Posted by ray@lcorn on January 04, 2003 at 18:47:50:
Jeffrey,
I know the “vigilante maintenance” was a typo in your post, but I think it was also a freudian slip. Rental mobile homes are among the most maintenance intensive creatures on the face of the earth.
From the perspective of building or owning a project purely for cash flow, a Section 8 MHP will certainly fill the bill. However it completely negates the advantages that MHP’s enjoy as a property type.
Assume for a moment that you would spend the same money to develop or acquire a land lease park as you would a Section 8 park with rental homes. It’s not so much a question of “will it work?”, because it can be done. It’s a matter of “Why would you?” if there are better choices available.
One of the attributes of a land lease park (rental spaces as opposed to rental homes) is stability. Because the homes are so expensive to move, the park owner has a tenant base that remains stable year end and year out, and can raise rents on a regular basis. No other property type (except for a credit tenant NNN property) enjoys that type of stability in the rent roll.
Directly as a result of that stability, and the fact the tenants own their homes, tenant quality is generally higher in a land lease park than other residential income properties. Qualifying for the home purchase alone generally means the people have decent credit and a habit of paying their bills.
Next on the list is maintenance. In a land lease park, not much goes wrong with dirt. Assuming the infrastructure (roads, water and sewer) is sound, maintenance in a land lease park is predictable and minimal. Tenants care for their own spaces, and will even add plants and flowers to their yards, thereby raising the curb appeal of YOUR asset. In a properly managed park there is a sense of community that develops between residents because of the stability, and they care about making the park a good place to live. Maintenance costs in a park average about 10% of gross income. Add a significant number of rental homes and that percentage will triple. Notice I said “will”, not “might.” I’ve been there, done that. Total operating expenses for a land lease park average about 35%. One with a high number of rental homes will average 50-60% operating costs. Staffing is almost imperative just to keep up with the maintenance, turnover and collection demands.
Injecting rental homes into such a setting destroys that stability and community sense. You’re moving a highly transient element into proximity with people that are in a mobile home to get away from exactly those people. Over time the grade of tenant on the spaces will descend to that of the rental homes because the god tenants either won’t come or they’ll leave as soon as possible. The cost of moving a home is expensive, but not out of reach.
So from the start you’re proposing a hybrid property that will not enjoy the same operating efficiency, a higher amount and more intensive management requirement, and a tenant base that is decidely sub-par, even in spite of government guarantees. Because of the increased effort and risk in the operation, the valuation cap rate will be much higher (hence a lower value) as a land lease park with the same investment. That will affect the financing, the resale price, and the relative risk the owner carries. Prices on such operations carry average valuation cap rates in the 14-18% range, well above even the worst apartment building. And remember, you’re spending the same money it takes to build a park that will sell at a 9-11% cap, as is typical in the market right now for land lease parks.
The only benefit to rental homes is the immediate cash flow while the homes are relatively new. Once the first few years of tenant abuse start to take their toll, even that will dissapate. Unfortunately, rebuilding and replacing used mobile homes is another element of higher effort and risk.
At the end of the day, what’s been created is the worst of all worlds. You’ve got a property populated with the most depreciable and maintenance intensive of assets, the worst elements of the tenant stream creating a highly transient rent roll, and the most management intensive operation imagineable.
If you’re going to spend the money to build an investment, why would you make choices that are guaranteed to minimize the value of the investment?
I will tell you that there is another side to this argument, and there are a lot of parks out there that fill with rental homes. The short term boost to cash flows blinds many owners to what is being created in the long run. And there are exceptions… those hands-on owners that police the operation daily, screen the tenants diligently, and stay on top of the maintenance (a true vigilante manager!). But even they come back to reality when they get tired of running an adult day care center, and go looking for someone else that only sees the cash flow.
ray