There’s a science to profitably buying and operating mobile home parks, and no better way to understand this science than through case studies. This is a case study of a park we bought, turned-around, operated and sold in Indiana. We bought it for around $1,750,000 and sold it for around $3,150,000 which netted roughly a $1,400,000 profit. In this video we show you the facts about the market, the deal at purchase, how we turned it around, the drivers to profitability and how much each of these drivers made in numeric terms.
A Mobile Home Park Case Study In Indiana - Transcript
There is probably no better way to apply science to mobile home park owner studies of parks in the past that have been purchased, operated and sold to see how those turned out, and to understand the lessons learned. And that's what we have here, a mobile home park in the state of Indiana.
Let's start off with the metro stats of the market. Population of 1,268,993 in the metro. That's good. We love metros of 100,000 plus. Well, this one is obviously 12 times greater than our normal target. Single family home price of $209,700. That's nearly double our typical target of $100,000 and up. Three bedroom apartment rent of $1,262 a month, which is about $262 ahead of our typical target of $1,000 a month. And 9.6%. vacant housing which is significantly better than the US average are 12.2%. So the bottom line is that the market is very attractive from an affordable housing perspective.
What do we pay for the park? Well, let's start with what we got as part of the purchase. 122 lots with 87 occupied, $290 per month lot rent, and the park pays for all water and sewer. We bought this property for around $1,750,000 which worked out to around a 10% cap rate but the park was in extremely bad aesthetic condition. That's the reason mom and pop were willing to sell it so low was because, and most people who looked at it who were not part of the mobile home park industry or knowledgeable on mobile home parks, were immediately turned off by the way it looked. However, we saw in it nothing but opportunity. Our charter brand plan was simple. We were going to raise rents to market, we were going to have the residents pay for their own water and sewer usage, we were going to fill the vacant lots, and we were going to improve the aesthetics which thereby not only made it of greater value for existing residents, and have the ability to attract new residents, but also to effectively lower the cap rate because a property which looks nice is more valuable than one that does not.
We then sold the park around three years later for about $3,150,000 which gave us a profit of around $1.4 million. So what created that profit? Well, the first thing we did as part of that turnaround plan was we raised the rents from $290 a month to $335 a month, which was still below market rent, but that one maneuver increased the value by about $587,250. The next thing we did is we transferred the water and sewer cost from the park to the residents. That's always a win-win, because in this case, now the residents have to pay their own water, which means they conserve water. And it typically knocks water usage down by a third. It also removes from us the largest single line item and cost. So by having the residents pay for their own water and sewer useage, the only fair way to treat it, it gained us a profit of around $452,250. We also filled three vacant lots, not hard to do when you offer a great affordable housing option in a market of that size, and they gave us a profit of around $105,525. And then we lowered the cap rate from 10% to roughly 8% which gave us a profit of around $255,000.
So what were the lessons learned from this case study? Well, number one, mobile home lot rents across America are ridiculously low, and you can raise them significantly while still offering an excellent housing value. All the time in the media people talk about the evil nature of raising rents because they don't know what they're talking about. When I raise the rent in a mobile home park closer towards market, while at the same time making it a more attractive property, that increase in housing value is much appreciated by the residents who are clearly willing to pay more to live in a nice place. And on top of that through mom and pop quantitative easing, there's opportunities nationwide to simply raise the rents because mom and pop never kept them towards market.
Another lesson learned is having residents pay for their own water and sewer is a win-win. It's good for conservation of that resource, and also good for the park owner's bottom line. There's very little pushback from anyone - City Hall, the media, even the residents - because no one can really argue the fact that all Americans should pay for their own utilities. I pay for my own utilities and you probably pay for your own utilities. That's the way it normally is. Mobile home parks, however, because the water is typically master metered back when these were built back in the '60s and the '70s, back when water wasn't that valuable, they're behind the times and that needs to be transferred over to make it fair.
Next, the demand for affordable housing is so strong. But to fill vacant lots requires effort and capital bringing the homes to fill the vacant lots. The demand for affordable housing must also therefore meet the availability of the homes and financing programs from actual SAFE Act licensed mortgage providers to create the ability for people to buy those homes. So there's plenty of demand out there. If you have vacant lots and you're willing to get out there and bring in homes, whether new or used, to sell or even rent, you'll have no trouble getting those filled.
Finally, lowering the cap rate is also a win-win, because a nicer property yields a lower cap rate and a higher price. And it also improves the resident's quality of life and the ability to increase rents. So the bottom line is all of the elements that you've seen in this case study when combined is a macro whole all went forward to making residents have a nicer place to live, a more sustainable place to live, a higher quality of life. And in the end, it was a win-win for everyone. This is Frank Rolfe with Mobile Home University. Hope you enjoyed this case study and we'll talk to you again soon.