March 1994
Vol 17 No 7
Every year I like to visit factories, parks and dealerships to update myself on the state of the art in manufactured housing. I advise you to do it to. You're going to be surprised at what you find, because many changes are taking place that could affect your future. In 1954 I bought my first house trailer at the factory and for most of the next 14 years I lived in trailers which I hauled over 28,000 miles coast to coast. My first was 34 feet long and 8 feet wide with a collapsible 8 X 8 screened porch on one end. I finished up my trailer career in 1968 with a model that was 70 feet long and 14 feet wide with an enclosed room along side for which I paid $88 per month including lot rent.
I paid $3495 for my first trailer with $500 down and a 4% loan financed for 5 years. The interest rate was up to 5% for my second trailer over the same period. My monthly lot rents ranged from about $12 at the low end to $25 for a super deluxe park in San Bernardino, California. I could have bought my last mobile home in Florida for $3500 used, but would have had to pay $30 for the trailer space. My oh my, how things have changed. New units now cost between $10,000 and $70,000 and space rents range between about $50 and $1000 with profit margins to match.
I recently spent a night in a brand new, state of the art, manufactured home in North Carolina. It was a 44' X 28' two bedroom, two bath, split floor plan model and could have included an optional fireplace if desired. It had exterior vinyl siding, interior sheetrock walls and a 10' popcorned cathedral ceiling. It was replete with luxury features such as a walk in dressing room, sliding deck doors, Euro-style kitchen, central heat and air, R30 insulation, custom drapes and upgraded carpeting. It provided a little over 1200 square feet of living area at a cost of about $38,000 ready to move in. It took a week to set up, including 5 separate levels of inspection by the local building and zoning department. In some states, new mobile home installations require HUD, FHA, State and Local inspections in order before move in.
Although it cost 10 times as much as my trailer of long ago, there was no comparison as to livability and appeal. This was neither the lowest nor highest priced mobile home that could have been bought. It represents the full retail, no-trade-in price that's going to be major competition for all low priced rentals in the future, whether house, condo, townhouse or multi-family. I don't care where you live or invest, there simply are no decent rental properties in decent neighborhoods that can compare on a price and rental appeal basis. Bear in mind, that, set on its own lot, with its gable roof, there is little to indicate it's not a conventional house.
LET'S TALK MANUFACTURED HOUSE RENTALS . . .
I currently own a small water front park for which my tenants pay $125 per month rent. On rental units that I own, they pay an average $365 per month including lot rent. They pay their own utilities. By buying used units – mainly from the estates of their former occupants – prices have varied between $800 and $4000. Taking an average cost of $2400 for a unit containing about 1000 square feet of space, whether single or double wide, we're able to rent these at $240 per month over and above the lot rent itself. Look at the yield:
$240 per month for 12 months give us $2,880 in gross additional annual rents. Operating costs of the park are all allocable to lot rents, so marginal income from unit rentals goes directly to bottom line profits. We've been buying units that are already in the park, so have avoided set up and transportation costs, but let's plug in another $1000 for transport and set up. That would give us an average cost of $3400 per used unit on which an average of $2,880 gross income is being earned each year.
Even though we've experienced very little maintenance and rare vacancies, we'll knock off 10% for costs allocable to the unit rentals for vacancies and repairs. This will leave us with $2,592 in net rental income per unit or 76+% return on the investment. If I've got your attention, let's take a closer look.
PARKING SPACE IS THE KEY TO MOBILE HOME PROFITS . .
In areas in which special mobile home zoning is required, mobile home spaces can be too expensive to own or to rent on an individual basis. We've seen finished lots in mobile home subdivisions that sell for from $25,000 to $40,000. They wouldn't make sense for a used mobile home rental program. If the same quality lot were to be rented in an existing park, the rental would be about $400. That would push the rental value of a mobile home out of the market. There's got to be a better way.
Of course, where zoning isn't a big problem, a lot of money can be made by buying or optioning small tracts of land with good road access just outside of town. After getting any necessary zoning for mobile homes plus permits for electric poles, wells and septic systems, spaces can be laid out for rentals. Assume that 4 quarter acre lots could be joined at the corners by one large well and septic tank at a total cost including paved parking pad and patio of about $24,000 or $6,000 per lot. Each should rent from $150 to $200, depending upon the area.
Let's deduct $300 per year in expenses from the low end $1800 per year gross scheduled rent. With very little effort on the part of the owner, the net operating yield on a $6000 investment would still be 25%. Bear in mind that only the land would be rented. So long as the well and septic worked, there would be no real maintenance,repair or collection problems. People with mobile homes find it very difficult to sneak out in the middle of the night without paying rent.
One of our readers has found another extremely lucrative way to solve the mobile home space problem. He looks for run down, shabby, obsolete older parks in good locations. We've all seen these. Dirt streets, no parking pads, no amenities, full of derelict trailers and vehicles. They're a real turn-off for the most part. Few investors want them. So the prices are usually a lot lower. Added to these are small, vacant foreclosed parks held by lenders who don't want them.
He buys the park with owner financing, then begins removing older units and renovating the most visible spaces near the street and entrance. Gates, landscaping, privacy fencing help a lot. He also places renovated newer units on these lots and rents them out under a 'rent to own' program to qualified occupants who can pay higher rents. Little by little, he converts the ugly duckling trailer camp filled with transients into an attractive mobile home park full of owner occupants. His rents not only increase, but the quality of his income stream also improves, dramatically increasing the value of the park property. Let's look at the finances.
Suppose he were able to buy a 25 space trailer park on city water and sewer renting for $75 per lot per month for $4000 per lot – with the owner carrying the financing at 8% for 15 years after a 10% down payment. With a full purchase price of $100,000 and a $10,000 down payment, the payments would be $1004 per month. We'll presume a cost of $2000 per lot the first year to renovate and pay taxes for each lot renovated. Under a 5 year plan, 5 lots per year would be renovated.
With 5 lots vacated for renovation, the first year he'll gross $1500 month for 20 lot rentals, or $18,000. He'll spend $10,000 for the down payment and $12,048 in installment payments plus $10,000 for doing the renovation on the first 5 lots plus $10,000 in estimated taxes and insurance at $500 per rented lot. His total net first year's investment would be in the area of $24,000. We'll assume that the lot rentals from the renovated lots would pay for any additional operating costs.
The next year, he'll have the same general expense picture except that he won't have to pay the $10,000 down payment and he'll pick up about $50 per month additional rent from the 5 renovated spaces. That would come to $250 per month, or $3000 per year. Thus, his second year cash costs would be reduced to $11,000.
The third year will be much like the second, except that he'll pick up another $3000 in additional rental income, reducing his net costs to $8,000. The fourth year these will go to $5,000 and the fifth year to $2,000. The sixth year, with all renovation and upgrading completed, he might project an additional $25 from all lot rents each month. That's $175 he'd be getting in gross rents for 25 spaces each month which would total $52,500.
Out of this, he'd have to deduct $12,048 in mortgage payments, maybe $15,000 in taxes, insurance etc., leaving him with a net cash flow of $15,500 per year on a total cash investment of $100,000. A 15.5% cash on cash return without regard to mortgage amortization or income taxes. But,suppose we didn't have the cash? What alternatives might we structure in to make things work better in terms of cash invested and cash flow? Let's look at putting in a rent to own mobile home program.
RENT THE LOTS, SELL THE HOMES . . .
Using the same figures as above for the first year, suppose we further broke down our cash flow to reflect that every 2 months we were able to complete the renovation on a lot, bring in a mobile home, and rent the entire package on a rent-to-own program at $500 per month. Let's plug in some further cost variables.
To up-grade the park, you'll want to use nice looking units. These could either be new units or renovated units. For about $14,000 you can buy new 2/2 single wide mobile homes of between 800 and 1000 square feet or so depending upon the quality. You can get financing for these at about 7% to 10% over terms from 15 to 20 years as an investor depending upon the area of the country and your own financial strength. Taking as a mid-point 8.5% with 20% down, each unit would cost you about $2800 down payment with monthly payments of about $150 with insurance.
The good news is that there would be few expenses once the units had been delivered and set up. Most malfunctions and complaints would be covered by manufacturers warranties. Furthermore, new units would have a high market appeal to the occupants, generating faster rent up. Each unit rented would generate about $300 in rents over the raw lot rent. From this, you'd have to deduct $150 in payments, leaving $150 per month. That's $1,800 per year net. It would take 19 months to get your down payment back out of net rents on each unit.
USED UNITS = MORE WORK, TROUBLE AND CASH FLOW.
As mentioned previously, we've been able to buy single wide units for less than the down payment on a new one. You can start at a very low level if you want to test the waters. A few weeks ago I was offered two rental spaces a short distance from my locale on which there were two mobile homes, a single and a double wide, badly in need of repair. I could have bought everything lock, stock and barrel for $13,000 cash.
It would have taken about $7000 to renovate the units and spaces. Afterwards, the cash flow yield would have been in the neighborhood of 45% net. I didn't make the deal because I didn't like the area in which they were located. I'd rather buy larger parcels which I could fill with distressed priced reposessed units. Of course, these would have to be moved and renovated at my expense to make them attractive to the market.
One fellow that I spoke to makes a living out of repo units that he buys off of dealers, banks and finance companies at deep discount. He only buys units that are under 10 years old. Typically, he'll repaint the exterior, reseal the roof, refinish the interior with drywall and wall paper, put in new fixtures, windows, hot water tanks; repaint the appliances and put in new carpeting/tile as needed. His costs run about $2500 per unit on the average for units he buys for around $3000. He resells them for $15,900 and carries 10 year paper on them at 12%. Not bad.
It's not easy to do. You've got to find the units, negotiate the right price and terms, transport them to your site, round up skilled workmen, supervise the renovations to get them done correctly, and be prepared for more 'call backs' on repairs as things wear out or fail. But it can be quite rewarding work.
Suppose you applied his methods to fill your park. By paying out $5500 as he did, it would take about 2 years to recover your costs. By the end of those two years, you'd have a free and clear unit every two months. It would be adding $350 per unit every other month to your cash flow in contrast to the new units above which would only be adding $150 per month. You can see that, your first year costs would INCREASE as you added units until you'd recovered enough rents to offset them, but that your later yields would be scary.
Let's fast forward to the start of the 6th year when all unit and renovation costs would have been paid and you'd be ready to start harvesting the returns. Twenty five new units would each be generating $150 in net monthly cash flow plus $175 in lot rents, or $97,500 gross out of which we'd be paying about $15,000 in costs and $12,048 in payments on the park. You'd be netting over $70,000 on our $100,000 cash investment after recovering all cash costs of the new units. That's 70%. The used units would be free and clear the 6th year. You'd be getting $350 per month per unit plus $175 per lot, or $157,500 annually. Out of this, you'd pay the same $27,048 as above, leaving over $130,000 per year cash return on the $100,000 you'd invested. That's real money!
WHEN ALL ELSE FAILS, WHY NOT SYNDICATE?
It's tough to make money when you've none to invest. Where many people fail, is in trying to raise money on dreams rather than on reality. Suppose you had such a park as has been described in the foregoing passages with the same potential for high yields. If you laid out a business plan and were willing to make the down payment on the park out of your own money, you'd be in a solid position to offer investors equity interests in the park and/or units in return for their financial support during the first 5 years.
With the yields we've been looking at, there's plenty of room to share 50/50. If every dime of the costs of units were paid by investors, they'd still command outstanding returns on their invested dollars. And once they've tasted the fantastic yields their dollars can earn, you'll have more trouble turning them down than you ever had rounding them up.
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