The mobile home park industry is an interesting sector, as markets that don’t work well with other niches seem to do just fine with the affordable housing product. In this case study we review a mobile home park in Wisconsin that has little exciting going on, other than the ability to make huge profits. Many investors have done well with fly-over markets such as Wisconsin that are off the radar screen and get zero attention in the media. In this video we review how the deal worked, what the key profit drivers were, and give you an estimate of how profit is generated with mobile home park deals.
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Making Over $1 Million With A Boring Park In Wisconsin - Transcript
There's no better way to bring science to the business of mobile home park investing, than following case studies of parks purchased and sold to see whether those worked or did not work and how they worked, and why they worked. And this is one of those case studies. This is a mobile home park in Wisconsin. All these numbers are approximate. The whole point of the numbers is not the actual to the dollar amount. What's important here is the actual reasons the profit drivers that made those deals work.
Stats on the market, Metro population about 165,883 people. That's right in line with our typical target of a metro of 100,000 or more. Why 100,000 or more? Well, because we found over time that a city metro of 100,000 plus typically performs fairly well for our industry. We don't have to be in giant cities of a million in more, a metro of 100,000 and up typically works just fine. Single family home price of $159,273, significantly above our typical target of $100,000 and up. Three bedroom apartment rent of $1,096 per month, that's about $100 a month more than what we typically target. And the vacant housing rate an impressive 7.9% versus the US average of 12.2%. So what do we know just from the stats? We know the market needs really pretty much all the criteria that we have found over time works for mobile home parks. More than 100,000 population, more than $100,000 single family home price more than $1000 apartment rent. And most importantly, in the case of this market, because we had a lot of lots to fill a vacant house here rate of 7.9, which means there's huge demand for housing.
Here are the stats at purchase. This park has 61 lots with 48 occupied back when we bought it. They gave you an occupancy of 78%. That's not what's considered stabilized by banking standards, which is typically 80%, but mighty darn close. In fact, close enough, no bank would turn this park down for being non stabilized. Stats at purchase, we paid $210 per month in lot rent at the time of purchase. And that lot rent includes water and sewer. So the park does not bill back water sewer, the mom and pop owner was paying the water sewer, collecting in $210 for every occupied lot. Purchase price for the property about $800,000. So it's not one of those million dollar plus variety properties. But as you'll see, in the end, it grew to be that. We like be able to buy parks that often start out under the radar screen of about $800,000, subscription $1 million. And we love the ones where you can buy it at that price point and then make it worth far more. The big cut off of course is you can't get into the level of loans where you can utilize loan brokers until the loan is about $750,000 or greater. So when it deals under a million, the financing options are reduced. All you have is seller financing and small town bank.
However, what's important is not what it is when you buy it, it's what it is when you sell it. When we sold the park, we’d increased the occupancy to 59 occupied out of 61. So we were then almost totally full 97% occupancy. So we basically came in and virtually filled up the park. We also raised the rent significantly to $320 per month, which was still below market to be honest with you. But it was a substantial hike from when we purchased it. There was still however room left to push the rents for the next buyer. We did not in this case, take the option to move water sewer as a cost back to the residents. Why was that? Well, they were conserving water and not using that much. And we didn't want to have to go ahead and install the meters, and read them and build them, and take all those steps. We decided instead we would just basically get that money back through rent increases.
Sales price, and we sold it a little less than $2 million, about $1.9 million. So about $1.1 million different between the price we paid for it and the price we sold it for. Now the big question, though is what created that that gain in value? Well, the first thing was raising the rents from $210 a month to $320 per month. That $110 increase, which was done over a number of years, increased the value of the property based on normal cap rates by about $800,000. So really the bulk of all of our value creation on this case study was done simply by raising the rent. But we also filled 11 vacant lots. So what did that do to our profitability? Well that allowed us to gain about $300,000 in value. So as you can see, basically the two ways we made value with this property one was raising rents that was $800,000, and then one was filling vacant lots was picked up about $300,000.
Now what are the lessons learned from this case study? Number one, raising rents is the best method to increase value. That's always been the case and will always be the case. When you have so many lots in a typical mobile home park, raising the rents even nominal amounts has a huge impact on the bottom line and a huge impact on your valuation. Also, when you raise rent, there's no upfront costs unlike putting in water meters. There's no additional capital required to enact it. 100% of your rent increase goes to the bottom line. So it basically all becomes profitability. There's no restrictions on raising rents in any of the red states. But there are some in some of the blue states, known as rent control. Not many. Rent control dates back since World War One so it's been over 100 years since they came up with the idea. It doesn't work well at all. As a result, only a small handful of states have adopted it. It's been discussed by other states over the years, but no one's ever taken the bait, mainly because see how terrible it's performed in the states that have enacted rent control.
Finally, mobile home park lot rents are insanely, incredibly low. They make no sense. They made no sense when I bought my first part Glenhaven. And they still make no sense today. In many markets, you're still looking at a difference between the apartment rent and the mobile home park rent of as much as $1,000 a month, which is crazy. When you take into account the fact people actually prefer our product. Why? No neighbors knocking on walls and ceilings, ability to park by your front door. Most importantly, right now with a pandemic, you have your own yard, you have outdoor space, and then there's also a strong sense of community.
Second lesson learned, filling vacant lots is highly profitable. The demand right now for mobile homes and mobile home parks is extremely high. In fact we're seeing some of the highest demand we've ever seen much of it due to COVID. Because people have now learned they really, really like our product much more than apartments. There's also a lot of financing programs out there to help make it possible to fill your vacant lots with little out of pocket. The best known of those the cash program through 21st Mortgage. But a lot of manufacturers also now offer various financing programs. Biggest challenge in filling those vacant lots is finding homes to bring in. Right now because of COVID you've got some upcharges on the homes and slower delivery times. As a result, many park owners have turned to used homes and they've depleted the inventory of used homes. So in the park where you're looking at filling lots one key question is you make sure you put in your budget, sufficient time to find the homes to bring in. And of course, filling lots is a win-win for everyone because America has a desperate need for affordable housing. And you're helping making that housing possible.
Finally, the final lesson learned is that flyover markets are in fact extremely profitable for our industry. Now, if we were in a different industry, if we were McDonald's or Domino's Pizza, we would need different kinds of numbers than these. We would need huge amounts of population, we'd be all kinds of worried about where that population was in relation to our Domino's Pizza franchise. But in this case, we find that many of the flyover markets are among the most profitable in the US. Why is that? Because mobile home parks work well in the criteria of 100,000 Metro and $100,000 home price. And these are all things you find throughout most of the Midwest and the Great Plains and all other regions besides the coasts. People often look down on flyover market saying well, but you know, they're not sexy like they are in California and New York. But we would rather have sexy profitability than sexy locations. Because at the end of the day, it's really just all about how much money you make. We're the income property, business and income is key. Income is revenue, less expenses. It also is a function of the price that we pay. And we find those dynamics to be often the most attractive in those flyover states. This is Frank Rolfe with MHU.com. Thought you would enjoy this case study. Talk to you again soon.