Another Reason That Modern Lot Rents Are Unsustainably Low

“How to Build and Operate a Mobile Home Park” was written by L.C. Michelon, the Director of Management Services for the School of Business at the University of Chicago, in 1955. In the book you will find this paragraph:

“Much of your income will come from services other than from space rentals. In a mobile home park these include the laundry, the store, the gas station, mobile home services and sales, the bottled-gas franchise, the storing of mobile homes, the hauling of mobile homes short distances, telephone calls, and so on” [from Chapter 14 “Increasing Net Income” page 115]

This is yet another example of why mobile home park lot rents are too low in the U.S.

1960s rents were $50 per month ($500 in today’s dollars) and that was break even?

When the early pioneers of the mobile home park industry built the bulk of U.S. properties in the 1950s through 1960s, the goal was to simply break even with the lot rent, and to make money with the additional services stated above. Those services are no longer offered or profitable in a modern mobile home park. But what’s important to note is that $50 in lot rent in 1955 is equivalent to around $500 lot rent in today’s dollars. So, at an average lot rent in the U.S. of around $300, this model means that parks are certainly not breaking even realistically at today’s low rents when you take into account capital expenditures and proper management costs.

The movie theater example

A movie theater attempts to make no money from ticket sales. If you look at what those tickets to “Ford vs. Ferrari” cost you – and then cost the theater to screen the move – you will see there’s no profit from it. In fact, many theaters actually lose money on ticket sales. They only screen movies to make their money in food and beverage sales. The average trip to the theater for two individuals costs $20 in tickets (at a loss to the theater) and $30 in popcorn, candy and drinks (which is about 90% profit). That’s why many theaters have recently halved the number of seats and instead focused on more food services – literally offering full meals brought to your seat at huge mark-ups. This is also the business model for modern gas stations, which often sell the gasoline at a loss to capture the convenience store sales.

But mobile home parks have no additional way to make money other than lot rent

A mobile home park is not a theater or a gas station, and it certainly has none of the money-making additions that the 1955 book would suggest. In fact, there’s nothing other than lot rent coming in to pay the bills. So if the original business model changed so much over the decades, how have mobile home parks survived? By cutting back on capital expenditures and hiring lesser management. A simple drive through many mom and pop-owned mobile home communities will immediately reveal this very obvious fact. Roads in poor condition, common areas abandoned and falling down, and zero enforcement of community rules.

Why higher lot rents are the only method available to bring old mobile home parks back to life

Just as 2+2 = 4, the necessity of higher lot rents to pay for greater capital expenditure and professional management is a given. A property we purchased in Texas is a good example. To repave the roads cost $240,000, the clubhouse and pool $40,000, the trees $50,000, and renovation of the abandoned park-owned homes $700,000. All the while, mom and pop’s lot rent was so low that it would not even cover the regular operating costs of water, sewer, taxes, insurance, manager salary and mortgage. The renovations cost as much as the property itself.

It all boils down to taking one of two paths

All old mobile home parks (and they’re all old, having only been allowed to be built between roughly the 1950s and 1970s by city ordinance) are at a fork in the road. They can either be demolished and cleared for re-development into a different usage (of which apartments are the most common) or they can be brought back to life at considerable expense. Higher lot rents are the only economic method to make the salvation of old mobile home parks possible. Otherwise, they will all end up like the original business model itself – gone as the result of changing times and starved for capital.

Why cities should do more to promote bringing old communities back to life – and why most won’t

An off-the-record discussion with most city managers would reveal the fact that most cities would like to eliminate their mobile home parks. They view them as costly from a tuition and city services standpoint yet without any positive merits. Much of their negative attitude stems from the poor condition many of these mom and pop properties exhibit. But the idea of bringing them back to life is also not appreciated, as the general hope is that the declining park will ultimately be redeveloped into a more attractive use of the land. That being said, we have experienced some city officials with the right attitude and it’s very refreshing. They tell us “do whatever you need to bring this park back to life and we’ll support you”. They know that affordable housing is a huge crisis and that, as long as there is a mobile home park in their city, it might at least be the best it can be.

Conclusion

The mobile home park business model has changed over the past half-century. So has America. There are many mobile home parks in the U.S. in poor condition, yet residents would like to have a nice place to live, and millions more need a place to live they can afford. Higher lot rents are a necessity to meet these desires. If lot rents could simply return to 1950s levels in today’s dollars – despite the fact that there are no additional profit centers – then communities could once again be great places to live.

Frank Rolfe has been an investor in mobile home parks for almost 30 years, and has owned and operated hundreds of mobile home parks during that time. He is currently ranked, with his partner Dave Reynolds, as the 5th largest mobile home park owner in the U.S., with around 20,000 lots spread out over 25 states. Along the way, Frank began writing about the industry, and his books, coupled with those of his partner Dave Reynolds, evolved into a course and boot camp on mobile home park investing that has become the leader in this niche of commercial real estate.