Park-Owned Mobile Homes: Cash Cow or Financial Trap?

First of all, the warranty on the mobile home is considered personal property when it is in a park. Historically, it has been a rapidly depreciating asset. The costs associated with lending this type of asset push many banks out of the market altogether. This leaves park owners and private investors as the driving forces behind the mobile home rental market when it comes to mobile home park financing.

A conventional financing program will not typically consider revenue from park-owned mobile rentals toward the debt service capacity of a real estate loan. There are some alternative higher rate programs, which consider all park revenue, both mobile home rental and platform rental. The most common problem buyers have with these types of parks is the numbers provided by sellers or real estate agents. They will often consider all income when determining cap rates, value, etc. Mobile revenue is never used to determine the appraised value of a property. This is because the mobiles in the parks are not real estate improvements. One cannot simply mix several different types of income in the blender and determine a value based on a single cap rate. All parts are not equal. The revenue stream generated by park-owned mobile homes runs different risks of disruption or loss than the revenue stream generated by a mobile platform. A more secure stream of income deserves a different valuation and also a different loan interest rate, a reflection of risk.

The easiest way to imagine this type of park is in two components. You have the real estate component, which consists of land and any verifiable improvements to the land. Typical mobile home park improvements may include dollies, RV pads, clubhouses, laundry room, pool, office, etc. The real estate value is largely determined by the normal operating income generated by the actual improvements. It also has the movable or personal property component. Personal property can include cell phones, computers, appliances, etc. Financing products are available for these pieces of personal property at higher rates, shorter amortizations and shorter fixed periods than would be expected with a normal real estate loan.

These different streams of income deserve their own separate determinations for investment value. An income derived from the rental of real estate, such as a mobile home park platform, is considered more reliable and valuable than an income derived from personal property, such as a mobile home rental. The cap rate for a passive investment such as a mobile home park (considering only platform rentals) can be in the 8% range in some markets, while the cap rate for a more business-intensive project such as rental of mobile homes or RV rigs, can be in the 8% range. the 12% range for that same market. Obviously, the actual cap rate will vary greatly between different markets, but a riskier entry will still warrant a higher cap rate than a less risky entry. This kind of thinking suggests that $1 of mobile rig income is more valuable than $1 of mobile home rental income.

The fact that two streams of income are generated through real estate improvements does not mean that they are the same. While RV decks can be valued like real estate, they still require more work and their income streams are less reliable than a mobile home deck and therefore warrant a higher cap rate at valuation. This is evident in the market vacancies that any underwriter will use to determine the stabilized cash flow of an RV rental property.

From an investor’s point of view, reliable or easier-to-produce income is more valuable than income that takes longer to generate or is less reliable. From a lending point of view, reliable or easier-to-produce revenues contain less interruption risk and thus less default risk.

Lenders will only accept real estate as collateral to secure a CMBS (commercial mortgage-backed security). A CMBS is a loan that is secured against commercial real estate and offers lenders the flexibility to sell like any other bond security traded in today’s market. This type of money has become much more prevalent in recent years. Many national lenders today, with typically more aggressive products than a local bank can offer, employ this type of credit structure. Very similar in consequence to the investor, a CDO or CDS structure can also be used today.

The issue of simultaneously selling different types of assets (real and personal) often leaves inexperienced buyers in the middle of a purchase contract needing additional cash to cover rolling value, as most Lenders can only offer dollar loans against the value of real estate. . Real estate loans are not the answer without considering some type of cross-collateralization, which is atypical of most conventional financing options. One of the most common solutions is for the seller to carry a note for the value of some or all of the mobiles. If seller financing doesn’t work out, there are a number of private investors who can offer a variety of options depending on the situation. The key phrase to remember when securing financing for a property, such as a cell phone that is not considered real property, is “mortgage chattel.” In commercial real estate, this term is generally reserved for a situation where a mobile home is in a park and does not occupy its own state-owned lot.

There is an occupancy issue to consider. There is generally less incentive to keep a mobile tenant in the park. A renter who owns their mobile is much less likely to move than a mobile renter. The costs and efforts to move a mobile phone are often a factor that helps safeguard the long-term occupancy of tenants who own their mobile phones.

There is also an additional expense to consider. Anyone on a rented mobile is less likely to take care of it. Mobile owners are responsible for the maintenance and repair of the house. When a mobile can no longer be rented for use, the owner must pay to dispose of it.

There are many different benefits and drawbacks of owning mobile phones in a park. Parks can be very profitable when they charge mobile rent in addition to platform rent. The determining factor to use or not this type of rental park is usually “How much do you want to invest in the project?” If you’re looking to get into a property and put time and work into it, park-owned mobile phones could be a great way to maximize cash flow; Make sure you approach financing properly. For the passive investor who likes to cash checks every month, a rig rental-only park is the route of choice – expect to receive the most competitive rates and terms.