mobile home investment, the code violations could pile up and even shut your mobile home park down.
Why invest in mobile home parks?
Invest in the growing market of mobile home parks
When you invest in mobile home parks, you take advantage of the growing demand for low rent housing. Mobile home parks support the demands of the housing market. They are relatively inexpensive. Mobile homes provide a cost-effective and comfortable living space. It allows people to own a home for a smaller investment than a traditional home. Mobile homes and mobile home parks satisfy the demand for affordable housing.
Mobile home parks are also popular with investors. One of the reasons for its popularity is that mobile home investments are resilient to economic cycles. Whether it is a booming or declining economy, there will always be a market and need for affordable housing options. With more than 60 million people earning a household income of less than $20,000, they cannot afford to pay more than $500 per month on housing. Mobile homes serve as a viable housing option for low-income families.
Invest in a consistent business
Mobile home investing is often regarded as an inconsistent type of investment. The misunderstanding has to do with the name of the property. Mobile home tenants are considered less consistent than tenants of traditional multi-family properties. But, the term mobile is an inaccurate term to describe these properties. Generally, mobile homes are not changing location. Mobile homes are expensive to move. Thus, these homes are far from mobile. To relocate a mobile home, a tenant would have to hire an oversized truck, paying several thousand dollars to move a home from Point A to Point B.
The reality of mobile homes is that most of them remain in the same location where they were originally delivered. Unlike in RV parks, where renters can simply drive off the park, mobile home ownership enjoys low resident turnover.
Mobile home investing and cash flow
If cash flow is important to you, you will love investing in mobile home parks. Each month, you receive the lot rent from every tenant. At the same time, there is not a lot of expenses to worry about. Compared to commercial real estate or multifamily real estate investments, expenses are much lower. In other types of real estate investing, a significant percentage of your revenue goes to maintenance and other expenses.
Taxes on investment properties can be costly. But, property taxes aren’t as high on land. Mobile homeowners are required to pay their own property taxes. As a result, your tax bill is much lower than a commercial building or multifamily property with the same amount of gross income.
Because mobile home park investors don’t own mobile homes, they don’t need to spend on maintaining individual homes, only the common areas and facilities.