Mobile home parks have some uniquely attractive attributes, but one of the most appealing is the many different financing options available to buy a mobile home park. You will find more creative financing options in mobile home park investing than in all the other sectors of real estate combined. And this allows new investors to enter the business with lower risk and less hassle, as well as seasoned investors to take advantage of some extremely attractive structures.
Seller financing of mobile home parks
This is one of the best things about mobile home park financing – the ability to structure an incredibly attractive loan from a mom & pop seller who owns the park free and clear. Seller financing typically includes 1) no credit check 2) no loan committee 3) low down payment (as low as 0%) 4) 5 to 10 year term 5) non-recourse 6) 30 year amortization 7) assumption allowed 8) seconds allowed and 9) creative terms on the front end, such as interest only in the early years. It’s no wonder that seller financing is the key driver for most people to enter the business – it’s just too good to pass up.
Wrap mortgages on mobile home parks
Another construction that is popular with mobile home parks are “wrap mortgage”, which means that the buyer essentially “assumes” the first lien without telling the bank that they are doing so. These type of arrangements allow the buyer to skirt any type of bank committee or credit check, but include an element of risk, should the lender discover the property has been conveyed without their approval. In those cases, the loan can typically be called due and payable, and might lose your down-payment. So be careful with this financing type. In some cases, the underlying loan allows for a “wrap”, or a construction that acts as a wrap, so you should have a licensed attorney read the note and see what is, and is not, allowed.
Master Lease with Option
This is something that you only see in mobile home park deals. The structure is that you lease the entire mobile home park from the owner for a flat rate per month for a specific number of years, and during that time you have the right to buy the park at a pre-set price. This is a very handy method to employ when the mobile home park is so poorly managed that it cannot support a note of any size. Once the lease begins, you scramble to raise rents and cut costs and, if you structure it correctly, you have a large positive cash flow per month quickly. Then you have two options to secure your position: 1) sell the park to a third party and have a simultaneous closing and 2) buy the park, with a new appraisal so much higher than your option price, that you can end up with a zero-down bank loan. The best part about the Master Lease with Option is that, if you bet wrong and you can’t turn the park around, you can just walk away from it with no harm done, other than the loss of your time.
Bank financing of mobile home parks
This is the traditional mainstay of all real estate. You go to several banks, explain why it’s a good loan, run it through their loan committees, and end up with an offer or two. The down payment is typically 20%, the loan term 5 years, and the loan is recourse. Both fixed rate and variable rate interest are common. The great thing about bank financing is that it’s so “safe” – banks are tightly regulated by the U.S. government, and you always feel that you are going to be treated fairly. Make sure to match up the type of bank with the type of loan you are seeking. For anything smaller than $1 million loan size, you will have the most success with small, local banks, and not regional and national banks. Hit those banks on Main Street have no branches or just a couple. They understand the market and want your business. Big banks typically will not give you the time of day, and have no interest in learning the business, unless the loan is large.
Conduit financing of mobile home parks
This derivative of traditional bank financing is one of the most attractive types for mobile home park acquisitions. Also known as CMBS loans (commercial mortgage backed securities), these are loans that are originated at regular banks, and then sold on Main Street. They are so sought after because they 1) have 10 year terms 2) are non-recourse 3) have low, fixed interest rates and 4) allow for cash-out. But beware of one unusual trait of these loans: they do not allow for pre-payment without the costly penalty known as “defeasance”. Defeasance penalties can sometimes be almost as large as the loan itself. The best way to obtain a conduit loan (which has to be $1 million or higher in loan amount) is through a loan broker, such as Security Mortgage Group at (585) 423-0230.
This can be a scary alternative to the options shown above. These are un-regulated individuals and groups that make loans that banks won’t touch. As a result, you are always on edge that there may be some underworld theme to the whole transaction. One popular mantra of hard money lenders is to “loan to own” which means that they will deliberately agree to loans that they know will ultimately default, so they can take your asset and keep your down payment. Be very careful if you feel that hard money lending is your best bet.
There’s nothing wrong with buying a mobile home park with all-cash, but you have to understand that it is going to seriously damage your overall yield. When you do not bring sensible leverage into a real estate deal, you lose one of the key drivers to high returns. A 10% cap rate mobile home park, financed at 80%, can often derive a 20% cash-on-cash return. But if you do not use leverage, your maximum yield on the same park will only be 10%. So not using leverage at all is not a good idea.
A mobile home park has many, many different financing options. You need to match the right one to your park and investing goals. What’s great about mobile home parks is that there are so many options to choose from. No other sector of real estate has so much to offer on the financing buffet.