Mobile Home Park Mastery: Episode 25

Apartments Inside Mobile Home Parks

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While mobile home parks frequently compete with apartments for customers, what do you do when your arch-enemy is located inside a mobile home park? In this week’s Mobile Home Park Mastery podcast, we’re going to talk about the insider secrets of operating mom & pop’s old apartment complex inside your mobile home park boundary. Back in the day, early mobile home park pioneers would often build an apartment building at the front for either their family’s use or as an extra income source. Today, the challenges – and opportunities – are different. Enjoy this second installment in a five-part series.

Episode Transcript

Class B and Class C apartments are the arch enemy of mobile home parks. However, what do you do when you buy a mobile home park, and you get one that comes with it for free? This is Frank Rolfe and Mobile Home Park Mastery Podcast. We're on our second part of a five-part series. What do you do with all these extra things that sometimes come with mobile home parks you buy? Kind of the insider secrets to all these ancillary assets you don't exactly know what to do with, because they're not really mobile home park lots, nor are they mobile homes. But nevertheless, there they are. How do you make money with them? What are the tips I can provide you, as far as how to operate them and maximize the income?

The first good news about apartments are that they are real property. That means whatever you can rent the apartment for, will ultimately be transferred into your overall park net income, and as a result it will be accepted by appraisers and banks nationwide. However, there are some other considerations you need to ponder when looking at those apartments, because although you can rent them, and you can count the rent as real property income, which means it counts just as strongly as lot income for the mobile home park, there's a few other wrinkles you need to consider. One issue is that apartments inside of mobile home parks kind of lose their glamour. So even a nice apartment complex still has kind of a stigma against it when it's located in or next to a mobile home park. So you can't really comp the rents from the surrounding apartments. If you have a similar complex that's several blocks away, you should always anticipate you'll get a higher rent bec ause it's not next to or inside of a mobile home park.

So always discount down your rents. How much should you discount them down? Well, you can never discount them down enough, that's always a safe bet. I would say you should probably imagine taking them down 20-25% from comparable apartments that are nearby. Always give yourself that extra little hedge there. Also figure you'll have a little more vacancy in apartments that are located away from a mobile home park, again because they're inside of a mobile home park. We typically find that most people who rent the apartments inside of mobile home parks are the exact same customers that typically rent mobile homes. As a result, you get folks who do not have a lot of disposable income, and you're competing with mobile home rentals. So it's really hard to get enough supreme, superior price on an apartment, even if it was Class A, there just is that stigma hurdle you have to jump over to make it all happen.

The good news about apartments in our experience, has been typically they're a little bit newer than Mom & Pop's house. I don't think we've ever actually had an apartment building that came with a mobile home park that's older than probably the mid-60s, although we've owned mobile home parks that originated back in the 1930s. I don't think people really, in the kind of parks we buy, were really into building apartments, except haphazardly a little later on the movie. Most of your HUD parks, which was a very popular featured park in the 1960s, it came with club houses and pools, they didn't come with apartments, so we typically see apartments only in Mom & Pop specials, things that they designed. I see most of those apartments, again, popping up in the 1970s, traditionally.

Why are they there? I don't know. I know some of the apartments we've inherited with the mobile home parks were built by the owner for their relatives, and sometimes for them to live in themselves. So I'm not really sure what the point was, why they didn't just make that land additionally more mobile home park, but possibly Mom & Pop had a hankering to build an apartment complex. Pops were very handy, really loved to build things, it's kind of exciting to build something new, so maybe it was just an outlet for Pop's expression and his artistic abilities. I don't know really why they did that. But nevertheless, you will find many mobile home parks where there's an apartment complex located somewhere near the front.

However, there's one big asterisk I have to put out there on everything I just said, because there's one kind of apartment in a mobile home park that's going to be just ripe with danger, and that is when you have the old motel-style unit apartment. Let me explain the history of that, and why those are so prevalent in some states. If you go way back to the early origins of the industry, back when it was just a trailer pulled behind a car, and RVs and mobile homes were basically the same thing, so we're talking pretty much prior to 1960. What you had is a lot of motels would start allowing people with these strange contraptions to park behind the motel units. You'll see a lot of this for example on Route 66, where you've got these old motel units, that each unit has its own little carport. So you parked next to your little room, and then you went in your little room, which is basically just one room with a bathroom, and that was it.

Some of those early versions even had kitchens, because back then there weren't a lot of restaurants along the highway. So people would check in to their little motel room and eat dinner in there. I know we've all seen these. They look a little bit like the hotel units out of Psycho, the movie, to be honest with you. But the problem is, what do you do with those old motel units over time, when the park becomes more valuable than the old motel? What a lot of park owners would do then is, as the park became the valuable piece of the puzzle, and the motel was no longer in any way desirable, they would change those motel units into apartment units. They would basically start renting those things out by the month rather than by the night, and I don't think I've ever seen a worser group of customers, at least in appearance, and I'm sure demographics, than those people who would want to live in old motel units from the 1930s.

I know you've seen this phenomenon when you've driven around, and let's all face it, that's really not what any of us think of when we say the word "apartment." But nevertheless, they're rented out by the month, and park owners who own these things will try and convince a buyer, and a banker, and an appraiser, "Oh, they're perfectly legitimate. They're just kind of a retro apartment unit." No, they're not. Go inside those things. Look those things over. Typically, they're in terrible condition. They don't have any form of central heat or air, typically. Just pop a window heat/air in one of the windows, is quite commonplace. They've got massive amounts of deferred maintenance. These things are sometimes 70 and 80 years old, they were not built well on the front end. They were built by moms & pops in the early days of motels, and they really were not built for a lot of heavy usage, nor were they built to last forever.

So you really have to look at those. The ones that I have seen that have come with mobile home parks are typically needing tens of thousands of deferred maintenance, and here's the bad part. Even when you get done, what kind of product do you have? You have basically an old motel unit with a carport, and it's really not what modern people want to live in. Nobody really wants to live in a one room apartment anyway. That's just not a very popular item. I know it's catchy with a lot of millennials right now. There are 300 SF apartments going up nationwide in urban areas, but when you tell most people, "Hey, I live in an apartment," or "I have an apartment for rent," they're not picturing a motel room with a tiny bathroom attached, with a window air heaped into the side of it. So those things are really hard to value.

If I had to buy a mobile home park with those units in it, I would have to use a huge factor for vacancy, and additionally a huge deduction in the rent, or in some cases, if there's not that many of them, I might elect just to end the practice, because I don't think I'd want as a business model to be renting old motel units by the month. Even worse is a common practice in Florida, where they rent those units out by the week. Weekly rentals have often attracted some of the worst customers in America, and when you attach weekly renting to old motel units turned into apartments, you basically have perennial, often stuccoed flop houses, and certainly not something you would want to attach your name to, with any form of pride of ownership in most cases.

Additionally, bear in mind that those things are huge management nightmares. When you have a weekly rental, you are basically renting by the week and people come and go by the week. That means you have to have a staff to clean those things, show them, and also there's a lot of cash that changes hands in those old weekly rentals. You're really reaching a unique demographic in America, and one that we certainly don't really want to invest in, so be really, really careful of those situations where you've got those old motel units.

Again, I see those mostly, for some reason in Florida. Now, Florida I understand, because Florida has been really an ancient and original member of the RV/mobile home park industry, and so the motels that come with those parks, some of those parks date back to the '30s and '40s. The other place we see those in abundance is out on the west coast, California, and a lot of the bordering states to California. Why? I don't know. I see a whole lot of those in deals that people bring to me in the state of Washington, for example. Again, I'm not exactly sure why, except perhaps real estate there is so very valuable, that even those old motel units had enough value that no one ever tore them down, because they were renting for enough money they seemed to be a higher, and better use of land than just as raw land, as a tear-down.

Another item on apartments to consider is sometimes, just like Mom & Pop's house, you're just better off subdividing and selling it off. Unless you really want to be in the apartment business, you'll soon find it's not nearly as good a business as the mobile home park business. It's got a lot more management. It's got a lot more repair. You have to fix toilets. You have to unlock doors. And the worst part is, it never goes away. Mobile home rentals, if you are a smart operator, you'll find a path to ownership for the occupant, and one day they'll own the mobile home, and you don't have to worry about it any longer. However, when you have apartment units, they never, ever become the property of somebody else. You never get someone who takes possession, never anyone who becomes a stake holder in your business and takes care of them. It's just perennial renters who beat, and beat, and beat on them, causing all kinds of repair issues and management problems .

Now, we have subdivided and sold apartments off, and once again, just like Mom & Pop's house, most cities are more than happy to allow you to subdivide and sell the property off. It seems like most cities have this opinion that the less land they have that's zoned mobile home, the better life is for them. I've never seen a situation in getting an apartment complex subdivided that was not successfully solved. I will also add it's very rare for these apartments to be up inside of the parks. When we talk about Mom & Pop's house, sometimes Mom & Pop like to build their house in the middle of the park and build the park radially around it. For some reason, every apartment complex I see that comes in a mobile home park is always situated right at the front. As a result, it makes it much easier to subdivide, and it also is a little better for the person buying it, because they're not buying an asset that's located up inside a mobile home park, but right on the fringes of it.

I once took an eightplex apartment complex in Louisiana, subdivided it and sold it. It was the best thing I did, because the new buyer of the complex went in and put the capital into it to redo the outside, to paint it, repair the balconies, and change the roof, things I would have never done. So, if you think that it would improve your property's appearance on the entry, but you need somebody to really put some capital into the apartments, perhaps you're better off to subdivide it and sell it. Unlike Mom & Pop's house, traditionally the renters that the next person you sell to will allow in the complex will not be any different than yours.

In Mom & Pop's house situation, sometimes you subdivide, and you end up with a bunch of hillbillies who put pit bulls on chains in the front yard, and your park is damaged. Apartments, I'm not so sure people who are not buying an apartment complex as a stand alone business model aren't going to put a lot more effort into it than you did, so probably that apartments will actually flourish under somebody else's ownership. Also, don't forget it's not hard to find buyers for apartments. Sometimes when you subdivide Mom & Pop's house, and want to sell it off, it's hard to find that right person who wants to buy a house next to a mobile home park. But there are a lot of people who want to buy Class B and Class C apartments.

And let's face it, there's a lot of things worse than being located next to a mobile home park when it comes to apartments. Many of them are located next to other things that are much more blighted and unappetizing for a potential renter, such as a commercial factory, or some other use. So they're really not that hard to subdivide and sell. Again, this is Frank Rolfe with Mobile Home Park Mastery. Complete our second part in our five point series of going over different things that come with mobile home parks. Hope you found this interesting, and I'll be back soon.