Mobile Home Park Mastery: Episode 263

The Biggest Differences Between Apartments And Mobile Home Parks

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With apartments having reached a cyclical high and mobile home parks still running with plenty of value-building opportunity, many apartment owners are looking at buying mobile home parks. If you fit that profile, then the key initial question is “what are the big differences between the two?” In this Mobile Home Park Mastery podcast we’re going to review the differences between these two housing investment options.

Episode 263: The Biggest Differences Between Apartments And Mobile Home Parks Transcript

So there's a real dichotomy in the American housing market today. A lot of apartments have cyclically held their peak, yet a lot of mobile home parks don't have a lot of room to go as far as attaining their highest level of income and valuation. This is Frank Rolfe with the Mobile Home Park Mastery podcast. I wanted to focus on what happens for those many folks out there who are apartment owners looking at transitioning into mobile home parks. What are the key differences between both asset classes? There are probably more people who have gone from apartments to mobile home parks than from any other group.

So here is a key list of differences you have between owning an apartment complex and owning a mobile home park. The first is in apartments your customers are always renters. Why? Because in an apartment, you only rent the housing units. They don't own the walls, they don't own the floors, they don't own the carpet. They just simply pay rent for the whole thing. But in the mobile home park industry, our customers are part owner and part renter. Because they typically own their own home, but then they rent the land from you. And because they are an owner, technically they're a stakeholder in the business. They have skin in the game. They don't wanna lose their home. That's why the collections ratio in mobile home parks was so much higher than apartments throughout COVID. Because someone renting the apartment had nothing to lose, but someone who loaned the mobile home had a lot to lose. If they didn't pay their lot rent, they would eventually lose their home, and they knew that.

The next main difference is that in an apartment complex, there's toilets to fix, constant maintenance to do. But in a mobile home park, it's a parking lot. The word 'Park' in mobile home park stands for parking lot. It doesn't stand for national park. And since we're a parking lot, we don't have to fix toilets and all those repairs that apartment owners do. So we are much less focused and have much lower management stress on repairs or maintenance, 'cause we don't fix the household units. The tenancy in an apartment, the average is a one-year tenancy. But in the mobile home park business, it's 14 years. 14 times greater than apartments get. We all love that, of course, because when I have a tenant staying for 14 years with that low level of turnover it saves me a fortune as far as having to go ahead and find a new resident and all of the resulting vacancy.

In the apartment business, you count all the income, because it's real property and every inch of it is real property. So if you charge $900 a month in apartments for rent, then you count $900 as rent. But in the mobile home park business, we only count the real property income, which is traditionally the lot rent. So if we have someone who is in a rental mobile home, for example, paying $900 a month, but then your lot in space rent is 400 and the home is 500, you can only count the $400 portion. You can only count the lot rent in the mobile home park and not the overall unit rent. Also in the apartment industry, you have lots of management companies, but in the mobile home park business, you have virtually none. The only one that people much ever talk about in a glowing way is a company called M. Shapiro out of Michigan. But other than them there's really not much out there. So if you wanna be truly passive in the management, you can maybe do it with apartments, if you've got a large and successful apartment operator that you pay the management fee to. But in the mobile home park land, typically you are gonna have to stand as the management company.

Now you're gonna have a manager in the field, and if you're large, you might have district managers and others. But as far as being able to simply buy a property and passively stick it with some management group, you probably will not be able to do that with mobile home parks. In an apartment, you have natural disaster insurance, that at the end of the day, if there's a fire or a flood, you get the cheque for all the damage that's been done. In the mobile home park business, because we don't own the home is if there's any damage and a big flood, a hurricane, whatever the case may be, the money for the home damage goes to the people who own those homes, which is typically not the park owner. The only insurance money we get is what's done as far as damage to the land. Maybe damage to your utility lines, maybe mom and pop's house, which you converted into an office, things like that.

But we have this weird split, again, because our customers own their homes and we rent the land. In the event of something big that happens, a natural disaster, they get a cheque for the homes and we only get the money for the land. So that's one reason in your due diligence with mobile home parks, you have to be more careful of understanding all these potential natural disasters and shine away from those. Because unlike apartments, you won't get fully compensated if something goes wrong. In the apartment industry it's pretty much over worked at this point. Everyone out there in the world of apartments has been buying and buying. Buying into this fact that America is becoming a nation of renters more than homeowners. And we've all watched rentals go up at the fastest clip in American history. The average apartment rent in the US is now rumored to be around $2000 a month. A very, very lofty and even seemingly unsustainable number. However, in the mobile home park business, we're not even close. Of the 44,000 mobile home parks in the US, if you take the top 100 owners and add all of their holdings together, it's not even 4000 of the 44,000 parks. So in the industry, that's still 90% non-consolidated still in the hands of those moms and pops, still up for grabs.

And on cap rates you already know the answer to this. The cap rates on apartments are abysmally lower than mobile home parks. Now, there may be a reason for that, because people might say, "Well, that's because mobile home parks are innately more risky than apartments", 'cause it's younger and no one really fully still understands it as the industry matures. However, I would point out that mobile home parks performed magnificently throughout COVID. So perhaps we're the safer form of housing. We're the Dollar Store of housing. Right now, as the nation goes down the tubes economically, we are the most affordable option to millions and millions of Americans who need that low-cost place to live. So as a result, it would appear, that perhaps that higher cap rate for mobile home parks has really been misplaced. Maybe, in fact, from what we've learned from COVID, the apartment should have a higher cap rate if the cap rate is simply based on risk. Also, remember that just like apartments, mobile home parks share in all the same great financing options. We, too, have the options of mom and pop finance, bank finance, conduit, and the ever-important Fannie Mae, Freddie Mac, what's called the agency debt, option. So mobile home park owners can get all the same forms of financing at the exact same rates and terms as apartments.

So that spread between the cap rate and the interest rate, that spread is the same thing. We're starting at the same basic ground zero, as the apartments do and the fact that we have higher cap rates allows us to have the higher spread. But probably the most important difference between apartments and mobile home parks is simply the stigma that our industry has compared to the apartments, which has no stigma at all. So yes, it's a lot cheerier, and you'll be much greater accepted at a cocktail party if you own an apartment complex than if you own a mobile home park.

So if you're looking at, strictly through the optics of what makes me look the most impressive around others, then definitely, apartments are the way to go. But when you go into the mobile home park sector, you're going to take on a little bit of that stigma that all Americans carry against trailer parks. It's a product of the media, it's a product of our own experiences in life. But however you wanna count it, it's the simple fact that it's not that fun, it's not that cool, it's not that interesting to others, for you to be in the mobile home park business. It's just not considered the same as apartments. Apartments are such a larger industry. Basically, there's 10 times more apartments, than there are mobile home parks, and almost all Americans are familiar with them because they've lived in them, or drive by them, or know people who live in them. Yet it's rarefied air with mobile home parks, which, let's face it, only 8% of the entire United States lives in a mobile home. And of that group, probably a little more than half of those folks are in mobile home parks rather than mobile homes on raw land.

So we're just not as well-known. We're not as well accepted. People don't have the same number of experiences in mobile home parks as they have in apartments. But perhaps that's where the opportunity is. Sam Zell, who's the largest owner of apartments and mobile home parks, he's been largest of both, often tells all of his employees, "When everyone's looking right, look left." And maybe the fact that mobile home parks are something most people don't consider as an investment option that makes them truly remarkable and interesting. It's also important to note that Zell has sold off over half of his apartment holdings, but has never sold a single mobile home park. And I think that's because he believes there's still a whole lot of life left, and pushing rents, and increasing occupancy in the mobile home park sector, much more than there is in the apartments. However, the most overarching thing is that if you have experience in apartments, you'll do well in the mobile home park business, because it is, in fact, real estate. When you go to get a loan on a mobile home park and they say, "Do you have any experience in this topic?" And you say, "Well, I've owned apartments." Well, obviously, every lender is immediately happy and turned on because they know that you'll do well 'cause you understand it.

All real estate, particularly all the income property's all basically all part of the same big family. It's all about maximizing revenue and minimizing cost. It's all about mitigating risk. It's all about understanding financing, thinking like a banker. And if you've been in the apartments industry, as a background, you'll do well because you understand the basics of success. This is Frank Rolfe, Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.