Mobile Home Park Mastery: Episode 299

The Great Subsidy Debate

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The political issues that mobile home park owners face today boil down to a simple question: are mobile home park owners required to do the work of state and federal government? Apartment owners have received subsidies for residents who cannot afford to pay market rents for decades, yet mobile home parks receive no such assistance. In this Mobile Home Park Mastery podcast we’re going to drill down on this issue and explore the question of subsidies and who should pay them.

Episode 299: The Great Subsidy Debate Transcript

Many years ago, I was in the process of evicting a resident for non-payment of rent. I received a call from someone who did not want me to evict this resident. It was a city council person. For whatever reason, it was very, very important to them that this person not be evicted despite the fact they weren't paying the rent. So after listening to them tell me all the virtues of letting it all pass, of not charging the rent, to calling off the eviction, I said to this caller, well, you know what? It sounds to me like it's very, very important to you that this person not be evicted. So that being the case, I have a simple solution. One, I think we would all find fair and equitable. You just go ahead and start paying their rent. Just go ahead and pay the rent that's owed now and I'll call off the eviction and then just go ahead and pay it every month going forward, and you never have to worry about it again. In fact, I even take credit cards. They weren't happy about that at all. No, no, no, no, no, that's not what I'm talking about, I'm talking about you, the park owner. You need to not charge that rent. You need to let it all go. You need to just let the person live there for free.

This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're gonna be talking about this simple debate, subsidies, the great subsidy debate. Now, in mobile home parks across America, moms and pops are charging rents that are far too low, we all know that. The average lot rent in the US is about $300 a month at a time when the average house sells for $400,000 and the average apartment rent is over $2000 a month. So you have a swing between mobile home parks and apartments of $1000, $1500 a month difference. Now, why is that? Why should a park be at such a low rent while apartments are such a high rent? Well, that's what the fair market says housing should cost, and mobile home park lot rent certainly should be more than $300 a month, more like $600, $700, $800 probably. In Denver, they're nearly $1000, in Los Angeles they're over $2000 a month. That's the fair market level, that's where it should be. An economist at Duke University studied this years ago, a guy named Charles Becker. He came away to the same conclusion that mobile home park lot rents were frightfully low and made absolutely no sense. He surmised that what had happened is that many moms and pops had lost track of what the rents really were or they just decided to do what we call mom and pop quantitative easing. They didn't charge what market rents could be or should be because they just elected to leave them super low.

And when they did that, they created a subsidy. You don't have to write a check to do a charitable gift. You could also create that in the form of letting people use your property without compensation. If you had a city which will allow the homeless to live in a hotel and they don't pay any rent to the hotel, then that itself by that forgiveness of letting someone use property without payment, that's really a form of subsidy, is it not? Yet that's what mobile home park owners have been doing in a big, big way for so many decades. It's a really big number, in fact. If you assume there are 44,000 mobile home parks in the US and an average of 50 lots per park, which may be a little high, we're not really sure, no one knows that number. And if you assume the average mobile home park lot rent today should be closer to $600 a month than $300, which it certainly should, then that means mobile home park owners collectively across America are subsidizing residents to the tune of about $660 million a month. That's right, about $7 billion a year or more are gifted to the residents in the form of charging rents that are far below market.

Now, at the same time that's going on, you have the American apartment owners. They have a much different position on all this. You see what they do is, they always charge full market rent and those who can't pay the full market rent, well, they still get paid, the apartment owners do, because they get a check from the government under section 8 and that's a subsidy. So they don't have to subsidize their residents, they don't forgive rent, no, they just charge a full market rent and they get paid regardless of how it works. Because that's how the government system is set up. That's what the section 8 program is, you pay 30% of your income and the government covers all the rest regardless of what your rent may be. Well, that's simply not fair. Why do apartments charge full market rent and pay no subsidy and mobile home park owners instead pay out $7 billion a year or more in subsidies and yet it's expected of them. They don't even get thanked or appreciated for it, they're just told by society, well, well just charge that low low rent because gosh darn it, a couple people in that park, they can't afford to pay full market rent, they can't really afford to live in a modern world. Without ever acknowledging that it's not the role of the mobile home park owner. We are not a non-profit, we are not the government, we should never be in the position of having to subsidize rent.

Now, whenever you raise the rent in a mobile home park, you are always going to have typically one person or two people out of perhaps a hundred that struggle to pay the higher rent, the others don't at all. But yes, you'll have someone in there who's marginal, who can barely afford to live in the park to begin with, and it was that way when you bought it from mom and pop, and it was that way for a decade or two earlier when mom and pop owned the property. But that doesn't mean the mobile home park owner needs to make decisions based simply on subsidies and those who need to be subsidized any more than apartment owners do. You can't have it good for the goose and not for the gander, it just doesn't make sense anymore. And what's happening right now is, the great subsidy in the mobile home park industry is starting to end and people are mad about it, they don't like it. Now, across America what you've got are mom and pop owners who are reaching the end of their era, their journey as mobile home park owners, the biological clock is ticking and they've decided to go ahead and turn the reins over to a new generation of park owner. Whether it be a private equity group or just a private individual, whether it be a professional investor or just someone who's trying to make a good real estate investment.

Regardless what you have is people who no longer are going to believe in this concept, that their role in life is not based on what America tells them which is free enterprise and capitalism and freedom but instead is, they are stepping into the shoes of having to give perpetual subsidies to residents for absolutely no reason. Now, the media hates this, of course, because they love to throw out the concept that all landlords are evil. And what could be more evil than the mobile home park owner who dares to raise the rent without ever discussing or acknowledging that apartment owners have been doing this forever but they get subsidized, that every time you talk about affordable housing in terms of apartments, you're really not, it's not affordable housing. What the difference is, is who's paying the subsidy? The federal government's letting the resident live there for free in many cases but they're still paying the owner of the property in full. So the government is bearing the brunt of the subsidy, but in the mobile home park industry we have no section 8, no federal government programs, so every time the rent is too low, who's paying it? That's right, the mobile home park owner, and they're not going to keep doing it. That era is coming to an end.

Now, when I go to Costco, there's always that big banner above the little cafe they have in the Costco, which has what Costco's famous for. Their hotdog, plus chips, plus drink for $1.50. This is their loss later. One of the teasers that make many people eat at Costco when they go into shop, does that hot dog, chips, and drink cost Costco, a buck 50? No. I'm sure Costco loses money on every single one of those that are sold. That's how they subsidize basically, customers to come in often and shop. It's something that many stores engage in and trying to have a loss later to bring you in the door. And if that hamburger, not hamburger, I'm sorry, hot dog, chips, and drink was to go up from $1.50 to $3, a 100% doubling of rate, does that mean people wouldn't buy it anymore? No, they'd still totally buy it because it's an excellent and exceptional value, even at $3. And that's what mobile home park owners are faced with, because our product is so ridiculously cheap that it makes no earthly sense. And as a result, it's going to have to go up to market forces and the subsidies will no longer be there.

Now, out of every hundred space mobile home park, there are typically one or two residents in there who simply can't afford to live in a modern world, and they need a subsidy. They should get the subsidy. There's no reason that somebody in an apartment should get a subsidy and somebody in a mobile home park should not, doesn't make any sense, yet that's what we're continually expected to do, and it's just not going to last. Mobile home park owners are no longer going to agree to subsidize the residents, certainly not to the tune of $7 billion a year or more. So then, how's it all gonna end? Well, there'll be great criticism of park owners, which I figured that already is. Everyone will say that we're horrible, evil people, do not wanna subsidize, to do what the government should be doing, for us to pay the bill, not the government. So therefore, we're bad, we're wrong. Why can't we just keep that status quo going? They would say. Seems to be working perfectly fine. Any government official would tell you, but it simply can't go on any longer. It won't go on any longer because you see, there's one pressure that no one wants to accept or acknowledge. And that's simply that most mobile home parks need large, vast capital improvement to go ahead and continue on as a mobile home park. They have to be brought back to life. The infrastructure is old and aging, management isn't very good, often mom and pop themselves.

We've gotta go ahead and take these things and put them under more of a professional guidance. That costs money. And the big issue is, that mobile home parks always have better uses. Every piece of land out there that I've ever seen that has a mobile home park going on, there's something else you could do with the land, which is just about as profitable or more than that park as it sits today. The most common of which is tearing the entire park down and putting back apartments. Why not? If I can only get $300 a month for a lot rent on a lot in that mobile home park, well, let's tear the park down and put in apartments. Let's stack them three high and get 2000 a month per unit and not have to worry about being criticized on subsidies because the federal government, heck, they can pay the whole $2000 on every unit in the complex. Let them pay the subsidy. So that's how it's all going to end. Parks are either gonna charge full market rent or they're going to just be converted into better uses. Uses in which this subsidy debate doesn't exist. In fact, I can't come up with another product. Can you or any business in the United States that is expected to subsidize the resident to do the government's work for them? It simply doesn't exist.

So until such time as a nation finally affirms that it's become socialist or communist or under some other form of law, the simple fact is that private property owners should have the right to charge market rents. Those rights should be chosen based on supply and demand and not upon prior records of unprofessional investors who didn't even know what market rents were. There's no way the mobile home park owners going forward in the years ahead are going to continue on doing the $7 billion a year of subsidies simply because, well, that's what mom and pop used to do. That narrative is ending. Society will have to choose whether they wanna have mobile home parks or if they wanna have mobile home parks torn down and be redeveloped into other uses. If you look up all the articles in our industry on a weekly basis, that is the most common article you'll see there exists, is park owners who are finally throw in the towel and say, look, I'm done subsidizing the residents. I'm done charging $300 a month when the market force says it should be $800 a month. So as a result, I'll just go ahead and bulldoze it, put in apartments, put in an Office depot, do something that will give me better value for the land. Because that's how the free market works. That's how free enterprise works. That's how capitalism works, and you can't hold it back any longer. This is Frank Rolfe, the Mobile Home Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.