Don't Make These 10 Mobile Home Park Underwriting Mistakes - 52TEN (2024)

Before you invest in a mobile home park, ask yourself which of these situations you’d rather be in:

You wish you owned a park you don’t own, or…

You own a park you wish you didn’t own.

For me, the choice is easy. I’d rather long for a park I don’t own than own a park that’s costing me money. But how do you make sure you don’t end up owning a park you don’t want? There are a number of smart steps in the buying process, and solid underwriting is one of the most important.

The trick to mobile home investment underwriting is simple: get real with yourself about how the park should be running, and then determine your acquisition price and future operating budget from that information. In my experience with underwriting, investing, brokerage, acquisitions, asset management, and dispositions, I’ve seen or created hundreds and hundreds of financial statements and operating budgets, and every one of them has been different.

It makes sense that every mobile home park is different, because no two properties will optimally operate the same way. It certainly requires experience to sort out the differences between parks, but, more importantly, it also requires the discipline to consider all the significant factors before you invest.

Not all of these 10 underwriting mistakes commonly made in mobile home investments may apply to every park, but every one of them can have a big impact on value and cash flow if they’re not considered in your spreadsheet.

1. Not Discounting Park-Owned Home (POH) Rental Income

Rental units increase management and maintenance costs. Our business is not renting homes. We’re in the business of renting lots. When I see rental income included in top line revenue, I discount it significantly.

For example, if an owner has included eight park-owned homes that rent out for $525/month x 12 months, the top line revenue would be $50,400 for those homes. I would underwrite $31,200 of revenue for those same eight spaces as if they were getting lot rent of $325/month x 12 months. Depending on your business model, you may disagree with this one, but most mobile home park owners don’t want to be in the rental business.

2. Including Late Fees or NSF Check Revenue

I never give value to late fees or NSF check fee revenue. A park I recently underwrote showed $5,800 in late and NSF fees. At a 7.0 cap, that’s a value of over $82,000 of the purchase price. If the park is being managed properly, there should be next to no late fees or NSF fees. Pull that income out before you write your offer.

3. Including Note Sale Income

Including note sale income in the NOI of a park is a huge mistake. A package of mobile home loan notes generating $10,000 in interest per year should not add $142,857 (assuming a 7.0 cap) to the park’s value. Loan notes should either be included within the purchase price or be negotiated outside the park purchase.

4. Failing to Build in a Vacancy Factor

Let’s face it; no mobile home park runs perfectly. Inevitably, there are dips in a park’s income. Lots sit empty between home owners. Residents abandon their homes. Homes get destroyed. It’s smart to factor some wiggle room into your top line revenue to account for these possibilities. Depending on the park, I’ll include a vacancy factor of at least 2-4% of gross income. Even though that’s a relatively small percentage, it will impact bottom line NOI.

5. Forgetting About the Manager’s Home

Typically, an on-site mobile home park manager or manager/maintenance team will be given a free POH to live in during their employment. If the seller is showing income for that space, or if you have built into your operating budget that the space will eventually generate income, you’ll end up short on cash flow and will have inflated the value of the park. Again, a manager’s pad that would otherwise bring in $325/month x 12 months at a 7.0 cap would account for $55,714 in lost value, or a loss of $3,900 in top line revenue.

6. Incorrectly Handling Payroll & Burden

There are a number of different ways to pay your on-site team, and most of them are incorrect. In most cases, the on-site team should be classified as an employee of the park. The IRS defines it best here. This means you should be paying your employees with a salary.

A salary paid correctly through a payroll company (we love Gusto, by the way) will include a number of federal and state taxes that the employee is responsible for paying. The burden cost can range from 12-20% of the employee’s gross salary. This percentage depends greatly on state and local regulations. Assuming a manager’s salary of $30,000 per year, the additional burden could show up on your expenses as $3,600-$6,000 of additional cost you weren’t planning for.

7. Overlooking Property Tax Basis Reset

This is a big underwriting mistake that can drastically impact future cash flow. Depending on the state and county where your mobile home park is located, your property taxes will be calculated differently. Regardless of the location, your property taxes will go up year over year 99% of the time.

I typically assume a 3-5% increase every year. Here in Arizona, the property tax dollar amount is based on the assessed value of your property (among other factors). The mistake investors make is not recognizing that the assessed value can be reset upon a property sale. This can have a huge impact if it’s been a decade since the current owner purchased the property.

Depending on your state and county, your property tax bill could go up significantly after a basis reset. If you underwrite last year’s tax bill into future yearly operating budgets, you could be at risk. Research the method used to calculate your property taxes, and understand how the tax basis could change upon a property sale.

8. Failure to Budget for Capital Improvements

Repair and maintenance line items will be obvious when you review a financial statement, and any smart mobile home park investor will budget for these in the future. What I see left out of financial statements and future budgets time and time again, however, is a capital improvement reserve line item.

We take pride in our communities, so improving and maintaining our parks is critical to our business plan. Roads need sealcoating at regular intervals. Roofs need replacing. Pools need re-plastering. These are big ticket items you need to be planning for. If you haven’t planned for these types of improvements, where will the money come from to get them done?

I create a 15-year capital improvement budget for every property we own. This helps me to understand how much these big-ticket items can cost and when I should expect them to hit my operating statement. Every month, I hold back money from cash flow to ensure that we stay ahead of maintenance, that we are always improving our parks, and that we are prepared for big-ticket issues when they arise.

9. Not Understanding TPT Tax (Rental Tax on Mobile Homes)

This tax requires a bit of research to understand. It is simply a tax on the rental income you receive on your POH rentals or your lot rent. Here in Arizona, not all cities require you to pay it, and most every city that does impose the tax has a different rate.

In general, the tax can range from 1-3% of gross revenue. If the tax doesn’t show up as both income and an expense (that offset one another) on the park’s financial statement, it either isn’t required that the park pay it, or the owner has left it off. Check with the local municipality to find out which is the case.

10. Inefficiently Dealing with On-Site Manager Utilities

Finding a good on-site manager can be a big challenge. As with any business, attracting top talent to manage a mobile home park requires that you incentivize them to join your team. Often, a free home or a competitive salary isn’t enough. Sometimes including utilities in the manager’s employment package is necessary to get the manager for the job.

There are a number of ways to structure utility compensation with a manager, but my favorite is to provide a utility stipend as part of their pay structure. Depending on the situation, that stipend could be approximately $300 a month. Regardless of how much it is, I keep it to a flat rate.

I like the stipend because it’s an amount that won’t fluctuate every month, making it easy to budget for. It also keeps the manager from cranking down the air conditioning to 68 degrees in July. If this is something you need to include in a manager’s employment package, don’t forget to add that $3,600/year line item on your operational budget.

Mobile home investments can be a fantastic opportunity, but making any of these underwriting mistakes can end up saddling you with a burden instead of a successful investment.

This content is the perspective of the author and is not intended to be relied upon as a forecast, recommendation orinvestment advice, and is not anoffer or solicitation to buy any securities or to adopt any investment strategy. The information and opinions contained in this content are derived from experience, historicdata, and other sources deemed to be reliable,are as of the date of this content, and may change as subsequent conditions vary.

Don't Make These 10 Mobile Home Park Underwriting Mistakes - 52TEN (2024)

FAQs

What are the risks of investing in mobile home parks? ›

Owning and managing a mobile home park comes with inherent liability risks. From slip and fall accidents to property damage, compliance issues, and natural disasters, being aware of these risks is essential for the success and protection of your investment.

What are the responsibilities of a mobile home park owner in Florida? ›

—A mobile home park owner shall at all times: (1) Comply with the requirements of applicable building, housing, and health codes. (2) Maintain buildings and improvements in common areas in a good state of repair and maintenance and maintain the common areas in a good state of appearance, safety, and cleanliness.

Is a mobile home park HMDA reportable? ›

Taking a security interest in a manufactured home community, even if you don't take any manufactured homes as collateral, is HMDA reportable. Manufactured homes are defined below. Within the definition of dwelling, they define a multifamily residential community, which includes manufactured home communities.

Why do trailer parks have a bad reputation? ›

Trailer parks, especially in American culture, are stereotypically viewed as lower income housing for occupants living at or below the poverty line who have low social status.

Why are investors buying mobile home parks? ›

Investors can purchase the entire mobile home park and lease each pad to residents that either rent or own a mobile home. Mobile home parks provide affordable housing for low-wage earners in the U.S., and with that, also provide stability to owners in the case of a declining or depressed economy.

Who is responsible for trees in a mobile home park in Florida? ›

The default provision is that it falls on the landlord by law.In other words, if it's not in a lease or other document they gave you when you moved in, then they cannot enforce it against you now. They would be responsible for their own trees on their own property.

Do you pay property taxes on a mobile home in a park in Florida? ›

Mobile homes with an RP decal must be on the real property assessment roll and taxed annually as real property. The owner of a mobile home who does not own the lot or land on which the mobile home is affixed must pay an annual license tax by purchasing an MH (mobile home) decal.

What is the 723.061 law in Florida? ›

[5] Section 723.061(1)(d), Florida Statutes, allows a mobile home park owner to evict a mobile home owner, a mobile home tenant, a mobile home occupant, or a mobile home for: "Change in use of the land comprising the mobile home park, or the portion thereof from which mobile homes are to be evicted, from mobile home ...

What loans are not reportable under HMDA? ›

Any institution with loan origination of 200 or more open-end lines of credit must gather, record, and submit their reports to HMDA. However, if the loan or line of credit is not a closed-end mortgage loan or an open-end line of credit, it does not need to be reported.

What is the penalty for violating HMDA? ›

An unreported, inaccurate or late HMDA data submission constitutes such a violation. The Mortgagee Review Board has imposed such penalties for noncompliance. Current penalties are a maximum of $6,500 per violation (applications not reported or inaccurately reported) with a cap of $1.25 million per lender per year.

What are the consequences of not maintaining and reporting accurate HMDA data? ›

Errors exceeding the tolerance can result in data resubmission, examination delays, regulatory violations, and civil money penalties. HMDA data collection and reporting can be challenging.

Is it bad to invest in a mobile home? ›

Mobile Homes Tend to Drop in Value

Mobile homes placed in mobile home parks typically decrease in value over time. On the other hand, land normally appreciates over time. So, if you own land and build a traditional home or, in some cases even place a mobile home on the land, the value will normally appreciate.

What are the pros and cons of owning a trailer park? ›

The benefits of investing in a mobile home park may include low maintenance, high demand, and multiple tax benefits. Potential cons of mobile home park investing include unfavorable locations, the cost of maintenance for individual units, and the burden of enforcing rules and regulations.

What are some of the special dangers of mobile home living? ›

Mobile homes are more vulnerable to natural disasters such as hurricanes, tornadoes, and floods than traditional homes. They are often structurally weaker than traditional homes, and many are built in flood-prone areas.

Is a mobile home park passive income? ›

Mobile home parks offer an excellent opportunity for passive investors to potentially enjoy steady cash flow, diversify their portfolios, and benefit from the stability of affordable housing.

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