We’ve talked about tough turn-arounds, so now it’s time to turn our attention to a different type of mobile home park experience: the simple ones. Just as there are factors that make a mobile home park tough to convert into an economic engine that produces predictable, sustainable cash flows, there are basically five different turn-around methods that require minimum effort to create significant profit. In this first of a five-part series, we’re going to discuss a simple method to enhance the cash-flow and value of a mobile home park. Why it works and how to do it effectively. With just this one podcast, you’ll see why we got hooked on mobile home park investing, and it will forever change your thoughts on “trailer parks” as an economic engine.
Episode 44: Easy Turnarounds Transcript
We've been talking about tough turnarounds but now we're going to reverse course and talk about the other end of the spectrum, which are super easy turnarounds. This is Frank Rolfe, Mobile Home Park Mastery Podcast and we're going to be talking on a five part series of easy turnarounds in the park industry, the very opposite of what we've talked about for the last five weeks. Now the one we'll talk about today is increasing lot rents in mobile home parks, but before we begin we need to go over some background on mobile home park lot rents in America and the bottom line is, they're extremely under market.
There's an economist at Duke University named Charles Becker who recently brought out a paper on mobile home park lot rents and he found in his research that they're roughly 30 to 40 percent below market. We know that the average US lot rent is about $280 per month, so if you simply take Becker's work and apply that to the $280 threshold, what it means is that lot rents in America should not be $280 a month, they should be closer to $400 per month. If you want to prove out Becker's work, all you have to do is look at those parks when they were first built back in the '50s and the '60s and take the rent then and then inflation adjust it.
Again, you find the rents should be in roughly the $400 and up market. Why is it? Why are mobile home park lot rents so low? Well, the first reason is simply that mom and pop owners never kept the rents in line with inflation. Inflation would go up as much as 10 percent a year at certain points in American history, back in the '80s and the '90s, however mom and pop never raised them at all often. When they did begrudgingly raise them occasionally, it was never based on inflation. It was just kind of a half hearted $10 raise or something, but it didn't numerically tie back to anything. We call this basically mom and pop quantitative easing.
They simply elected not to raise the rents. Now why would you not raise your rents? You're the landlord, that's what you do, you raise rents, but a lot of times mom and pop got a little confused on what the mission was. If you look at a lot of those early mobile home parks, you'll see that they have one common feature, a stick built house. Sometimes in the middle, sometimes at the front and that was always mom and pop's house, so mom and pop lived among the residents and kind of like the Mertz family and Lucy and Ricky, they had trouble exacting a truly just numerical landlording tactics when they were hanging out and befriending the residents.
They often elected not to raise the rent even though they could have, even though they knew they should have done it they didn't. We call this mom and pop quantitative easing. There's another reason and that's simply because since there's no new mobile home parks built and haven't been since the 1970s, there was no constant reminder of what rents should really be. If you look at the apartment industry, what happens there is every time they build a new Class A apartment building they have to build that at a rent level that will support getting the loan. In America right now, that typically is going to be anywhere from a range of 12 to $1,500 a month.
Then all your Class B and Class C apartment owners, they fall in line right behind that Class A. If the new Class A building goes in at $1,500 a month, the Class B guy then takes his rents to $1,200 and says "See, I'm cheap." Then the Class C guy takes his rents to $1,000 and says, "Look, I'm even cheaper," but in our industry there's never been a reminder of what these things truly cost. That's part of our problem. That's why the rents are so low. Now how do you raise the rent? Well, raising the rent in mobile home parks is relatively simple.
Most of your residents are on a month to month lease and as a result you can amend or cancel that lease really at any time if you give the right prior notice. To find out the right prior notice, probably one of the best starting spots is to call your state mobile home association and they can happily tell you in that state how much advance notice you have to give. Once you know the facts of how it works, you simply send a letter to the resident advising them of the increase. That costs you roughly 50 cents plus your cost of time and paper to write the letter.
What's interesting about these increases are, 100 percent of all the revenue falls to the bottom line. There's no costs that come out of that rent whatsoever. That means 100 percent of that gets thrown into your net income in the park and that means when people apply the CAP rate, that comes up with the value of the park. It's really a double win. You not only get monthly cashflow increase but you also get a huge additional boom in the price at the end of the movie when you go to sell it or refinance it.
Let's look at a model of that. If you have a 100 space mobile home park and you increase the rent just by $20 per month, which is not much of an increase given how low these rents are in the US. That $20 increase creates $24,000 per year of increased net income and at a 10 percent cap rate, it increases the value of that mobile home park by $240,000. Simply raising the rent in a 100 space park by $20 gets you $24,000 per year of additional cashflow and $240,000 in additional value. This is just absolutely amazing when you look at the power of rent increases in mobile home parks.
It's simply because there's so many pieces of $20 more coming in. If you had a duplex or a single family home, $20 would have only the impact of maybe $20 or $40 a month, but in a mobile home park where you have so many residents, you take 100 times that number and it takes your revenue to a whole new level. Now let me give you an example of what happens when you're raising the rents in a mobile home park. Here's a real life example. This is one of the largest rent raises that we've ever done. This in fact was done just by myself back in my old portfolio.
What happened was, I bought a park in Grapevine, Texas. Phenomenal location, you could walk from the park to the brand new school district and Grapevine's a very, very hot market, lots of nice stores, nice shops and a lot of custom homes there. The general market back then, and this was about a decade and a half ago, the median home price was $250,000 and the average apartment rent even back then was about 1,300 a month. It's much higher today. What you have is very, very expensive housing and very, very little to any affordable housing, yet right here in the middle of all this with the super location with custom homes right next door was a mobile home park with mostly old flat roof homes build back in the 1960s.
The lot rent in this park was $100 per month. That's right, $100 per month. If you owned one of these homes free and clear, which everybody did, then they were only paying to live in a market with quarter million dollar median home prices, $100 a month. That's just ridiculous, I think we would all agree. Now I talked to mom and pop and asked, "Why is your rent only $100 a month, because I did the comps on all the other parks and in all the other parks the rent is $350 a month? Why so low?"
The owner told me, "Well, here's the deal. I used to live in that house right at the entrance to the park and I wanted to get into town politics, I wanted to get on the city council and I thought if I raised my rents I would have unhappy residents who might come down and catcall me or heckle me in my political aspirations so I deliberately elected to leave the rents low, $100 a month. Later on I moved out of that house and moved across town but I still didn't want to raise the rent because I hadn't raised it in so many years I was afraid I would have people who didn't like me here in town and at that point I'd become mayor and once again, people would follow me around and whine and complain that I was so money motivated. I elected to leave it still at $100 a month."
Basically mom and pop had left the rent at $100 a month for about 20 straight years. Is that good business? No, that's terrible business but I just wanted to give you the preamble as to what was going on in the park and then how I fixed it. I know the rent's at 100 and I know the market rent is $350 a month, so now I'm in a predicament because I want to raise it, but I'm so far off market I'll never catch up. If I raise the rent 20 or $30 each year, what will give me? I'll have to be doing that for about six to eight years to ever get up to where market is and even then, the market will be long gone by then, so I'm never going to catch up.
It's just impossible. Even if I went with a larger rent raise, let's say I raised it $50 a month each year, it would take me four years before I'd even get up to 300 and by then the those $350 rents are probably up in the mid fours, maybe even up to 500. What I did was, I took a unique tack. I thought, you know, it's hopeless to be doing this in small increments so I'm just going to do it all at one time. I wrote a very nice letter to all the residents telling them that the rent would be changing from $100 per month to $275 per month, 60 to 90 days out.
I explained to them that the rent was insanely low at $100 but it was still insanely low at $275 because the market rent is 350, which is nearly another $100 more than what I was raising it to. I even gave them a list of every mobile home park in the city of Grapevine with their phone number and what their rents are. I sent out the letter and what do you suppose happened? Nothing. I didn't get any push back, I didn't get any calls, I didn't get any nasty letters back and not one single person left. Why was that? Well simple, it was insanely, stupidly low at $100 but it was still insanely, stupidly low at 275. It all goes back to value.
There's nowhere anyone could live in Grapevine for a lower cost than what I was charging. As a result, since I had the best value in town, I was rewarded with that with still not having a single person leave the mobile home park. What's the moral of that story? Well first, mobile home lot rents are crazy low, insanely low, ridiculously low. If you look around you will find that in many markets throughout America, the rents are way under what they should be. Number two, when you raise the rents that does not mean you lose your residents. All it means is that you bring the rents more in line with the market but it's still a great value. As a result, nobody leaves.
Then finally, it's the easiest turnaround model there can be in all of commercial real estate. Who ever heard of situations where rents can be $100 or $200 below market? It doesn't exist. Apartment owners are very, very sophisticated. They would never allow their rents to fall that much below their peers but in mobile home park world, you have often moms and pops who simply lose sight of their goal, lose sight of being a good landlord and doing that which they should economically do to maximize the property and instead get diverted into other issues, such as simply their own form of quantitative easing, passing judgment on what they think people can afford to pay or trying to get friends of the residents.
What do we do? Can we forward that, as park owners we're always raising the rents but not in an evil way, we're not trying to gouge. We're simply trying to undo decades of deferred inflation adjustment all at one time. Now next week we're going to talk in our next part of this five part series on easy turnarounds, about an equally easy turnaround method. Maybe even easier than raising rents because you only have to notify one or two people, and that's all about cutting costs. Just as mom and pops often have let the rents fester and never been raised properly, they equally often do not take the costs and cut those when necessary. We'll talk about two main areas.
One, mobile home park managers, where they're overpaid, horrendously overpaid in some cases. I'm talking $100,000 a year salary on a 80 space park. We're also going to talk about crazy costs such as water leaks, people who let water run to the tune of $60,000 a year even though all it would take is a few thousand to fix those repairs. Again, this is Frank Rolfe with the Mobile Home Park Mastery Podcast series. I think you'll really enjoy this five part series on easy turnarounds. Just as the other ones we talked about were so very difficult in nature, these are so very simple it will blow your mind that no one has done them to date. Again, talk to you again soon.