Mobile Home Park Mastery: Episode 308

The Mechanics Of A Successful Rent Raise

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Raising lot rents to market levels is a continual challenge as most mobile home parks currently sit at a fraction of where rents should be. Park owners spend hours ruminating over the how much to raise rents, not because they are constrained by market forces, but simply wanting to make sure that they are fair in how to do their calculations. In this Mobile Home Park Mastery podcast we’re going to review what the mechanics are of a successful rent increase.

Episode 308: The Mechanics Of A Successful Rent Raise Transcript

Mobile Home Park owners are simply held to a different standard. In every other business when you raise the price of your goods or service, it's considered good business. But in our industry, you're told that it's evil, that it's bad. I've had many interviews with many publications over the last 30 years, and the craziest ones are the ones who ask me, "Why do you raise rents?" "Why can't you lower rents?" Well, it's kind of an insane question when you're, "I try to run a business". Because a hallmark of good business is that you set your rates appropriately. And the problem is as a Mobile Home Park owner, we're often taking on properties that have never had their rent, ever, set to market levels. And as a result, as an owner, you have to raise them. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're gonna talk about the hallmarks of doing a proper and correct and successful rent increase.

Now, why do we have to raise rents? Why can't we just leave rents the same for the next 100 years? That's what mom and pops did sometimes, when you look at their books. We've bought properties from moms and pops who haven't raised their rents in 10 years, 20 years. So why can't we just go on with that?

Well, if you read that weekly review of news articles that I write anymore that you can get on, you'll see a very common article is on Mobile Home Parks closing down. It is the most frequent item that I review. And that's simply because if you don't raise the rents to market, there are better uses for the land. There's lots of better uses for a Mobile Home Park property than a Mobile Home Park, if the rents are too low. What can you do with them? Well, I don't know. Let's build apartments, build a Home Depot. Mobile Home Parks are traditionally the perfect size for redevelopment, typically 2 to 10 acres in size, exactly what pad users want. They're typically in really good locations because they weren't built since 1970, so the whole city has grown around them. And they also have really good road frontage. And most importantly, cities hate their gut. So if you want to get a Mobile Home Park zoned into any zoning known to man, you know the city's gonna give it to you in order to get the thing torn down.

So really, as a park owner, you're in a race. A race against time to make sure your park doesn't get leveled and redeveloped. And the only way you're gonna do that, the only way you can keep the net income up at a time when you can take that Mobile Home Park and demolish it and build an apartment complex on it, is to increase the rents.

So why are the rents low now? Well, that's simple. The reason the rents are low now, is that mom and pops weren't doing a good job of minding the store. Instead of increasing the rents a little every year in line with inflation, they held off for years, and years, and years.

So the lot rent in the US today, the average lot rent is one half of what it was, in today's dollars, when the parks were built. That's just not tenable. We live in a time where Mobile Home Park rents average $300 a month, when the average apartment rent is now over $2,000 per month. And the average single-family home is over $400,000. This can't go on anymore, and it's not going to go on anymore. As mom and pops are replaced with new, professional, more institutional owners, they're going to raise the rents up to market levels. So if we assume that rents have to go up, it makes no sense to have Mobile Home Parks at rents that are, literally, 80% less than apartments.

Then, how do you do it? How do you do it properly? Well, the first thing you wanna do to start the mechanics of raising your rent, is figure out where you fit with your contemporaries. So you wanna do what's called rent comping. You want to comp all the other parks. You wanna find out what their rent is, what utilities are provided. And you also want to get a glimpse of where you fit in the spectrum of quality, from the worst park with gravel roads down by the river, under the bridge, to the nicest REIT property. Where do you fit in on that spectrum?

And if you make a list off Google of every park in your market, and you studiously, call each one and ask them, "Hey, how much is your rent? And what utilities does it include?" And you then look at them on street view and Google Earth, you'll pretty soon see where you fit in that spectrum. So the first question is, where should you be? What should your rent be? And more than likely, when you do it, you'll find that your rent, which is maybe now at $300 a month, should be more like at $450. But you can't start the process till you know how you fit in.

Now, once you know where you fit in, here are the hallmarks of doing a good rent increase. Number one, are you still gonna be providing a good value? Because if you don't have a good value, you will lose customers. The media does not understand a basic tenant of Mobile Home Park ownership, and that is, if your park is not a good value, the customer does have the ability to leave. Who pays for it? Another park owner. If I go to another Mobile Home Park down the street or across town and say, "Hey, I hate the park I live in, would you move me to your park?" They'll say, "Sure, we will. I'll move you for free." We do hundreds of those every year, they're called organic moves. That's how customers are able to police good value from bad value. It's not that they pay the cost of the move. If they had to, they could never come up with five grand, or seven grand, or whatever it costs. But a park owner sure can. And based on prevailing rents, it's somewhere between a one and two year return on investment. So if you don't stay in line with your value, if you don't respect your position in the market, then you're gonna lose customers. So the first hallmark is, you still have to be a really good value.

The next is you don't wanna break any laws. Some states have rent controls, some states have regulations of how fast you can raise rent. Even if they don't have rent controls, they still have some ability to manipulate the system on how fast you can raise it. So you have to make sure that whatever you do, you've researched, talk to your state mobile home association, do the research yourself. Don't do it until you know for a fact exactly what you are or not allowed to do in that state.

Also, if you exceed where you fit in... And particularly if you exceed the rent that everyone else has in the market, if you're the highest in that market but you don't belong there, you're 50 bucks a month higher than a REIT and you don't have any of the amenities of that REIT, it's really not gonna help you much. Because down the road when you go to get an appraisal for a refinance or a sale, the appraiser is gonna say, "Wait a minute here, these rents don't work. I'm not gonna use those in my appraisal because these simply aren't fair. They're not right." So you can't really fool anyone. Going super high with your rents will work for you, but only under the assumption that you're not going to later try and sell or refinance, 'cause then it's not going to work for you at all.

Another hallmark of a good rent increase is that you don't have a lot of negative coverage. 'Cause none of us as park owners want to be in the media. We don't want anyone pointing the finger, publicly shaming us. It's just bad for business. Just like a restaurant. You wouldn't want to have a bunch of people in the paper saying, "Oh, that restaurant, its prices are absurd. It's not worth it. It's a bad value." That's not a very good thing. A hallmark of a really good rent increase, in fact, is one in which you lose nobody. That's the goal. And the way you lose nobody is, because it's still a good value.

I've given the example millions of times to people to understand the difference between price and value: Going down the highway, late at night, last exit, two hotels, Tiki Motor Court, holiday Inn Express. Tiki Motor Court, 20 bucks a night, holiday Inn Express a 100 bucks a night. Which do you stay at? No one ever says the Tiki Motor Court. I don't know who stays at those horrible roadside hotels you see. Everyone always goes for the Holiday Inn Express. Why? Safety, security, cleanliness. Stay at the Tiki, you might get bedbugs, might get shot. Don't know what's going on. Holly Inn Express, that's where you wanna stay. And of course, the Holiday Inn express costs 5 times more. So that means all of us humans, we must not just do things based on price point. There must be more to it than there is, and that's called value.

As long as you maintain rent increases that keep your value in line with your contemporaries, and most importantly in line with the customer, you can raise your rents, even significantly, and lose no one. But the one part that is not a hallmark of a rent increase that some people think should be but is not, is that you then win a popularity contest. You will never have your residents ever like paying more rent. They'll tolerate it because it's a good value, but they're not gonna be happy about it. So if you try to just please the residents, then you can't raise rents. Your rents will have to remain whatever they are today until the end of time.

In some cases, mom and pop made that mental choice. They decided not to raise their rents for one simple reason. They didn't want the tenants to hate 'em. Those tenants are their friends, that's who they hang out with. You have all seen The Lucy Show, right, where the Mertz is? The landlord hang out with Lucy and Ricky Ricardo? That doesn't happen in the real world. It shouldn't happen with you as a park owner. You should set your rents not based on popularity, but based on what's right and what's a good value. But don't be looking, when you raise your rents, for people to come running outta their homes saying, "Oh, thank you so much for raising them". It's not going to work.

Also remember that in every mobile home park, there's always those one or two people that complain about everything. It doesn't matter what you do. If you gave every tenant a million dollars, they'd say, "How come you only gave me a million? I wanted more." "How come I didn't get 2 million?" They're impossible to please. If you read those articles in the paper, it's really sad, the people who write articles and produce TV shows and stuff.

Have you ever noticed, they always just go by one person? Mobile Home Park might have a hundred customers in it, and the whole article is geared towards one person who says, "I can't afford to live here anymore 'cause they raised their rent 10 bucks." Don't they ever ask themselves, "I wonder what the majority said?" Because we found the majority like paying more rent. They like paying more rent because they know that by paying more rent, the park will stay in operation. They know that by paying more rent, they'll get a better manager. They know they'll get better infrastructure repair. And they don't mind paying more, because like the Holiday Inn Express, they'd much rather stay at the Holiday Inn Express than the Tiki Motor Lodge.

But you'll always have at least one person in every Mobile Home Park who wants that Tiki motor Lodge. To them, value is meaningless. All that matters is price point. Price point is king. But that does not reflect in any way the other 99% of the park's population.
0:11:42.8 Mark Rolfe: So again, raise your rents, don't keep your rent static. As American prices go up, it's completely inappropriate for you to be the only business that does not. But at the same time, do it with a with with a focus on value. Don't lose anyone with your raise by keeping your park in line with where you fit in that spectrum, and you'll have no problems maintaining your rents at market levels.

This is Frank Rolfe from The Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.