Mobile home park vacancy can either be an asset or a liability – and this bi-polar nature is typically separated by a very fine line. In this Mobile Home Park Mastery podcast we’re going to examine how something that could equate to greater net income in the future may also be viewed as a terrible liability in the near-term.
Episode 331: The Bi-polar Nature Of Vacancy Transcript
I remember back at Stanford University in an English class, and they were giving us an example of a sentence that had two distinct different meanings. The sentence was, the farmer was outstanding in his field, which could mean the farmer was exemplary in his line of work, outstanding in his field, but also meant the farmer was just out standing in his field. Basically two completely different meanings on the same set of words. And in the Mobile Home Park business, we have two different meanings to a single word, and that word is vacancy. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. We're gonna talk about vacancy. How it is such a bipolar experience to have vacancy in a Mobile Home Park is it has both extremely good and extremely bad attributes. So the first thing you have to know about vacancy is at a certain level, vacancy is considered upside because it means we can bring in more customers, create more revenue, increase more net income, and make the property more valuable.
But at the same time, it can also mean downside because at a certain level, we have to race to get more occupied, to be able to be within the blessings of the lending community. So the first thing you have to know about vacancy is the way it is optically seen by banks. Now, in our industry, there's a thing called stabilization rate. And stabilization rate is considered to be about 80% occupancy. And for some reason, when you are at 80% occupancy, lenders think you've got a really good, solid, sustainable Mobile Home Park. But at any occupancy below 80%, they become worried. And the more you fall away from 80%, the more worried they become. Now if your occupancy is, let's say 78%, while not stabilized to many lenders, it's just close enough, they feel you're definitely probably a good property, a quality property, and you'll probably get there over time.
But if you're at 50% occupancy, they become extremely alarmed that this property is not worthy of enough customer appreciation and love for people to wanna move in. And as a result, this thing has got a terrible, terrible future ahead of it. So the first question when you're looking at the topic of occupancy is how close are you to stabilization rate? In particular, can you get a loan on the property? Now, there are some lenders out there who will drop their stabilization rate demand down to maybe 70% occupancy. So that's always an option. But the big problem you have is that most banks at a certain level just will not make a loan on the property. Now, what happens when they won't make a loan on the property? Well, now you may not be able to buy the deal. You may have to resort back to seller financing, or you may have to find a specialized lender, maybe through a loan broker who will do a lower occupancy park.
But it's strange how different the way properties are looked at from a banking perspective simply based on the occupancy. And also even if you get that loan on the park that has lower occupancy, the big question is, are you gonna be able to get to 80% occupancy when the loan comes due? Because most loans in the Mobile Home Park business are not fully amortizing. They're not 25 or 30 year loans. But instead they typically have a range of anywhere from about five to 12 years in length. And if you bought a property that is not stabilized, you're on a race, an absolute foot race to get that thing to 80% before the loan comes due because you know that in the realm of lending, almost all the doors open at 80%, but they begin to close when you are below 80%. So sub 80% occupancy is a bad thing.
And then 80% occupancy and on is a good thing because at 80% occupancy, that means we have an additional 20% of total lots and homes that we can fill. We had the ability to increase the net income on that property by a full 20% simply by tapping into that insatiable American demand for affordable housing. So that's clearly a good thing. So 80% occupancy and up is good. Below 80% is basically bad. Now if you're below 80%, is there any other way to make things seem better? And the answer is, perhaps. Sometimes when you have a park that has less than 80% occupancy, it may behoove you in the way you position this asset to basically increase the occupancy without bringing in homes, without doing anything. But simply take those vacant lots and rent those to the neighboring owner. So if you have a home on lot number three and lot number four is vacant and they're sequential side by side, perhaps what you should do is take lot number four, which is vacant, and rent that to the tenant of lot number three.
Let's say you charge $25 or $50 a month. Well, it's worth more than that to you because now you no longer have to mow it. You no longer have to fix it. This person oversees it. And equally additionally important, that probably is gonna make them want to have even a longer tenancy 'cause now they have this extra yard, this extra outdoor green space. So sometimes you can simply take those vacant lots and rent those to the neighbors. If you had a very high density park that was at 50% occupancy, it might make sense for you to go ahead and make every person in there have a double lot, thereby boosting your occupancy overnight from 50% to 100%.
Another option would be to take, if you have a long line of vacant lots that are all side by side, would be to reposition those lots into a better use. Some mobile home parks simply have too many lots for the size of the market. You just aren't ever going to fill them. And in the modern Mobile Home Park today, there's all kinds of amenity features that require land. A big one is overflow parking. Many mobile home parks today don't have enough parking for the simple fact that the modern American household is carrying around three or four cars, whereas most parks only have parking for two. So how do you get around that? Well, you could go ahead and take several lots side by side, pave them, or at a minimum put down gravel and turn those into overflow parking, which as a result is going to allow you to have the ability to park people. They'll be happier. You won't have any issues with 911 trying to bring the ambulance through and they can't get down the street because the cars are all jammed in there.
So maybe some of the vacant lots could go into another use. Maybe you need a green space for your residence. Maybe you say, well, I'm gonna take those four vacant lots and make that into a playground and picnic and outdoor grilling area. And the simple fact of doing that may also allow you to charge more rent. If you think of it this way, if I could build an amenity on those four lots and up my rent as I up the value from people living there with that amenity, that might more than compensate for the money I would've made as those being used as mobile home lots anyway. So possibly there's some way you can take and artificially change the inherent occupancy or vacancy in that park without having to go out there and buy homes and bring them in, all the terror of getting that job done.
Now, anytime you have in any Mobile Home Park deal significant vacancy, you have to have something that is correspondingly good. There's five key drivers to buy the Mobile Home Park, infrastructure, density, the economics, the age of homes, and location. And if your occupancy is weak, there has to be something so strong as to offset that. That strong item might be location. It's a fabulous location, and therefore you know you can get those lots full. Or it might be the economics because it's got so much vacancy, mom and pop are willing to sell at an even bigger discount. Or maybe it's the fact that that extra vacancy is causing mom and pop to carry the paper at very advantageous terms.
The bottom line is that vacancy can be both a great thing, a potential 20% enhancement in value and revenue or it can be a bad thing if it blocks you from being able to obtain traditional financing. But as in all things in life, it is one attribute that can be changed. While you can't really change the location of a Mobile Home Park, while you can't really change the density of the Mobile Home Park, you can in fact change occupancy and vacancy. And what you do with that one item may trigger an extreme increase in the property's value. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.