Let’s first clarify – we’re talking a million in value, not in cash out. But we’re still talking an increase in value of over $1 million in one year. That’s a huge number in any business, but not that uncommon in the mobile home park industry. How is this possible? Let’s examine what community operators can do to increase value, and model out how much value they can tap.
I have long written articles about how ridiculously low most lot rents are in the U.S. This is always chalked up in the media to the concept of the “evil landlord” but it’s simply a matter of economics. Until someone can explain why apartment rents in most markets are $1,000 per month more than mobile home park lot rents, I’ll hold firm with the theory that none of this makes any sense. When you raise the rents on a 100-space mobile home park by just $20 per month – which is still ridiculously small an increase compared to apartments – that creates an increase in value, based on a 40% expense ratio and an 8% cap rate – of around $180,000 in value. That’s proportional, so larger increases yield values much higher.
The largest cost item in most mobile home park expenses is water and sewer. In this regard, most mobile home parks are still in the stone age – virtually every apartment, duplex and single-family home in the U.S. requires the tenant to pay for their own utility usage. It just makes common sense, and is the benchmark of creating conservation through accountability. Studies have shown that residents that pay their own water and sewer use an average of a third less of this precious utility. And, since water and sewer averages around $40 or so per household, in a 100-space park that equates to a value increase of around $600,000 at an 8% cap rate.
Every lot you fill in a mobile home park (assuming an average lot rent in the U.S. of $280 per month) yields an increase in value to the property of around $25,200. If you fill just five lots in your park, that’s a value increase of around $125,000. On top of that, this is a very important issue for those who are needing affordable housing. With mobile home park lot rents so low – and our homes so affordable – we are the lifeline to those who live in apartments who want a higher quality of life.
Increase appraised value
Through the hard work of improving the property’s appearance and professionalism, you also create value by lowering the effective cap rate of the property (and its corresponding appraised value). If you buy a property for $1 million that has a cap rate of 8% with a net income of $80,000 per year – and then lower that effective cap rate to 7.5% thanks to better appearance and operation – it increases the value of the property by around $66,000.
So that’s the simple formula of creating huge value with a mobile home park. It’s not rocket science. And it’s the natural chain of events when you bring an old park back to life and install professional management. No other sector of real estate offers these type of rewards, nor the societal benefit of providing high-quality affordable housing.
To learn more about the correct way to do the above steps – plus everything from finding properties to buy to due diligence, financing, operations and every other type of issue – consider attending our next Mobile Home Park Investor’s Boot Camp. It’s a three-day immersion weekend and it’s 100% online so you have no travel cost time or danger.