One of the most common questions we get regarding buying mobile home parks is “can you make $100,000 per year on a single asset?” This is understandable as most investors are looking at alternative investing to do what the stock market fails at, and that’s to provide predictable and significant cash flow on a recurring basis. With the average dividend yielding around 2.5%, you would need $4 million in stocks to accomplish this. And to own $4 million in stocks you’d have to earn around $8 million pre-tax. That’s not much of a business model. So here’s why mobile home parks can hit this target, but based on complete science and not a “get rich quick” infomercial premise.
The difference between cash flow and cash-on-cash return
First, some definitions. When somebody asks “can I make $100,000 per year” what they are asking is putting that money in their pocket, not just theoretically on paper. If you pay down $8,333 per month on a mortgage, then you’ve technically made $100,000 per year, but you don’t see any of it until you either sell or refinance the property – which is many years into the future. And the biggest problem you have is that to pay down $8,333 per month of principal would require buying a property that cost around $3 million and requires around $1 million in down-payment alone. So for the sake of this discussion, I’m focusing strictly on $100,000 per year in cash flow and not principal reduction. And I’m also assuming most buyers don’t have $1 million in cash for a down payment.
What the target property would look like
To create cash flow and not simply principal pay-down, you need a property in which you can increase the cash flow by $100,000 per year. And with mobile home parks, the best tool to achieve that is through increasing rents times number of lots. Since our target is $8,333 per month of rent increases, we will need a property that has sufficient lot count to create this volume. A 10-space park would need to increase the rents by $833 per month, which all agree is never going to happen (unless the park is in Los Angeles). We advocate increasing rents by an annual amount not to exceed $50 per month. So if we were trying to hit $100,000 in five years, we’d need to increase rents by $250 total over that period, and that defines the lot count required as roughly 34 occupied lots total.
The amount of capital involved
If I’m trying to buy a park with around 34 occupied lots, then that’s going to be a purchase price of around $1 million in most of America, which requires a down-payment of around $200,000 at a local lender or from mom-and-pop seller financing. This is far better than the $4 million in cash required in stocks (and completely unattainable for most investors)but there are still alternatives to this in certain cases and based on the negotiating skills of the buyer. You might be able to get mom-and-pop sellers to accept less than 20% down-payment (we have done twelve -0- down deals over the past 25 years), or you might be able to get the deal on a Master Lease with Option structure. But let’s just stick with the original plan at this point.
The strategy that makes high cash-flow possible
When you increase lot rents, essentially all of the increase goes to the bottom line. That’s because the existing rent has the costs covered under that expense ratio that runs from 30% to 40% in the industry. There really is no incremental cost increase from each dollar of rent increased. But to factor a cost level into that increase, here’s what we’ll do in this example. We will take the entire principal and cash flow from the down-payment on the property and set that aside to cover any and all increased costs (which it will more than outstrip). Now, given that we bought the property at a price in which the mobile home park can simply service it’s note and provide zero return on the down-payment to offset any additional rent costs, we are in a position that every dollar of increased rent falls to the bottom line. So all we have to do is simply raise the rents in a 34-space occupied mobile home park by $50 per month for five years and we’ve hit the target of $100,000 per year. In a nutshell, the strategy is simply:
- 1) Buy any mobile home park that is in a market that allows for an increase of rent of $50 per month annually (which is most of the markets in the U.S.).
- 2) Buy this park at any price that cover the monthly mortgage and all operating costs.
- 3) Buy a park big enough that this increase has meaningful consequences to your goal (34 lots or larger).
- 4) Enact the plan.
Why it works
You can’t just arbitrarily increase rents in real estate. There has to be a value to the customer, and you have to fit into market rent levels. If you tried to increase rents in most real estate sectors, you’d lose your customers as they already feel that there are better alternatives. This is why apartment and single-family home owner have to be very careful about rent adjustments. But mobile home park lot rents across the nation are ridiculously low and only sit at an average level of $280 per month due to non-economic forces, the largest being what is called “mom-and-pop quantitative easing” which simply means they never raised their rents for decades in line with inflation. Case in point, if you inflation adjust mobile home park lot rents from levels at original construction in the 1950s to 1970s you would have an average U.S. rent of $500 per month – almost twice the current level.
The sustainability of this model
In some industries, raising prices and rents has terrible consequences, particularly in luxury goods where there is vast competition. In the case of mobile home parks, the product is the necessity of affordable housing and the competition is non-existent since apartments are roughly $1,000 per month more and single-family homes are unattainable. You are not taking advantage of customers, but simply market conditions. In a world where apartments average $1,600 per month, you can deliver a product at $500 per month that was formerly $250 and still be a hero. That’s why mobile home parks have insanely high occupancy rates regardless of rent levels – because we’re so much cheaper than everything else out there.
And, of course, there are a range of options here
If the target of $8,333 per month is set in stone, there are still many variables to hit it at different rates of speed and price points. If instead of a 34-space property you bought a 100-space park, you could hit the $100,000 per year level at a rate of speed nearly three times faster. And a 68-space property would hit it in twice the time. For those who need something smaller, a 17-space park could hit is in ten years.
But this plan will not work everywhere
Before you go to Mobilehomeparkstore.com and whip out your checkbook, you need to know that this strategy will not work on every park. In fact, there are many that can never offer this level of success. Remember that to accomplish this plan you need to find a park that has:
- 1) The correct infrastructure, density and location to operate correctly.
- 2) Sufficient quantity of occupied lots.
- 3) Market conditions in which the mobile home park lot rent level is well below market.
- 4) A property that is suitable for bank financing at correct interest rate and loan-to-value.
Remember that you are in the mobile home park business, not the rent increasing business. While higher rents are attainable while still maintaining value to the customers, before you can have higher rents you need a good property that makes those rents possible.
The goal of making $100,000 per year in cash flow from a single mobile home park has long been practical, and that’s why we have done so many Lecture Series events over the years in which owners discuss their holdings in relation to this target. Of all the American real estate sectors, only mobile home parks have the raw material to make this goal attainable. And it’s not a matter of conjecture but simply science and math.