Any time that you pay more for a mobile home park than it is currently worth, based on existing net income, you are engaged in “stretching” to rationalize paying the higher amount. But the types of “stretching” required to bridge the gap typically vary from acceptable to too risky. In this Mobile Home Park Mastery podcast we’re going to explore the fundamentals of “stretching” and determine their quotient of risk.
Episode 394: Stretching Exercises Transcript
Webster's Dictionary defines stretching as the ability to be made longer or wider without tearing or breaking. But in the mobile home park business, we typically think of stretching as taking a leap of faith. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're going to talk about stretching to make deals work, and let's first start off with why would you even bother to stretch? Mobile home park, after all, is an income property, so the value should be derived by the income. But the problem is so many mobile home parks have been improperly managed by the mom-and-pop owners, and there's so much opportunity in fixing them that we all of a sudden have to give a little bit on the front end to get the deal done. In other words, if mom-and-pop want a price for the mobile home park, which is higher than what could be derived from its net income, we have one of two choices. We can either walk the deal and perhaps miss on a great opportunity, or we can stretch internally in our planning to make that deal affordable. Now, not all stretches are created equal. Some are a safe bet, some are average-quality bet, and some are so dangerous I don't think I would do it.
So let's break down into these categories all the different stretches that are available to today's mobile home park buyer. Let's start off with the easiest stretch, and that's just simply increasing the rent. Across America, the average of all mobile home parks, if you put them all together and divided through by the 44,000 parks, you would find that the average lot rent I would guesstimate to be between $300 and $400 per month. At the same time, the average single-family home in America today is $400,000, and the average apartment is $2,000 a month. Now that seems like a pretty big discrepancy, right, that mobile home park lot rents would be $300 to $400 a month compared to apartments, its closest cousin, at $2,000 a month. And you'd be exactly right. It makes no sense. Mobile home parks offer so much more for the customer than the apartment. They offer no neighbors knocking on walls and ceilings, having your own yard, parking by your front door, having a sense of community. Apartments offer none of these. So why would mobile home parks be at such a big discount? One reason, what I call mom-and-pop quantitative easing. In the same methods that they drove interest rates down to zero by the government manipulating the markets, mom-and-pops have kept mobile home park lot rents extremely restrained for no other purpose than their own choice that they wanted to keep them low.
They have nothing to do with market levels at all. I've bought mobile home parks from people who had had the same lot rent for 30 straight years. No inflation adjustment, not even in the era of Jimmy Carter and 10%, and not even in the era of Joe Biden, and his 10%. Some moms and pops just elect to keep the rents flat, or they might increase them, very small increments, very occasionally, like once every five or 10 years. So if you look back on when mobile home parks were built back in the 1960s for the most part, the average lot rent back then was $60, $70 a month, which in today's dollars is about $600 to $700 a month. So mobile home parks are woefully low. They're ridiculously, stupidly, impossible to understand low. So as a result, virtually every mobile home park you would buy, you can increase the rent. We try to hold our rent increases to roughly $50 a month, but in many cases, the market rent can be $200 or $300 more than the park is charging on day one. And in many states, those states which do not have rent control, which is the majority, only seven states have rent control today.
You're able to raise the rent as much as you like, but yet you want to do it within reason. You want to allow your customers the ability to adopt the new rent and work that into their budget. But if you're going to be able to raise your rent, let's say $50, and you can enact it in many states 60 days from the end of the month you notify the customer, that means you often can raise your rent within 90 days, which means if you're buying it based on mom and pop's rent, which would not support the purchase price perhaps, that all changes 90 days later. It doesn't seem like too big a stretch to go 90 days before you enact the rent that supports the purchase price. On top of that, you control all the variables when you raise the rent. All it requires is a notice in conformance with the state's law, an envelope to the correct address of the resident, and a stamp, or whatever your state's methodology is to inform a customer of a higher rent. But that's an easy stretch. So raising rent is a stretch that most every buyer should be able to do.
That's not too bad. Another one is cost-cutting. Sometimes a mobile home park will have a manager who's getting paid by a mom and pop $100,000 a year when the going rate for a manager on that same property would be $30,000, a $70,000 savings by simply firing and replacing the manager. Once again, that's a pretty easy stretch. You control all the pieces. You fire the manager. You hire the new manager. That's not too bad. Or maybe your concept is to fix the water leaks. It's not impossible to have a $5,000 a month water leak. So once again, what you can do is simply find the water leak during due diligence, and then after closing, dig down and replacing it. And you can probably get that done within the first 30 days of closing. So cost cutting, again, that's a pretty easy stretch. That's doable. Or maybe the mobile home park has vacant apartments or single-family homes that are just sitting there idle, in good repair, because mom and pop just never put out the effort to get them rented. Well, you're in the housing business with the mobile home park. People walk in every day looking for inexpensive places to live.
So once again, you can get those filled. That's another easy stretch. But then we go on to the more medium stretches. These have a much greater level of risk to them. The first one is billing back water and sewer. And this one is more difficult because it takes longer to enact. It requires installing meters if you're going to use metered usage to bill back. It requires understanding the state law, maybe perhaps getting registered to do that billing. So that one, you know, that's not really an easy stretch, right? And neither is renovating on selling off your vacant park-owned homes because you have to go in and get them all rehabbed, run the ads, find customers, get them qualified. So again, that's not super easy. That's a little more difficult. And then converting the existing renters in any park-owned homes to owners of those homes because no park owner wants to have rentals. None of us do. Everyone wants the tenant to own their own home and just pay lot rent. But that conversion, again, is more difficult because you have to go out there and do a whole bunch of steps. And then you have your extremely difficult stretches, which I would not recommend most people utilize as the way they can take that leap of faith.
One is assuming that you can fill vacant lots because filling vacant lots in almost every market in America with very few exceptions is extremely difficult. It can be capital intensive. It can be very, very time and work intensive, running ads, answering the phone, showing the homes, getting them sold, getting them combined with a third-party lender. And then just the very act of having to find the right home and bring it in and manage the fact that it's been skirted and decked and everything else. So that's a stretch I don't know that anyone should really rely on if they're going to try and make sense of mom and pop's price. Another one is filling commercial buildings. Filling commercial buildings can be very, very difficult because you're a mobile home park.
You're in the housing business. You're not a commercial landlord. And as a result, no one ever walks in looking to rent commercial buildings. You can put a big banner out in front of the building if you like. You can call around some commercial brokers, but it takes a lot of time to find a tenant. And that's assuming you can find a tenant at all. And the last one is selling off raw land. Selling vacant land that comes with the mobile home park, despite mom and pop saying it's so incredibly valuable, when you subdivide and go to sell it, you will often find that nobody actually wants it. So again, that's a very, very difficult stretch, not to mention the sheer amount of time required to subdivide property, which in some counties and states might take you six months to a year to fully get completed.
So what's it all mean? Well, it means on the easy stretches, yes, that's not a dangerous leap of faith. You can do that. On those medium stretches, perhaps you should only give the seller credit for maybe half of the impact of successfully performing that stretch because you need greater compensation for that. And on the really difficult stretches, I don't think I would do that. You can't give mom and pop credit for things that require an exorbitant amount of time and energy and risk and capital. So it's perfectly fine to stretch to meet the seller's price, but make sure you don't do it in a position that's unfair to you as the buyer. You don't want to have to go through a huge number of steps and hurdles to rationalize why you spent that amount of money. But if you just apply some common sense, look at the steps, the capital, the risk, it'll be very clear to you whether or not stretching is the right solution. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.