Passive investment in mobile home parks involves a group of investors seeking exposure to the performance of MHPs and an experienced sponsor who understands them. The sponsor finds the park, underwrites the deal, performs the due diligence, and raises capital from the investors to acquire the park from its current owner.
Once the park is acquired, the sponsor is responsible for repositioning the park using a strategy designed to increase its performance and value. This includes making physical improvements, optimizing income and expenses, and properly managing the park —all to provide the best experience to residents and delivering predictable, recession-resistant cash flow to investors.
When 52TEN considers a mobile home park investment, our focus is to mitigate risk and maximize the probability of success. To do so, we analyze four critical characteristics of each park: its location, size, current and future operations, and condition.
Let’s take a closer look at each item to understand how they factor into an investment decision.
While the old real estate adage of “location, location, location” is also true for mobile home parks, it takes some reverse engineering to determine which locations make the most sense for an investment.
To start, when evaluating a market, it’s vital to understand population growth and job growth. Other factors such as crime rates, median income, and diversity of industry are also evaluated, but those first two statistics are the most important. If a city has declining population and employment trends, that signals less demand for housing — an essential component for success in a mobile home park investment.
Once we identify a market with strong population growth and job growth, we dig deeper into the other factors and start zooming in on neighborhoods. Almost every city has areas with higher crime and more blight. Even if we completely renovate a mobile home park in a tough neighborhood, it will always be a challenge to attract quality residents from outside the area. Given this reality, we prefer to focus on safer neighborhoods that will appeal to the kind of people who will appreciate renovations, take pride in their community, and become long-term residents.
At 52TEN, we target metropolitan areas with over 50,000 people, where a growing population constantly creates demand for housing. Larger cities tend to attract more diverse industries and more stable employers. They also provide more options when sourcing contractors, vendors, services, and other professionals to work at a park. These intrinsics are essential for attracting quality residents, selling homes, and optimizing the park’s day-to-day operations, all of which impact the underlying performance of the investment.
Park size refers to the number of mobile home spaces that exist in the park. The more spaces a park has, the more likely it can support the budget for an appropriate on-site team. The on-site team at a park typically consists of a manager, a maintenance person, and other part-time labor to manage the daily park operations. Generally, a minimum of 50 spaces is needed to accommodate a quality on-site team and still make sense as an investment.
Larger parks also gain advantages with more attractive debt options and more significant economies of scale. This allows the park to afford better contract services, more effective advertising and marketing, appropriate management software, and other higher quality items that impact the park’s long-term performance. In the same vein, more spaces lead to volume discounts for repairs and maintenance. For example, if we install lamp posts at a 200-space park, the cost per unit will be lower than installing the same lamp posts in a 50-space park.
Underwriting Current and Future Operations
Given all the potential variables involved, underwriting a mobile home park investment requires a deep understanding of how parks should perform. Some parks have city services, while others have private water and septic systems. Some have park-owned homes that will need to be renovated and sold. Some have vacant spaces to be filled, and others have temporary RVs that are using spaces. No two parks are the same, so experience with a variety of parks is essential to determine a property’s value and potential.
When our team underwrites a park, we complete two separate analyses: one that uncovers the truth about how the park is performing today and one that projects how the park should perform in the future.
In the first analysis, it is critical not to overlook common items that are misrepresented or missing, such as manager home income, vacancy factor, payroll burden, capital expense reserves, transaction privilege tax on mobile homes, on-site staff utilities, and the property tax reset that occurs after the sale.
Sometimes, the previous owner may overstate income, understate expenses, or attempt to cover something up. Typical examples are excluding expenses for duties they perform themselves, including temporary rental income that will disappear, or claiming ancillary income that occurs only as an occasional event.
Proper underwriting to clarify the actual income and expenses will allow both parties to arrive at a price that is supported by the park’s performance today. The price will ultimately impact the success of the investment, so this is a critical step.
The second analysis is commonly referred to as a “pro forma.” Creating a pro forma begins with a rent survey to confirm market rental rates, followed by a market demand study. With those results in hand, we can project where the park’s expenses and income should be as we forecast year-over-year execution of the long-term strategy for the park.
Inexperienced sponsors may underestimate expenses and overestimate income to justify a higher price. When that occurs, an ideal outcome only happens if everything goes perfectly.
The truth is that no mobile home park ever performs perfectly, even if the previous owner says it has. All parks will provide surprises along the way, and the pro forma should be conservative to accommodate those surprises.
Conservative underwriting will increase the likelihood of outperforming projections. That’s always a welcome outcome.
Conducting proper physical due diligence on a park’s condition includes evaluating over 100 items, some of which require extensive expertise in mobile home parks to evaluate correctly. Our team divides due diligence into four areas: financials, initial walkthrough, compliance, and paid services.
We start with items that require our time but not money. First, we look at the financials to determine how the park is currently performing. Then we do an initial walkthrough to gain a deeper understanding of all the park’s physical components. If everything still seems like a good fit, we spend time on compliance to ensure there are no deal-killers before we start spending money on inspections, surveys, contractor bids, etc.
Reviewing financials can be tricky, particularly when the current owner has not kept up the books correctly or is attempting to hide something. The goal here is to underwrite how the park should be performing and see if our analysis lines up with what the seller is demonstrating. From experience, this is where we can begin to see operational inefficiencies, cost overruns, and areas where income can be improved.
During the walkthrough, we confirm the number and size of spaces, the general condition of the utilities at each space, the status of the home on each space (park-owned, tenant-owned, vacant, RV, etc.), and the condition of the rest of the park and amenities (roads, clubhouse, office, pool, etc.).
After that, we like to sit down with the current on-site staff to understand how they are running the park and gain clarity on any challenges that exist (collecting rent, problem tenants, home sales, marketing efforts, recurring maintenance items, and problems with park infrastructure, etc.). This day spent at the park allows us to architect the right long-term strategy, structure the deal correctly, and solve for any challenges.
Parks must comply with city, county, and state regulations to operate. During this step, we confirm that everything is current with zoning, building safety, sales tax, licensing, and insurance. We also like to check with the police, the fire department, and the sex offender registry to see if there are any potential problems that might affect the park. Our goal is to understand what challenges may be present and avoid surprises that could impact future operations.
In addition to surveys, we conduct electrical, plumbing, and septic/sewer inspections, as well as anything else required to address the underground infrastructure. Pool, home, asphalt, and other inspections may also be completed, depending on the park. It is vital that inspections are performed by contractors who are familiar with mobile home parks. Experienced contractors give us a clear understanding of the existing condition, what will be required for repair and maintenance, and how we should be budgeting for future capital improvements.
Lowering Risk for Sponsors Means Lowering Risk for Investors
The likelihood of long-term success dramatically increases when a sponsor thoroughly analyzes a park before acquisition. That long-term success will impact the residents who live in the park, the people who invest in it, and the sponsor who performs all the work. When done correctly, the potential risk is mitigated, and the result is a win for everyone involved.
This content is the perspective of the author and is not intended to be relied upon as a forecast, recommendation or investment advice, and is not an offer or solicitation to buy any securities or to adopt any investment strategy. The information and opinions contained in this content are derived from experience, historic data, and other sources deemed to be reliable, are as of the date of this content, and may change as subsequent conditions vary.