Mobile Home Park Mastery: Episode 231

To Lead Or To Follow?

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Mobile home park lot rents are ridiculously low nationwide. At an average lot rent of around $300 per month, many mobile home park owners will surely re-develop into a better use of the land in the years ahead. For those who elect to remain as a mobile home community, it’s essential that rents be placed at sustainable levels in keeping with market forces. But what do you do when your market mobile home park lot rents are unsustainably low -- do you stay low or become the market leader? In this Mobile Home Park Mastery podcast we’re going to discuss how to set rents, why healthy rents are essential, and when it’s important to be a market leader rather than a follower.

Episode 231: To Lead Or To Follow? Transcript

Wikipedia defines to lead as to be foremost or chief among. And I think we would all agree that all mobile home park owners would like to be leaders in every step of the business, the best in property condition, the best in customer satisfaction, the best in profitability. But there's one item that most community owners are shy to be the leader in, and that is in rent levels. This is Frank Rolfe, The Mobile Home Park Mastery Podcast. We're gonna review why it seems that so many people don't wanna be the leader, yet it is about time now in many markets you must lead. Let's start off with an overview on mobile home park rents. I've written many articles, had many discussions about the simple fact, the mobile home park rents are crazy, ridiculously, unsustainably low. I always get criticism from it, particularly from the media who says, "How dare you say such a thing? You're encouraging others to raise rents." Well, we are landlords. We are in the business of having rents at market levels. I don't know any community owner out there, other than perhaps those owned by ROC that are in a non-profit status. And even then, the non-profits are fighting. They also have to raise rent significantly, after they do a resident-owned community transaction.

So why is it so hard? Why do we have this strange situation only in mobile home parks regarding how to set rent levels? Well, I think the problem is easily solved if you simply look at all the other sectors of real estate and how they do it. How do they set apartment rents? Well, there's always that Class A apartment being built from scratch, brand new, and it sets its rent level, and then everyone falls in behind that. They all get into line. They say the Class A apartment rent is $1600 a month, and I'm Class B and I'm then $1400 a month, and I'm Class C and I'm paying $1200 a month. Everything you can mention, whether it be office, apartment, retail, lodging, they always have new properties going up, very expensive. And then that sets the going rate for the new, the top of the line and then everyone else just follows that. But in the mobile home park business, they have not allowed mobile home parks to be billed in most markets in about a half a century. So as a result, we don't have that constant reminder of our value. We don't get that constant recollection of what things really need to be. So over the half a century, many moms and pops, they simply lost their way. And that's why in many markets of America, you'll find mobile home park lot rents at an inflation adjusted half of what they were back in the 1950s and '60s. The typical mobile home park lot rent back in the '60s, for example, was about $50 a month.

If you simply apply regular annual inflation to that number today, you'd be at about $500 a month. Yet our industry's average, and no one knows the exact number, but it's believed to be about $280 a month. How in the world can we survive as an industry at $280 a month? And what people don't understand is, without higher rents, some terrible things happen. The first one is, no one is gonna bring any of these old mobile home parks back to life. Why? There's no money in rents that low to make it worthwhile to do any of the capital infusion required to rebuild infrastructure and other items. Number two, you can't have professional management, which is what the customers really want. They don't wanna have mom and pop who rarely visit the property, who just select someone inside the park to possibly help out and then pick all their own favorites who are showered with all kinds of things like not paying on time and utilizing vacant lots and whatever rules infractions they wanna do. No one likes living like that. People want to have fair rules, fair rent collection, professional management. You can't afford it on rents this low. But most important, which people just don't understand, is that mobile home parks all have alternative uses. There are other things you can do with the land. And if you don't have rents that make mobile home parks the best use of the land, then the mobile home parks go away. That's what happens.

If you Google up mobile home parks in the news, the most constant frequent story you will see are mobile home parks being redeveloped into other uses. And why not? In many cases, the value of the land raw is worth far more than the value of the mobile home park as an operating income property. Just recently, there was a film produced, it was kind of an art film in Colorado, bemoaning the fact that a large mobile home park had been redeveloped and the people displaced. What's the point of the movie? It's not the evil landlord that shut down the park to redevelop, it is the fact that the rents were artificially low. Had they been higher, high enough that the mobile home park was a more profitable use than the development use, it would have stayed a mobile home park. You simply cannot have good, healthy, nice place to live, mobile home parks that are not redeveloped in the absence of higher rents. It's just impossible. Never going to happen. So how do we come up with what the market rent should be? Well, the first thing you have to know is you can't just look at the other mobile home parks to set your rent, because in some markets, all the other mobile home parks are owned by old moms and pops who they themselves don't know how to set the rent.

So you first have to start at the housing in general, in the market. Look at your single-family home cost, both to buy as well as to rent. Now, in most markets, virtually every market worth investing in, the single-family just is not even within the realm of possibility for the typical mobile home park resident. That number is gonna come in astoundingly high, and you can't set your rents at that number, that number is home and land, stick build home, certainly will be at a premium. But nevertheless, it reflects where you are. If you're in a market with extremely high single-family home prices, $200,000, $300,000, $400,000, that's certainly gonna reflect on the fact you should be able to charge more in lot rent for people who want to have a detached dwelling but can't afford that full single-family home cost. More than likely, instead, you're going to look towards apartment rent. Now, if you get the three-bedroom rent in most markets, that's your most accurate reflection, because most mobile homes and most mobile home parks are in fact three-bedroom. And a three-bedroom is a pretty rare animal in the world of multi-family.

There just aren't that many three-bedroom units. Two bedrooms are pretty common, one bedrooms obviously, but the three, well, that's kind of unique. Look at that three-bedroom apartment rent. Where is that at? And then look at your two-bedroom apartment rent, there's an old adage among some moms and pops, that the correct lot rent would be 50% of the two-bedroom apartment rent. And if you look at most markets that is actually fairly scientifically true, although possibly, it's because the moms and pops themselves used that theory in recent years to come up with what the lot rent should be. But the bottom line is, when you look at those two-bedroom and three-bedroom rents, you will see in most markets, the mobile home park lot rents then make no sense at all. The average apartment rent in the United States right now is over $1600 per month. The average lot rent in America is around $280 per month. Explain that difference to me. How does that make any sense at all? The mobile home park resident has their own yard, the apartment person does not. They can park by their front door, while the apartment person can't. They have no neighbor knocking on their walls or ceiling, but yet, the apartment person does.

And yet, we're supposed to be over a $1000 a month less than an apartment? Now, some would say, "But wait, that's apples to oranges. The apartment includes the dwelling." Well, I have news for those people. Go out in almost any American mobile home park and go door to door and see what you have. Almost every home is owned free and clear. So for all of those people, 80% of every resident at every mobile home park in the United States, probably on average, no, it is apples to apples. Their total cost of housing, dwelling and all, is $280 a month, because they only have the lot rent to pay, and the apartment $1600. So how do we make sense of it? Well, we can't. The bottom line is, you just can't. So in many cases, we know the mobile home park rents must rise because they're just ridiculous and they don't conform to all the other options in the market. Now, if there are other mobile home parks in your market, I would only suggest that you do the comps of the other parks. Google up your market, get the name of all the parks, call them all up.

Pretend to be a customer, see what they're charging for lot rent and what utilities are included. But the problem is, you can't just use that as your basis to make up your rent. And that's because, what if you're in a market that only has a couple of mobile home parks, both owned by moms and pops who don't know how to set their rent? Or, as it happens in some markets, what if you're the only mobile home park in the market? You can't do any mobile home park comps then. For those who have parks in their market, they will suddenly realize there's really a three-tiered pricing structure. This phenomenon was found and discussed at length with me with Charles Becker of Duke University, who studied mobile home park lot rents years ago. He tried to figure out what it was all about. I said, "Well, here's the deal, Charles, on the high-end, you have those park owners who are large corporate groups, REITs, private REITs, those kinds of folks. And then at the very bottom of the range, you have all the dirt road, hillbilly parks, no infrastructure, no management, horrible location. And then in the middle, you kind of have everyone else. They just don't know what to do with their rents. So you have these timid souls in the middle, you have these crazy people on the bottom, and then you have these professional managers on the top." And his question is, "Why don't the people in the middle go more towards the top?"

Because he looked at the parks and he didn't see a whole lot of difference between the ones that were owned by the REITs and the ones that were owned by the regular other owners, who are doing a good job of property condition and professional management. And the truth is, there's no reason for the gap, except apparently, those who are not of a corporate structure just didn't feel comfortable up at those REITs rent levels. And in many markets that rent level is a $100 a month difference between the REITs and the everyone else category. And it makes no sense. So why are mobile home park owners timid about being the leader? That has to be it. If the market rent of the larger owners is $600 a month, and you're only charging $400 a month, yet your product looks just as good as theirs, what's holding you back?

Well, I think there are several reasons. The first is just fear of being the highest, because all of us are taught that one of the safe spots to be, whether it's in business or in a track meet, is to follow right behind the leader. And that helps you gauge your pace and make sure that if you don't win, at least you come in in the number two position. So most of us are just groomed to believe we don't wanna be a market leader. We want someone else to be a market leader. But why is that? Why are we all afraid of being the market leader? Well, you know the answer to that. It's because the media has made a vendetta against landlords in general, and mobile home park owners in specific, so we all think there's some kind of safety in hiding behind somebody else being the market leader. But here's the problem, for many community owners today, you will have to lead. Once you get up to rents of the moms and pops, which often doesn't take long, if you buy a park and start bringing it back to life and improving it, you will soon find your rent will need to be higher. And once you've hit that level, you have to lead, you have to advance your rent higher. Now, take solace, safety in the fact that your rents are completely justifiable and in line with market forces.

But the problem is if you don't lead, if you don't have the bravery to say, "This is the fair rent, I don't need to be $1200 a month under the local apartment. I don't have to be the same amount under the stick built housing stock, I'm worthy of more. I've got more to offer than the apartment. I've got the better location, I have the yard, I have a much better quality of life," then be proud of that fact and raise your rent accordingly. Don't become one of these moms and pops yourself. That's how they all fell into that rut. They didn't want to be the leader. They didn't wanna push the rents up to where they should be. So the moral to it all is, we all in the years ahead must become leaders on rents. We can no longer hide behind others. We should no longer distance ourselves from the REITs and the other professional players who are typically in almost all markets at least $100 a month more. We need to price our product in accordance with its true value. People always find it odd, when mobile home parks increased rents, they don't lose any customers and everyone wants to claim it's because they can't go anywhere.

That's a complete lie. [0:13:49.4] ____ mobile home park resident has just as much right to move as anyone else, let's see what the options would be. They could sell their mobile home, they could sublease their mobile home. They could even go to the owner of another mobile home park, and they'd happily pay to move them from that park to their other park. The reason they don't leave is because it's a great value. Our rents are crazy, stupid, ridiculously unsustainably low. And even if we raise them up significantly, they still meet that criteria compared to all other housing forms. The key is, we just all must become comfortable with being a leader.

This is Frank Rolfe, The Mobile Home Park Mastery Podcast, hope you enjoyed this, talk to you again soon.