Mobile Home Park Mastery: Episode 162

The “Detached Apartment” Model

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There are around 44,000 mobile home parks in the U.S., and not all of them are following the same business model. While the vast majority of park buyers and lenders are focused on the “renting land” model, there are some who engage in the “detached apartment” concept. But does that concept work? In this week’s Mobile Home Park Mastery podcast, we’re going to examine this business model and give its strengths and weaknesses, as well as moments in which it might work and settings in which it would fail.  Warning: this knowledge may change your perception.

Episode 162: The “Detached Apartment” Model Transcript

Detached Apartment

Traditionally apartments sit on a slab foundation or maybe a pier and beam, but some people believe that an apartment can sit on the metal chassis of a trailer. This is Frank Rolfe, Mobile Home Park Mastery Podcast. We are going to be talking about the Mobile Home Park concept of the Detached Apartment. What it is, what it means, what the problems can be and what it might actually be appropriate.

Now what is the Mobile Home Park variant of apartments known as the Detached Apartment? Well what it stands to when you have a Mobile Home Park with Mobile homes in it with the Mobile homes owned by the Mobile home park, but the valuations retreated differently than a standard Mobile Home park would be, see most Mobile Home Parks are all about the parking lot. The concepts of renting land. So what we look at Mobile Home Park into our valuations the only income we use is the real property income. And the real property at a Mobile Home Park is either the land which you rent for Mobile Homes or may be it is mama papís old stick-built home or may be mama papís old industrial building, may be some self-storages they have, itís all real properties. We all know what that means, itís very clearly to find. But some owners want to also then say that the Mobile Homes the park on homes at they own or rent out, that those are also or should be treated as real property. Because and thatís what causes the problem is that most of the us have been classically trained that you canít count the park-on home income, you can only count the land income in your overall evaluation and your cap rate. 

So letís look at that model there for a moment, letís assume a mobile home rent inside a Mobile Home Park for $800 per month and letís assume that the underlying lot rent is $400 a month. The way we would look at the value, the way our lenders would, the appraisers, most everyone in the industry would, would be in that transaction, where the resident pays $800 each month, only $400 can be counted toward the actual income of the property, the income that is there in capital to come up with the value. But that leaves still $400 laying on the table. Now, I would say, from 25 years of experience you are not going to make much money even with that $400 laying on the table. You have to pay the taxes, you have to pay the insurance and most importantly you have to pay repair and maintenance. Now we have heard maintenance on some homes can run as much as $200 a month. So if you assume for the taxes and the insurance in another 50, you are only getting $150 after repair and maintenance, taxes and insurance and that does not even include such items as advertising or any commissions that you have to give to anyone to rent that home. So itís got very, very low margins. However, some would say, nevertheless, they feel that the, whatever income that derives, if itís only 100 a month or 150 a month or 200 a month, that that should be capped the same as the land. And thatís just not how the industry has been treated from the beginning. You normally do not put any value on the home. So why is that a problem, why do we always fight back against valuing the park-on home income over in about the lot rent? 

The main problem is that a Mobile home is just personal property the same as a car. Subject to depreciation it does wear out eventually although if you maintain it, it can last for a very very long period of time. But it simply just not a part of the business model that everyone has adopted over the last half century. So effectively when you want to count your home income, be advised that there are very few people who will agree with you and who will go with that in fact, I donít know if any lenders that will, I donít really know if any appraisers that will, but you may be able to find somebody out there who is more sophisticated who may say, oh, yes. That home rent is the same as the lot rent. You know, one key reason that there is a problem is that letís assume I cap that home rent portion, letís assume that the home after paying the lot rent, taxes, insurance, repair maintenance nets $200 a month. That would give you $2400 a year and a 10 cap that will be $24,000 evaluation. However, I can replace that Mobile home with a different Mobile Home for a value of will be $8000 or $9000 if itís an older home. And additionally, I can sell the home for that. So why am I paying $24000 again for a home thatís only valued only $9000? There lies the issue. When you go buy a car that was run through the Hertz rental car fleet, itís sold to you as the value of the car. Itís not sold to you as the value of the income that comes straight to you from those payments from Hertz rental car. So itís just gets really odd when you try to put extra value on something that I can replace for a fraction of that amount. That is really the key issue. Thatís why the appraisers and the bankers and everybody else will not allow you to use that park-on home income, so when can you? When might it ever be appropriate? Well I will give you some situations when it might be appropriate to try and approach the Mobile Home Park as a Detached Apartment complex. 

Issue number 1: When the park is really really small. Letís assume you are looking at a Mobile Home Park that has only 10 lots to it. Now, 10 lots and a lot rent of letís say $300 a month, would be $3000 a month, but you take out expenses and this is probably 50% in this case, so that will leave you about $18000 a year of income, a value of about $180000 and thereís not a lot of people out there who wanted to buy Mobile Home Parks in that price range. But letís instead assume we cannot convert this now to a 10 unit Detached Apartment complex. Letís assume I can rent those units for $700 a month. Now I have $7000 a month of revenue. $84000 of revenue. I take it half expense ratio and now I am a $40000 thing. With a value of 40000 now you have reached more of a critical mass where investors are interested. So I often see smaller parks that I think of myself, you know I had that small park may be what I would do is go the Detached Apartment model, because thatís may be the only way you can ever scale it enough to make it interesting to another investor. Thereís a property like that not far from about 30 minutes down the high way, I drive-by it frequently when the guy did that very model, itís a small Mobile Home Park and he lives in a stick built home at the front and he painted all the homes the same colour and his landscape and it looks kind of like an apartment complex only obviously every units is spread out, just in about 10 feet apart.  But I think he does okay with it. I rarely see a Mobile Home for rent sign out in front. So I think it stays pretty much full. And I am pretty confident thatís why he kept it that way, thereís no money in that Mobile Home Park if he were to sell those homes off and just get the lot rent, so I think he decided that if he was going to be in the business and messing with that small park, that he want to have enough critical mass to make it seem worthwhile. The other time you want to do the Detached Apartment model is when the lot rents are stagnantly low. In parts of America you will find lot rents go as well as $100 a month or even lower. I have seen my Home parks myself in Mississippi with the lot rents were only $75 per month. However the homes can rents often in those same markets with $700 or $800 a month. So in that case if you were to sell the home off and keep just the lot rent, thereís simply not enough money there to make it worthwhile that you will even be in the Mobile Home Park business. Thatís why thereís so few institutional owners in some of those states.  Simply because there doesnít seem to be any money, itís the same amount of effort to own and operate a Mobile Home Park in a state like Ohio with lot rents around $400 a month in a state like Mississippi with lot rents may only be $75 - $100 a month. As a result, people say ìWell, if I am going to be in the Mobile Home Park business, I am going to buy that 60 space Mobile Home Park in Mississippi, thereís no way I am going to do it if I have to get $75 a month, I am going to go with the Detached Apartment model, because therefore, I will be getting $700 or $800 a month in total revenue.î Also remember that a lot of the way that we all look down upon the Park owned home rent portion is because our lot rents are so substantial. If you take a park in a state like Mississippi with very low rents and you look where your cost go, when you are only having to allocate a $100 a month to lot rent as opposed to $400 in most other states, now suddenly thatís a very much smaller piece of the pie, when you are renting the home for $700 or $800 a month. So now it would appear that your margins are better and you would be correct.

Thereís probably far more money in the Detached Apartment model in states with lower lot rents than there would be in the Mobile Home Park model itself. Now the problem is, even if you adopt that, I have to always warn you it will be very very hard to have any form of liquidity because most buyers will not agree with you, most appraisers will not agree with you nor would most lenders. So you may not be able to ever find anyone who can buy the property from you because they just canít find anyone who would make a loan even if they liked that business model. You might therefore end up having to either keep that business model forever generationally or to sell it you might have to carry the financing on it. Now that that is the end of the world some people like to carry financing, some people would like to keep an asset going through the generations and if thatís the case then that is great. But thatís always going to be at the back of your mind, one of the big problems with the Detached Apartment model is simply liquidity, finding other people that embrace the model. I know someone who embraced the model in a big big way. He has a Mobile Home Park down in Alabama and he has got about a hundred lots and every single unit in there is a rental and he looks at it as a Detached Apartment complex. Itís really not a bad deal at all for him. He does his own construction, he is a contractor by trade and so he does all the remodelling himself and he acknowledges itís something he can never sell because nobody else in the world would ever want to buy it. No one would want to go in and self-manage it and do all the restoration themselves. So as a result heís just going to stick with it till the end of time and just pass it down through the family. If thatís your decision, thatís great. But again most Mobile Home Park owners are more passive, they like the idea of liquidity, to be able to finance and refinance. That is one of the big drawbacks of Detached Apartment model. It doesnít typically give you that flexibility. This is Frank Rolfe, from the Mobile Home Park Mastery Podcast talking to you about Detached Apartments. Hope you enjoyed this. Talk to you again soon.