Vol. 23 No. 11
LET’S TALK MOBILE HOMES . . .
I bought my first mobile home to get away from living with my in-laws. But my interest in them goes ever further back than that. As a young man in the Air Force, I noticed that the there seemed to be two kinds of young married people that I worked with. Those who were constantly trying to borrow money to tide them over between monthly paydays; and a few who always seemed to have a few extra dollars to spare. The difference was, they lived in “trailers”. That got my attention.
Back then the economics were simple. You could buy a mobile home for less money than you could pay to rent or buy a conventional house. I bought my first mobile home for $3,495. My wife’s willingness to live in a mobile home was a major factor in our having money to invest decades sooner than our peer group. By living in a mobile home, and paying off our debt with the money we saved, despite low wages, by the time we had our first child, we were completely free of personal debt.
Living free of payments created cash flow for investment. This enabled us to buy five water view building lots in Florida, build one house and buy six others over the 11 years that we continued to live in a mobile home. All the while others in our age group were still struggling to make ends meet with little to show for their effort other than rent receipts or a payment book. When we sold our mobile we got back $1,850. The $1,645 that ownership of it cost us was offset by the many times in the net worth we built in the investments we were able to make with our free cash flow while we lived in it.
There’s nothing particularly noteworthy about this little story except for the lessons it teaches: (1) People just starting out can get a lot further ahead on a pay-as-you-go approach than by living beyond their means on borrowed money. (2) Unless it is increasing in value or amortizing swiftly, a personal residence is more a financial liability than an asset. A home consumes earnings, robbing the owner of capital to make better investments. (3) A mobile home provides decent, inexpensive housing, consuming far less capital. (4) Living in a low-cost mobile home provided cash flow to buy investments that could start compounding earlier for more years.
Today, all of the numbers have changed. Young people make more money. They have pension plans or IRAs to provide future financial security. Mobile homes and park rents are much more expensive. On the other hand, houses and everything that goes into them are also a lot more expensive too, but the ratio of costs is still roughly comparable. A mobile home is certainly less expensive, but not exactly cheap. Where my $3,500 mobile home had to compete with a $10,000 house, today, a $35,000 mobile home competes against a $100,000 house.
In many areas, until just a few years ago, a person could establish a mobile home park on raw land zoned for agriculture by getting a permit, installing water, power, telephone, and sewerage utilities, and marking off lots. Many parks were built for under $1000 per lot. Not so any longer. The combination of EPA requirements, impact fees, water and sewer restrictions, meeting special zoning and density requirements, and the entry of R.E.I.T.s into the market has caused mobile home park prices to be closer to $15,000 per lot. When I first bought my mobile home, lot rent in a decent park cost about $25 per month. To express this another way, the cost of a lot was about 40 times the monthly rent. To maintain this ratio, a $15,000 lot should command $375 per month rent.
Of course there are exceptions, but lot rents now range from about $125 to $500 per month, depending upon the area, but average rents probably are closer to $175 than $375; making mobile home park prices almost 80 times monthly rents. A $15,000 mobile home park charging $175/mo lot rent with normal operating expenses would still realize about 8% annual investment return. That yield compares to returns on single family rental houses.
LAND/HOME PACKAGES OFFER HIGHER RETURNS . . .
I know a fellow who is able to buy inexpensive land on which to develop his own mobile home condominium communities. Each lot is separately platted and deeded. His costs to develop an up-scale mobile home subdivision are approximately $10,000 per lot. The retail market value of finished individual lots with curbing, gutters, paved streets, wiring for cable TV, with all connections to the lot is about $45,000. There is a ready market for these lots at that price. Being able to create something and sell it for more than four times the cost is a pretty good business, but it can get to be a lot better when you plug in new mobile homes.
Mobile home manufacturers are extremely flexible when someone contracts to buy a large number of units from them. They’ll change floor plans and exteriors, add amenities and appliances, and even furnishings, for the right price. When a new mobile home costing $40,000 is added to one of the above new lots, it can be sold and financed for $99,000. The little effort required to have a mobile home selected from among several designs by a buyer and installed on a lot earns the developer an additional $14,000 profit. There’s still more to this than meets the eye.
It’s a lot easier to get people to buy a mobile home lot when they can also buy a brand new home designed to meet their needs, and furnished with the appliances, carpets, and window coverings of their choice than it is to get them to buy the naked lot. Because more lenders are willing to lend at more reasonable terms on a new home placed upon permanent foundations, payments are comparable to buying a house. Why do people prefer to pay as much to buy mobile homes on lots as they would on houses? Amenities!
Unlike a new stick-built housing tract, a mobile home subdivision is really a tidy, controlled, sometimes gated, community of people of about the same income level living in homes that are all in comparable price range. Mobile home communities frequently include amenities such as swimming pools, on-site maintenance people, play areas for kids, jogging paths, community centers, cable TV, etc. And they are very secure; often with gates that require entry codes. Break-ins, muggings, molestation of children are virtually non-existent in up-scale mobile home communities. The community association can maintain standards for lawn maintenance, outside storage, signs, noise control, parking, pets, etc. that neighborhoods rarely can. When sited in these settings and maintained properly, mobile homes appreciate just like other kind of housing. Buyers can see what they are getting, and have a quality home built to rigorous specifications, delivered, set up, financed, and occupied days after making their purchase, whereas a stick-built home might take months, and then still not be built as advertised.
The mobile home market is growing and prices are rising. More people from newly weds to retirees are choosing to live in mobile homes. That opens up other venues to the developer or mobile home park owner. Typically, a 100 space mobile home park represents about 300 residents. They need food, water, fuel, insurance, appliances, etc. They might want to add room additions, storage sheds, awnings or carports to their homes. They might need to finance these. Kids and elderly occupants may need a day care center. They might want to take day-trips for shopping or recreation. All of can provided by the owners or managers at a profit.
When Association By-Laws or Park Regulations prohibit storage outside the home itself, it creates a market for mini-storage units that add to the bottom line. Typically, park-owned units rent for just under the costs of comparable commercial mini-storage units of the same size. I’ve seen mini-storage units erected in park areas which would otherwise be wasted to produce added income. In other instances, units have been placed around the perimeter of a community to serve as a barrier to keep uncontrolled visitors out. In addition to providing conveniently located storage space to residents. Additional revenue can be generated by setting aside fenced space for storage of boats and recreational vehicles. As a general rule, costs for open storage run between $20 and $35 per vehicle. The larger the park, the more profit centers you can create.
MOBILE HOMES CAN BE PROFITABLE WITHOUT OWNING A PARK.
Developing and managing mobile home communities can be extremely profitable, but based upon the return on investment, it’s hard to beat mobile homes themselves. Homes can be new or used, single or double-wide, bought and fixed up for resale, rented and written off, or held as inventory for sale, located in existing parks, private parcels, or on sale lots, financed privately or through commercial lenders. Let me give you some examples of a few ways mobile homes have been used to make extraordinary profits:
1. A mobile home in excellent condition located in a park was purchased from an estate for $4000. After superficial cleaning, it was rented to a long term tenant for $425 per month. The lot rent was $125 per month. The park manager agreed to manage the unit for $25 per month, collecting rents, paying himself, and remitting the balance to the owner. First years net revenue was $3000; yield was 75%.
2. The owner of a run down half vacant 18 space mobile home park no longer had the energy to keep it up. An entrepreneur offered to master-lease the entire park for 80% of the last three years’ average net operating income, if he could have an Option to buy the park at $4000 per space anytime within the next 5 years. The owner agreed because he’d lost interest in the park. Fixed up and filled up, the park’s value tripled. The entrepreneur cleared over $75,000 cash in 14 months.
3. A park owner provided a “hauler” truck to a dealer in return for his buying new units and delivering them to the parks at dealer cost. These units were rented for net cash flow that permitted loans to be completely amortized in 5 years. At the end of that time, the owner will have over 50 five-year-old free and clear units generating gross rents of $15,000 per month with very little effort.
4. One dealer placed new units inside a corporation and sold them on Lease/Purchase contracts. He wanted to convert the rental income to cash. He issued corporate notes secured by the corporate stock for tax-free cash, and used it to buy more.
5. Used mobile homes were taken in as trade-ins and sold on contracts at above-market prices. The contracts were discounted with full recourse to yield 25% to a Roth IRA. The IRA received the income tax free. The dealer got the cash.
6. Swampy land bordering a navigable river couldn’t be filled in for conventional home construction. This “worthless” land was bought for a few hundred dollars per acre by a buyer who built wooden platforms over the wetland areas, on which he sited mobile homes. In this unique “water top” mobile home community, his residents can fish off their wood decks and park their boats “at home”. He used mobiles to create value and to produce high cash flow on an unusable site.
7. A widow was left with 9 small land parcels ranging from 1 – 3 acres in a rural area where zoning permitted mobile homes. At a cost of approximately $4000 per lot, she installed wells, septic systems, electrical service, and cement patios. She rents the lots for $185 per month to owners of mobile homes. With virtually no turn-over or repairs, she receives $15,000 per year in very passive rental income.
8. An immigrant with limited English language skills and a little money, but an intense desire to succeed was able to buy an older dilapidated double-wide home on its own lot. He converted it into two duplex apartments. Next, he added on a third efficiency unit across the back. Triplex nets him $1100 per month to pay off debt.
9. Entrepreneur uses a MH lot he owns in an upscale community to showcase mobile homes displayed there. After sale, he relocates them to another park he owns. This way he sells new units and is gradually improving rentals in his own park.
10. One entrepreneur agrees to master lease every space in a rental park as it becomes vacant, paying by annual rents, but at a discount to market rents. He then puts used units in these spaces to rent to his own tenants at market rates.
MOBILE HOMES CAN BE “FIXED UP” TO MAKE MONEY!
If you want to become a full-time entrepreneur one way is to start finding homes to fix up and sell. Unfortunately, the conventional housing market is getting pretty crowded and competition is keen. But, for the most part, buying mobile homes to fix up is largely overlooked despite the high profit in fixing up mobile homes.
First of all, if you’ve got the space, homes can be brought to your vicinity for repair, then relocated to a sales lot or mobile home park for resale. Second, as a rule, you don’t have to get a permit to repair a mobile home. Third, they are a lot cheaper to buy and cheaper to fix up than a house. Fourth, there’s a legion of people who are looking for good, clean, affordable housing; a mobile home in a good park can provide this at reasonable cost to them and at a profit to the person fixing them up.
Fixing up mobile homes must start with finding a source of them. Check with lenders who finance them. Lenders don’t really want to take back mobile homes. They’re big and they have to be stored somewhere. They deteriorate rapidly when left unoccupied; particularly when there’s any kind of way water can get into them. Storage can be expensive. That creates an opportunity.
In one instance, I bought a lot for a client which included an abandoned mobile home that was financed through a local credit company. When I asked what the mortgage balance was, the manager said $3,850. When I asked what the cash pay-off was, he said $2200. When I mentioned that it needed “a lot of work”, the price dropped to $1800. When I explained that, because of a drainage ditch around the property, to remove the unit would require a crane. In the interim, $200 per month rents had already started to accrue, he sold it to me for $800. With $1000 of repairs and refurbishment, it sold for $3,995 cash without being moved, and the owner paid $150 per month lot rent.
One dealer acquired repossessed, abused homes from lenders and dealers for little more than the costs of moving them. He “re manufactured” them. Dry-wall was installed on walls and ceilings. Floors were repaired, carpeted or tiled. Appliances were repainted. New fronts were put on cabinets. Exteriors and skirting were repainted. Acquisition, transportation, repair, sales and financing cost $3,000 to $5000. Units were sold for cash between $12,500 and $19,500 delivered and set up. He had an inventory of individual mobile home lots that he’d optioned which he packaged and sold with his used mobiles to those who wanted a lot/home package.
You find “fixers” by cruising the el cheapo trailer parks looking for abandoned and dilapidated mobile homes. Be sure to call on all vacant units that appear to be owned by lenders. Leave notices on bulletin boards. Pay managers finders fees. Stay in touch with companies that lend money on mobile homes, and with investors who buy mobile home “paper”. Once you find a prospect, negotiate for it just as you would a house. If you plan to sell the unit, try to barter a higher price for a single payment note due on sale. Or try to Option the home and space offering your repairs as Option consideration; paying for it when you’ve found a buyer. Be careful when selling on installments; your collateral has wheels on it.
If you sell a free-standing home on a rental lot, you’re probably selling personal property that you can repossess without going to court, but be sure to also get an assignment of the lease as security. Otherwise you might wind up owning a mobile home that you’d have to move off the lot. If the mobile home is being sold together with a lot, it might be deemed to be real estate under State law. In such case, it might be wise to first place home and lot into a land trust, then to sell the beneficial share of the land trust on an installment contract. Properly drawn land trust shares are personal property, so no incidence of title to land or home will transfer until the final payment. You should then be able to repossess the unit without going to court. Buy Lonnie Scruggs’ “Deals on Wheels”(972)-496-6032
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