Re: Developing a Section 8 MHP - Posted by ray@lcorn
Posted by ray@lcorn on December 29, 2002 at 13:30:05:
Ryan,
I will echo Steve’s comment and Ernest Tew’s advice against owning a park full of MH rentals. I also agree with the cost estimate being way off, and would add that the operating expenses of such a park will be about 50% of gross, before debt service. In the past I have referred to parks with all rental homes as “horizontal apartment buildings.” Which brings me to the obvious question…
Why not build apartments? From the market conditions you describe I would be looking for ways to develop a large apartment project. There are thousands of investors that are very successful with Section 8 apartments. As a property type they are much better suited for the requirements of a subsidized rental program than rental mobile homes for a variety of reasons, not the least of which is financing. In a market with that much pent-up demand it seems it would be a slam dunk.
In case you’re still not convinced, here’s an excerpt on the subject from my book, “Dealmaker’s Guide to Mobile Home Parks”.
Rental Homes
As we discussed earlier, one of the differentiating factors of a mobile home park as an investment is the stability of its tenants due to the expense involved in moving a mobile home. Rental homes negate this advantage. Many park owners look at rental homes as being a boost to cash flow, and on the surface that would appear to be true. The homes can often be bought cheaply, or in many cases, an owner will accept title to a home in payment for past due rents. Collecting a deposit and rent double or triple the amount of space rent seems to be found money, with no harm done to either tenant or owner.
But this is not the case. The home is usually rented to a succession of tenants who have no investment in the community, and no pride of ownership in their homes. As a result, the maintenance on the home remains the responsibility of the owner, and is often neglected. Many rental tenants will not even tell a landlord of minor problems such as leaking toilets or stained carpets for fear of reprisal or loss of deposit. If not totally ignored, the maintenance is done sporadically, and costs run abnormally high due to the transient nature of the tenant base and the relatively low amount of damage that can be sustained by a mobile home without incurring substantial expense to correct. Often the yard and space around the home is ill kept as well. I have seen parks where it was hard to tell which cars ran and which were yard art due to the proliferation of junk around rental homes.
The effect on the community as a whole is just as pronounced. Rather than fostering an atmosphere of neighborhood and shared responsibility for upkeep with the residents, the rental home tenants tend to come and go without developing friendships or ties to the community. Residents who own their homes will resent the transients, and have the impression (rightly so) that the owner of the park doesn?t care about the quality of life for the residents. They will cease to be community minded, and may even start making arrangements to leave. Prospective new home owners exploring parks for location of a newly purchased home will most likely not choose to locate in a community that looks and feels unkempt. The park owner will then begin to meet resistance for increases in space rent. I have very often found that parks with a high percentage of rental homes lag the market in space rent by as much as 25%. The reason is simple. None but the lowest quality tenants will choose to live in substandard conditions if better are available at a comparable price.
Finally, because of the depreciating nature of a rental mobile home, the cash flow from that home must be valued differently than that of the income from space rentals. Allowance must be made for increased maintenance costs, collection losses, and higher vacancies in both spaces and homes. Since the home itself will rarely outlast the spaces, it must be capitalized at a different rate. I will generally not count the rental income from a home in the gross income for the park. I value the homes separately, based on age, condition and size. In the case of badly worn or aged homes, I will actually deduct the cost of moving them out of the park from the final value of the park. In short, there is no scenario in which a rental mobile home is an asset to a mobile home park.
Also be aware that the potential exists for a park to have a rental home problem without the park owning the rental homes. Many times I have seen dozens of homes owned by other investors as rental housing, but shown on the rent roll as a space rental only. The effect on the park is the same regardless of who owns the home. I don?t begrudge investors that make it their business to rent mobile homes. I just don?t allow it in my park. When examining the rent roll, you should be on the lookout for the listing of the same name on multiple spaces. Or the tip-off may be a corporate tenant, such as XYZ, Inc. may be listed as the tenant of space #101. That same corporate name may be listed on the rent roll for multiple lots. If so, then you have probably found the owner of a rental home. Question any tenant listing that does not appear to be normal. Ask the question outright of the owner, ?How many of the homes in this park do not belong to the occupant?? Again, the only way to totally insure that you have the facts regarding ownership is to require tenant estoppel letters as a condition to closing.
end of excerpt***
If you’re interested in the book, the direct url is http://www.creonline.com/catalog/b-137.html
I hope we’ve talked you out of this plan. If not, best of luck.
ray