The #1 American fear is public speaking, followed by snakes. Buying a mobile home park does not make the list but only because most Americans don’t have the guts to even contemplate it. And buying a mobile home park can be a frightening experience. So how can you conquer your fears regarding buying a mobile home park and taking the necessary steps to obtain financial independence?
Getting comfortable with the product
The first source of fear in buying a mobile home park is simply not understanding the product. Mobile home parks are like high-density subdivisions and completely unlike the shanty towns depicted in the media. Don’t believe me? Simply Google “mobile home parks” in your city and drive a handful of them. Sure, you’ll find that one old nasty “trailer park” under the bridge down by the river, but the bulk of all mobile home parks will have a nice entry, attractive homes, and solid infrastructure. If more Americans knew what mobile home parks really look like, this fear would dissipate rapidly.
Understanding the key profit drivers
There’s no mystery as to how mobile home parks make money – it’s an extremely simple business model. The key profit drivers are 1) increasing the lot rent 2) increasing the occupancy 3) billing back water and sewer and 4) improving the appearance of the property which results in a higher appraised value. Since your product is simply renting land, the revenue is received monthly and most park owners only write roughly ten checks per month. Mobile home parks are famous for having extremely stable incomes as the customers can’t afford the $5,000 to move their homes, and there are no technological enhancements to make mobile home parks obsolete. That’s why mobile home parks have one of the lowest loan default rate in the U.S.
Doing outstanding due diligence
The science of performing proper due diligence has been blazed over the decades, and mobile home park buyers have an outstanding ability to take diligence to such an extreme level that they can estimate the correct condition, legality, and financial performance of the property with amazing precision. This is one of the great strengths of mobile home park investing: it’s not a complicated business model. You get in land rent and pay out utilities, wages. insurance, property tax, repair & maintenance and a few other items.
Passing the worst case/best case/realistic case test
The best way to overcome “paralysis by analysis” is to define three possible outcomes with the mobile home park in question: 1) the worst case 2) the best case and 3) the realistic case. The worst case would be what (within reasonable guidelines – not the end of the earth) the economics would be if you fail to hit your targets. The best case would be attaining 100% occupancy and full market lot rents and everything else working out perfectly. The realistic case would be somewhere in between, having successfully filled some lots but not all, and other items hitting maybe 80% of your target. If you can survive the worst case, are thrilled with the best case, and are perfectly happy with the realistic case, then you should go forward. If, however, you cannot survive the worst case financially (such as negative cash flow, aren’t that thrilled by the best case, and completely unenthused by the realistic case, then you need to drop the deal and find another one.
Healthy risk vs. reward relationship
Sam Zell – one of the largest owners of mobile home parks in the U.S. as well as the largest owner of apartments and office buildings – is a huge believer in the basic theory of risk vs. reward. It’s a simple concept. If a deal has low risk and high reward, then you should always do it. If it has high risk and low reward, you should never do it. If it has high risk and high reward, then you might do it subject to your findings in due diligence and your ability to mitigate the risk. Any mobile home park you buy should clearly score well in the matrix before proceeding.
Proper capital budgeting
Do I have enough money in the bank to buy this mobile home park? That question should be answered during due diligence and not the day of closing. You need capital for the down payment, capital for any cap-x expenditures that are required post-closing and capital for a rainy day. You need to figure out each of these numbers during due diligence and make sure you have this money at hand. If not, you need to arrange for additional financing or find an investor or partner that shares your vision. You will have no fears from a money perspective if you have distilled these needs and planned accordingly.
It’s OK to fear public speaking and snakes as you have little control over the outcome. But you can control every aspect of buying a mobile home park successfully and this is the key to conquering your fear. In fact, mobile home park owners are able to live life with little fear in both buying the property as well as building an important financial lifeline in a troubled America.