Mobile Home Parks can be terrific investment opportunities for individual commercial investors, especially now with the increased demand for manufactured homes due to the affordable housing crisis. However, too many commercial investors are missing opportunities as a result of falling into the 3 "No-Nos" of mobile home park investing:
The Right Mindset for Commercial Real Estate
Tackling problems in commercial real estate can be scary, but don't pass up these opportunities. Instead, change your mindset. You need to have the mindset that it's okay to own mobile home parks with problems to solve. There's a quote from Machiavelli that says,
"Make no small plans, for they have no power to stir the soul.”
What does he mean? Well, in commercial real estate it means that when you have a big issue that you can potentially solve, you can do well. Big plans have big solutions and you can impact a lot of people if you are successful. In commercial real estate investing, your mindset is critical. Some of you will pass on these types of deals because of your mindset. I have a video called Do You Have the Right Mindset to Own Commercial Real Estate? . I encourage you to watch that teaching so that you will have the right mindset to be successful in this business.
No-No #1: Rejecting Deals with Park-Owned Homes
Problem: The landlord owns the homes and the park and is renting out the lot and the home to the tenant. Many lenders and investors don't like this set up. In fact, some lenders will not do the loan if more than 20% of the homes are park owned. The reason for their reluctances is mobile homes dilapidate too quickly. They aren’t going to last seventy-five to a hundred years like an apartment building, so it’s understandable that the lender won’t give you a 30-year loan.
Solution: If the no-no is not to reject these deals, what do you do? You need to have a strategy to make sure your ownership of these homes is short-term and not long-term.
Strategy: Sell Park Owned Homes to the Tenant
There are 2 strategies you can use to accomplish this:
1. You become the lender and arrange with the tenant to pay you a monthly mortgage payment and then they take over the home and all the responsibilities of maintaining the home. Now you get the mortgage note and the lot rent which is ideal.
2. The tenant gets a loan from a lender. Although many tenants cannot afford a loan from a bank, there are nationwide mobile home park lenders that give loans to tenants with low incomes. Two major lenders are 21st Century and Manufactured Nationwide. These companies provide three loan options: 85% LTV requiring 15% down, or 96.5% LTV requiring a 3.5% down payment, or 100% LTV which is 100% financed with no down payment.
No-No #2: Rejecting Deals with Lots of Vacancies
Problem: The average investor will shy away from a deal if there is a very low occupancy. Let's say you find a 200-pad mobile home park in a decent area, but a third of the pads are empty. That can be scary, but don’t pass these deals up.
Solution: Fill the vacancies yourself. Don't wait for the tenant to come to you with his own home to rent a plot. It's not going to happen. You need to fill the lots with homes yourself and then have them purchase it from you. Now you have the lot rented and your tenant is in a home that they financed. So, you're just renting out the lot.
Strategy: Partner with a Mobile Home Manufacturer
To accomplish this, you can partner with a mobile home manufacturer. These are the two big manufacturers, Titan and Clayton Homes. Here are the steps to this strategy:
- Get a line of credit from one of these two companies.
- Order the homes.
- The homes get shipped directly to the mobile home park.
- Find a buyer
- You don’t pay the manufacturer until you sell it to the tenant. The tenant gets financing which you use to pay off the manufacturing company.
No-No #3: Not Having an Exit Strategy
Possible Problems: The mobile park is not up to bank standards. Maybe there's something physically wrong with the property, or there's too many park-owned homes. Perhaps there are some financial issues with such as the income and expenses don't support the loan you're asking for. Or lastly, it could be that the owner has legal problems like unpaid liens and the lender won’t give you a loan until those issues are dealt with.
Solution: The solution is to do a seller financing. At Commercial Property Advisors, we're experts at seller-financed deals. It's one of our favorite techniques purchasing properties in these situations. So, we take over the park with five-year seller financing, seller carry first or a master lease agreement. Again, we prefer seller financing mainly because of 3 things:
- No banks involved
- Your credit isn’t really a factor
- You have five years to address the situation
An exit strategy is a clear and concise strategy to get your money out of the deal. Your exit strategy will be to fix these possible problems and then get into a long-term loan. Fannie Mae and Freddie Mac have specific mobile home park loan programs that allow you to purchase a property like this using seller financing, and then to refinance it into their long-term 30-year loan. We love these loans for several reasons:
- They can be up to 80% LTV, meaning that they require 20% down.
- You need a 660 or higher credit score, so you don't need perfect credit.
- You can do a cash-out refinance
- There are no tax returns involved
Summary of the Exit Strategy: Purchase a mobile home property and fix it up to bank standards; make it worth more by increasing the rents, increasing the NOI and value, and upon execution of a long term loan, do a cash-out refinance and pull out your down payment and your renovation costs.