The Problem With Low Rents

The media and many politicians are absolutely convinced that low rents are what the nation’s mobile home park residents need to have a happy and productive life. They share this belief because they have absolutely no idea how economics work or the damage their deranged attempts at manipulating markets has on their constituents. Indeed, low rents are the worst thing possible for residents in our nation’s mobile home parks. Why is that?

Can’t justify putting money back into the property

All investments are based on a rate of return. The standard formula to derive a cap rate is the net income of the property divided by the total cost of the mobile home park. As you pour money into the total cost – by making capital repairs – you lower the overall return threshold down unless you can increase the net income by a corresponding amount (which means raising lot rent). When you don’t allow for increasing rents, you essentially end up with “slum-lording” or depriving properties of the needed capital repairs to stay in good working order. That’s basically where most mom and pop parks are today, and the ability to bring these old neglected parks back to life is conditioned on raising rents to justify that needed capital infusion for utilities, roads, trees, common areas, clubhouses, pools and the like.

Economics precludes bringing in homes to fill vacant lots

There’s a general rule in the mobile home park business that you should not buy a home to fill a vacant lot that costs in excess of the value of one occupied lot. This safeguards a mobile home park from being top-heavy in home debt. So how does that work? If you assume a lot rent of $300 per month, then the value of one occupied lot (at a 10% cap rate) would be around $25,000. That allows for a used home from the 1980s or 1990s. But what about a lot rent of $150 per month? You can’t even bring in a home on a budget of only $12,000. It costs $5,000 to move a mobile home and set it in a park, and there’s little likelihood you can find a used home and renovate it on a budget of $7,000. When a park has low lot rents, it essentially denies the owner the ability to bring in homes and provide affordable housing to those who need it – which is an incredible waste.

Other land uses and values will lead to destruction of the park

Mobile home parks are not a very high use of land, economically speaking. Apartments, office, retail and even storage are considered higher uses of property. Most mobile home parks have decent road frontage and the right land mass for re-development into a huge variety of alternative uses. Low lot rents speed this process up and are the mark of death of mobile home park operations. What most in the media and politics do not understand is that low rent does not help residents but merely make them ultimately homeless when the wrecking ball arrives.

No room for professional management

Most mom and pop parks are self-managed. That’s not always ideal. Most Americans prefer to have professional management that understands and respects the law and does not play favorites. They like managers that work proactively to keep the property in good condition and utilities flowing. But professional management is expensive, and low rents preclude hiring top-tier talent.

It’s as much work to make $95 per month as it is $300 per month – and nobody wants to do it

The final reason that low lot rents do not work for the residents is that there is little interest in buying and saving a mobile home park with low rents. It’s a given that the only salvation for a dying mobile home park is an outsider to buy it and bring it back to life with a capital infusion. But low rents make all parks less compelling and – at a certain point – not interesting to any buyer. Without that sale, there’s no hope for the property or its occupants.

Conclusion

If you want to destroy the quality of life and future of mobile home park residents, then keep lot rents low. That’s a sure way to guarantee the end of that mobile home park as a place to live. If you want to offer a safe, clean affordable place to live that’s attractive and in good repair – and governed by professional management – then the only solution is higher lot rent. It should be obvious to anyone, yet far too many people offer the wrong narrative.

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.