Table of Content
This accumulates year on year, then at a sale event, investors get paid their pref in full before other profits are split between them and the operators. Similar set ups exist in the MHP space, although it’s much easier and more common to not only hit our pref each year, but to exceed that due to the high cash flow. I’m going to touch on “forced appreciation” below, which not only increases equity, it also increases cash flow. Annual Lot Rent Increases – it’s expected in the mobile home park space that lots rents will increase annually. It’s common to see 5%-15% annual lot rent increase and sometimes you’ll need to increase rents up to or exceeding 20% to come close to market rents . If cap rates and occupancy stayed the same, just by merely raising rents each year for 3+ years, park owners can create handsome profits at refinance or sale with little effort.
Firstly, to obtain land that will be granted zoning for this purpose will be most challenging. The cost of developing every new pad is somewhere in the range of $25,000 to $40,000 per pad, consequently a 50 pad park would require at least $1,750,000 in development costs, excluding the land cost. You must also build in the cost of borrowing during construction and all the way to when the park is fully occupied. Due to this fact the existing parks are much more appealing. Traditionally, Mobile Home Parks have some of the highest cap rates (7-10% National Average) across all of the asset classes.
LOAN RATES
The perception of higher risk in customer turnover requires a higher cap rate to justify that risk. Valuations for tax reporting are also a common service provided to our clients who require fair market valuations for a variety of purposes including allocations of purchase price and estate tax planning. The Financial & Tax Reporting Services practice provides the independence and integrity that are the cornerstones of preparing valuation support for a defendable tax position. So in reality, a certain mobile home park will have a different value to each and every person. The idea is to decide what you want or will require in terms of your investment and then work to make the deal fit these requirements. Some buyers tell me they want at least a 7 cap, some say 10 cap, some say 15 cap.
From an accounting perspective, the majority of a mobile home park's value is comprised of land improvements , which can be depreciated at an accelerated schedule. Mobile home park depreciation schedules typically average 15 years compared to apartments of 27.5 years and commercial properties of 39 years. This unique tax feature often translates to tax free operating cash flows to the mobile home park investment owner. While demand for quality, affordable housing increases, the supply of mobile home parks is diminishing. It is estimated that approximately 1% of mobile home parks are redeveloped every year into higher and "better" uses.
Multifamily Loan Products
A fifth factor is that multifamily properties are without doubt the most popular type of commercial property and are even more in demand. Lastly, with the stock market continuing to go up, many investors fear the bubble is about to burst and preferred to diversify into investing in overpriced multifamily properties, confident that rents and property values will go up in the future. Historically Strong Cash Flow – MHP’s have gain the nickname over the years as “Cash Cows” due to the high cash flow that has historically been produced in the mobile home park space.
Since most RV park sellers are moms and pops, the door is often open to seller financing. If the seller gets paid in cash, they have to pay income tax and then put it in a CD or Treasury Bill for maybe 1%. If they seller finance, on the other hand, they only pay tax as they receive the payments and they get around 4% to 5% on the debt – that’s four to five times more annual income to them as investors. Then in a subsequent blog article I’m going to teach you how to navigate profitable mobile home park investments in today’s market. Tons of new and experienced investors are jumping on board to take advantage of this previously misunderstood asset class. MHP’s have proven to be one of the highest yielding and reliable investments, especially when compared to similar-kind investments (i.e. self-storage & multifamily apartments).
DON’T: Apply Cap Rate to Mobile Home Rent
It took a while to create a solid, rinse and repeat history of successful mobile home park investing. Albeit, there was enough of a track record for Warren Buffet to join the mobile home industry in 2003. Not too long after came 21st Mortgage CASH program, FANNIE & FREDIE financing for MHP’s, Section 8 Mobile Home purchase ability, and numerous large institutional buyers. Consequently, many investors from other asset classes have jumped fence to join the MHP Investing craze. Most buyers are indeed paying too much for commercial properties when cap rates are historically low, rationalizing that rents can be raised over time.
We also selectively represent buyers looking to acquire specific MH & RV communities throughout the United States. We can also assist the owners in determining if their community has a land value that exceeds the existing cash flow value of their community. As Manufactured homes are located on long-term rented spaces in quality parks, they lack underlying land ownership as well as the potential of future land ownership appreciation. They also may suffer from deep-rooted stigmas surrounding mobile homes and trailer parks. Location may be the primary way of determining both short term and long term value.
Since RV parks are more management intensive, investors demand a higher cap rate to justify a larger amount of their time and risk. One of the most attractive and growing investment property types, manufactured housing communities fulfill a much-needed supply of affordable housing. Depreciation expense is purely a tax deduction that does not affect cash flow.
In some cases, you will be able to fill up the homesites with minimal investment and effort so you may place a value of 25-50% depending on your comfort level. The key then is to reconcile the tax return with the profit and loss statement and then interject reality into the whole process. Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings. Manufactured homes are prefabricated homes built after 1976.
This cap rate refers to the rate of expected return on a real estate investment property which is calculated by dividing the net expected income by the property value to find a percentage. For investors, the low per-unit price means that it’s more feasible to purchase several units at once, thereby spreading the risk between multiple units and tenants. As a matter of fact, manufactured homes have the lowest cost per unit of any real estate asset class. But what’s happening now is an anomaly due to the four factors in play below.
Rates on the 10 year fixed mortgage have spreads of 2.45% to 2.75% over the 10 year US Treasury Yield. Freddie Mac Mobile Home Park Loan – Rates ca be fixed from 5 – 10 years and are tied to corresponding US Treasury Yields with spreads of 2.45% – 2.85% over the 10 year treasury yield for a 10 year fixed, 10 year term, 30 year amortization mortgage. Although mobile home parks are capable of achieving high returns, while simultaneously maintaining low vacancy and management liabilities – most do not. For many owners, higher cash flow alone is enough to combat the fears of mobile home park investing, and they trust Zell’s expertise.
When purchasing a mobile home park where there are park owned rentals, rent-to-own homes, and mobile home notes it is important to break out the income and expenses from this portion of the business from the lot/space rental portion. Manufactured homes are relatively affordable to buy since they cost so much less to build than traditional homes. As a result, commercial real estate investors can build larger manufactured homes while still keeping costs low, making them a great option for first-time investors especially. Additionally, due to the low cost, sellers are sometimes able to provide direct financing to investors.
Our team has over 30 years of experience and we have built industry connections over the years that allow us to offer our clients access to properties that are not even listed on the market. These off-market properties are often much more reasonably priced than on-market properties are in the current seller’s market. Commercial real estate agents at TFS Properties are here to help.
The factory built process allows for much greater consistency, quality control and accuracy than is seen with individually site-built homes, which often are plagued with delays and disruptions. All manufactured homes in the United States are required to be built according to federal construction codes laid out by Housing and Urban Development . A manufactured home is home built in a factory and then transported to the final home site, where it is typically quickly and easily assembled.
