I bought 36-space mobile home park with only $36K. This was possible by combining bank and seller financing. Learn how to do this.
Once I understood mobile home park investing, I knew without a doubt that I needed to invest in this asset class. I read everything I could about mobile home park investing, I listened to podcasts, watched YouTube videos, and began researching mobile home parks for sale.
Within a few months, I found a 36-space mobile home park and was able to negotiate a great price and great terms. In total, I was just under $36,000 out of pocket when it was all said and done.
Mobile home park investing is how I am building my rental empire and how I intend to reach financial freedom. After all, financial freedom is about cash flow and mobile home parks are cash cows!
This is How I Bought a Mobile Home Park with Only $36,000
My hope is that reviewing how I bought a mobile home park with only $36K will help you understand what it takes to succeed at mobile home park Investing.
Contents
- From Single Family Rentals to Multi Family Investing
- Are mobile home parks good investments?
- Low Cost Per Unit & Advantages of Owning More Units
- Low Maintenance
- Mobile Home Park Supply and Demand Opportunities
- Opportunities for Seller Financing
- Recession Resistant Investing
- Steady Monthly Income
- Pros and Cons of Moving Mobile Homes
- Learning About Mobile Home Park Investing
- Searching for Mobile Home Parks for Sale
- Finding a Project Mobile Home Park in a Small Town
- Is this Mobile Home Park a Good Investment?
- The Negotiation Strategy
- Negotiating Price and Terms with the Seller
- Negotiating Terms with the Bank
- Mobile Home Park Investing Due Diligence
- Mobile Home Park Manager
- Closing on the Mobile Home Park
- Becoming a Mobile Home Park Owner
From Single Family Rentals to Multi-Family Investing
As I was growing up, I admired my dad for buying and selling real estate as side business. Naturally, I developed a strong interest in real estate.
At a young age I was helping him find deals, create amortization tables, and doing manual labor on some of his homes.
At age 26, I bought a home that had been converted to a duplex. I didn’t live in this house until the last few months of owning it. My wife and I moved in, made some upgrades, and then sold it for a nice profit.
Over the next few years, I bought and sold a few houses. At some point I got involved in auctions.
However, the more I learned about real estate, the more I felt multi-family investing was the place to be. Eventually I started researching apartment buildings.
As I researched multi-family real estate, I came across an article that suggested that to be successful with multi-family it was best to invest in buildings with at least 16 units.
There are many good reasons for this, but the main reason was that with about 16 units you can afford to have an onsite manager. This made a lot of sense to me, especially because I didn’t see myself managing several apartment units.
I quickly learned that commercial real estate investors utilize Capitalization Rates (Cap Rates) to compare income properties. Cap rates are calculated by taking the yearly Net Operating Income (NOI) and dividing it by the Sales Price. The higher the cap rate the better.
I focused most of my searches on high cap rates and I discovered something I had never contemplated. Mobile home parks had much higher cap rates than all other income properties.
So I started looking into mobile home parks and learned there are many reasons why an investor should consider mobile home park investing.
Are mobile home parks good investments?
There are numerous reasons why mobile home park investing is becoming popular with many real estate investors and institutions. Below I touch briefly on a few reasons why mobile home parks are great investments.
Low Cost Per Unit & Advantages of Owning More Units
Mobile home parks have a lower cost per unit than apartment buildings. Therefore, you can own more units for the same amount of money.
And the more units you own the better. If you own a duplex and you lose a tenant, you automatically lose 50% of your revenue. If you lose a tenant in a 50-unit property you won’t lose any sleep.
Also, if you own 50 units and raise rents by $10 dollars, you easily increase revenue by $500 per month. This same logic applies to cutting costs.
Low Maintenance
When you own a mobile home park you are primarily renting out the land, not a mobile home.
As you can imagine, if you are renting out the land, you don’t have to be concerned with leaky roofs, malfunctioning furnaces, etc. This means mobile home park investing can be a great way to generate passive income.
Mobile Home Park Supply and Demand Opportunities
Demand for low income housing is strong and mobile home housing is the most affordable option. As such, demand will continue to remain strong. See https://www.jchs.harvard.edu/blog/the-continuing-decline-of-low-cost-rentals
However, the supply of mobile home parks is decreasing. In fact, it is nearly impossible to obtain permits to develop a new mobile home park. This is primarily because cities don’t like mobile home parks.
The combination of diminishing supply and increasing demand presents an amazing opportunity for investment.
Opportunities for Seller Financing
A large percentage of sellers are what industry is refers to as mom and pop sellers. Often times these sellers have little or no debt on their parks and are willing to provide seller financing. This can be a huge advantage over other forms of multi-family real estate investing.
Recession Resistant Investing
During a recession people still need housing. What happens during a recession is people find lower cost housing alternatives. And the lowest cost alternative is mobile home living. Therefore, mobile home parks tend to be recession resistant.
Steady Monthly Income
Most mobile home park residents own their homes and are great at paying lot rent. This is because if they fail to pay rent, they can still be evicted. Such situations could lead to them losing their home. This translates to steady monthly income.
Pros and Cons of Moving Mobile Homes
Moving a mobile home isn’t as simple as pulling an RV trailer. In fact, moving a mobile home can be prohibitively expensive for most low-income residents. As such, most residents will never move their homes to another park or location.
On the other hand, the cost of moving a home isn’t prohibitively expensive for mobile home park investors. Therefore, these investors are able to add homes to their parks with reasonable capital expenditures.
Learning About Mobile Home Park Investing
The more I read, the more I wanted to learn about mobile home park investing. I read numerous articles, joined multiple mobile home park forums, listened to podcasts, and read books on this subject.
The biggest attraction to me was that mobile home parks are cheaper to own than an apartment complex. And the biggest eye opening thing was that owning a mobile home park meant renting out lots, rather than homes. This was almost too good to be true.
I also began devouring any information I could find on how to evaluate mobile home parks and how to improve on mobile home park financials.
If you want to learn more about mobile home park investing, the video below is a great place to start.
How to Find Mobile Home Parks for Sale
My main way for searching for mobile home parks was still loopnet.com. However, by now I was also searching through other websites such as mobilehomeparkstore.com.
I had also learned that the best way of finding good deals on mobile home parks was to contact mobile home park owners directly.
In addition, I was also looking for mobile home parks in craigslist, broker listings, and even ebay.
By this point I had developed a very simplistic rule of thumb. If I found a park for sale for about $20,000 per pad, I would take a closer look. Otherwise I would move on.
Initially my search focused on parks in Washington state and Oregon. However, mobile home parks in these states looked way too expensive compared to other states in the US. Eventually I started looking for mobile home parks in Idaho, Montana, Utah, Arizona, etc.
Finding a Project Mobile Home Park in a Small Town
And then I came across a 36-space mobile home park in small city in Montana. The asking price was $350,000. This was less than $10,000 per pad!
However, there was a reason for the apparent low cost. This park had an occupancy rate of 33%. In other words, this wasn’t a turn-key type of investment. Significant effort end resources would have to be put in to take advantage of this opportunity.
A big question for me at this point was: could this park be cash flow positive on day one or would I need to throw money into it every month until I turned it around?
Another reason for the apparent low cost was the park’s location. If you visit some of the mobile home park investing forums, you’ll be advised to only buy mobile home parks in large metro areas.
This is really good advice, but I figured that as long as I could prove there was sufficient demand for mobile homes in this small town, I would be okay.
Finally, the biggest question I had to wrestle with was whether or not I was willing to purchase a project mobile home park, in a small city. Fortunately, the answer would come down to evaluating this investment as you would any other real estate investment.
Is this Mobile Home Park a Good Investment?
Although the price of the park at $10,000 per pad seemed attractive, the reason for the apparent low price was the empty lots.
However, I viewed the empty lots as an opportunity. This is because in all my searching, in my chosen geographical area, I had rarely found such low occupancy rates. Provided there wasn’t an obvious demand issue in this town, I felt I could fill this park with homes and significantly increase the park’s profitability and value.
Next, I looked at the park’s market cap. I could tell immediately this park was priced at a very low market cap rate – 5%. However, I knew I could use this information to negotiate a better price.
My real objective was to buy the park with as little money out of pocket as possible. To me, a more important metric for evaluating real estate investments is Cash on Cash Return (COC). COC is essentially income as a function of cash out of pocket.
COC is about leverage. The less out of pocket you are, the higher the COC return. If you want to exponentially increase your real estate portfolio you want high COC returns.
From reading in some of the mobile home park forums, I came to understand that 20% COC returns are not uncommon in this space. However, 20% COC returns would be very difficult to obtain in other asset classes.
I knew that if I could buy the park with little money down and ensure it was cash flow positive from the start, then I would be in a good position to eventually get a very attractive COC return.
Ultimately, the answer to whether this mobile home park was a good investment came down to the purchase price and financing terms. But going through the process of evaluating the park from various angles provided me with a great negotiating strategy.
I should note that at this stage in life my goal was to have multiple sources of income. A mobile home park was a great fit.
The Negotiation Strategy
Begin with the End in Mind
Because I wanted to have little cash out of pocket, my number one goal was to obtain some form of seller financing. Although the realtor had already told me the seller would not provide seller financing, I was convinced I could make a good argument for it.
I understood from the beginning that I would have to guide the seller to seller financing, by first pointing out how we both could benefit from it.
My strategy was to show the seller that no bank would provide financing for a mobile home park priced at a cap rate of 5%, considering it was only 33% occupied and in a small town.
Before Making an Offer
Standard practice when purchasing commercial properties is to send an offer to “lock the property.” And after the offer is accepted and you’ve conducted some due diligence, then you engage in negotiations.
However, in this instance I wanted to engage the seller early on to see if there was an opportunity to obtain seller financing. I did so by sending a pre-offer letter, in which I indicated I was preparing to send an offer. In this letter, I began makin the argument that an 8% market cap would be more reasonable. Below are some key excerpts from that letter.
“The struggle I am having is that Net Operating Income (NOI) is only $17,000 (4.9% at the current asking price). To satisfy the banks with at least an 8% CAP, the selling price would need to be $212,500. If you were to consider this price, I would send you a Purchase and Sale Agreement for your signature this very moment. However, I suspect you envisioned getting more for your Mobile Home Park…”
And later in the letter I added:
“…perhaps you would consider the possibility of getting rid of the bank and bank appraisals, at least initially. Later, after I invest sufficient funds into the park and increase NOI, I can go to the bank, re-finance the property and cash you out at a much better price, perhaps even at your asking price…”
As can be expected, the seller quickly asserted he would not sell at that price and that he didn’t want to provide seller financing. Nevertheless, getting a no early on was okay with me given my overall strategy.
The Black Swan
In the book ‘Never Split the Difference,’ Chris Voss devotes a chapter to black swan events. Black swans are events or pieces of information that would be game changing if uncovered.
As it turns out, during the diligence period I uncovered a piece of information that would become game changing.
Although the seller had enlisted a real estate agent, I wanted to develop rapport with the seller and found a way to speak with him directly.
During one of my conversations with the seller, he shared that he had a loan on the property. Since I was also considering bank financing, I asked if he would share which bank had provided him with financing.
The seller willingly provided me with his loan officer’s contact information. It was clear this was someone he had a good relationship with.
When I spoke with this loan officer, I explained my concern with the price of the park given the low cap rate. Surprisingly the seller’s own loan officer told me the bank would look for the park to appraise at a cap rate between 9% and 11% in order to provide financing!
Given an NOI of $17,000, a 9% cap rate would translate to a purchase price of $189,000. The information the loan officer shared was was the black swan! Keep in mind this was someone the seller trusted to a large degree.
Negotiating Price and Terms with the Seller
Although a 9% cap rate would have been great, I couldn’t make such a low offer. Instead, I looked through the P&Ls to try to justify a higher NOI and a higher purchase price.
My first offer was for $225,000. Below is an excerpt from my offer letter:
“The attached letter of intent is based on a NOI of $20,000 and a cap rate of 9%. Alternatively, if you were able to carry a portion of the loan, I would be in a better position to raise my offer.”
The realtor got back to me and said the seller was willing to entertain a small amount of seller financing but would not accept a lower the price.
At this point we were at an impasse, but I felt things were still moving in my favor. To keep the conversation going, I made a different offer. This involved something called a master lease option.
I won’t get into details here, but this would have allowed me to lease the park and later have the option to buy the park at a price of $290,000, presumably after the park was more profitable.
This offer didn’t gain any traction, but it kept the seller engaged. In fact, it wasn’t long after I sent this letter that the realtor called me to tell me the seller would accept a price of $250,000 and would still provide seller financing in the amount of $36,000. This was $100,000 less than the asking price!
I was thrilled. It felt as though my negotiation strategy was working. Although, up to this point I would still need a large down payment amount, unless a bank would agree to some creative financing terms.
Negotiating Terms with the Bank
Through my negotiations with the seller I was also negotiating terms with two different banks. Both banks wanted a 30% down payment. At a purchase price of $236,000, I would have had to put down $70,800.
What I really wanted was for either bank to consider the seller’s $36,000 as part of the down payment of $70,800. In other words, I wanted to put down only $34,800.
For a bank to accept something like this they would have to have confidence in my ability to oversee the park to success.
To increase my chances with the bank, I prepared a very detailed 3-year plan for the park, with some nice graphs and statistics. I also included a resume selling my experience in managing construction projects and my experience in real estate.
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Then I arranged for an in-person meeting with each one of the banks.
Amazingly, one of the banks ended up agreeing to my proposal to put down only $34,800. This is a down payment of less than 15%, compared to the more traditional 30% down.
Putting down a small amount of money increased my COC return and freed me up to invest more in adding homes to the park.
In addition, I was able to negotiate interest only payments for the first 6 months. This provided me with some financial flexibility during a critical stage of this park’s turnaround.
However, there was one more surprise.When the appraisal came out, it showed an appraisal value of $230,000. This provided me with one last opportunity to negotiate the price.
Mobile Home Park Investing Due Diligence
Due diligence is a key part of any investment. I’ve written a separate article on mobile home park investing due diligence. Please feel free to check it out.
Mobile Home Park Manager
A key element of mobile home park investing is having a good park manager. Throughout the due diligence period I developed a good rapport with the park manager. In fact, she became more loyal to me than she was to the seller. As a result, I was getting some really good information on anything I inquired about.
I was feeling good about this park manager and she was excited about a change in ownership. However, there was one issue I wasn’t thrilled about. The park manager had moved out of the park and was living elsewhere in town.
Having a park manager that lives in the park is of huge importance. We were discussing the possibility of her moving back to the park when she learned her husband’s work required him to relocate to a different state.
In other words, I was about to purchase a mobile home park, two states away, and the only person that knew how to manage the park was no longer going to be involved. This became a big concern for me.
The seller began looking for a park manager within the residents of the park. He found a young, responsible couple that was excited to take on this job.
The problem was, this couple didn’t have any relevant experience, so we would have to train them from scratch. However, I felt this was an acceptable risk to take. So, I kept moving forward with the purchase.
Closing on the Mobile Home Park
I finally became a mobile home park owner 5 months after the time I first contacted the broker. Closing was delayed about 6 weeks from the original agreed dates for various reasons.
There were two main reasons for this delay. The first was the seller took a long time to provide me with all the necessary documents. The second reason was the bank appraisal also took a long time.
I was aware from the beginning that the park appraisal could be critical to the timeline. This is in part because there aren’t many appraisers that know how to appraise a mobile home park.
I devoted significant time and effort to manage this part of closing, by working with the lender to help them find acceptable appraisers. Nevertheless, things still took a long time.
The seller understood the challenges and agreed to extend the closing date. I was happy to have more time to continue performing due diligence.
Becoming a Mobile Home Park Owner
By the time we closed on the park the financial prospects of the park were already in better shape. This is because by then the seller had fixed some large water leaks and we had added a home to the park.
Now I could focus on implementing processes to successfully manage this investment with as little effort as needed from my end. This included things like setting up the park finances in QuickBooks, collecting rents via an online website called Cozy, revising the park rules, establishing the park manager responsibilities, etc.
Another area of focus remained making certain improvements to the park. The #1 priority was adding homes.
Because I was able to purchase the park with only $36,000 out of pocket, I had enough capital ready to invest toward this effort. Looking for homes to purchase became a bit of a hobby.
Another improvement I pursued early on was water sub-billing. For this I utilized Southern Water Management. This is a company that provides this exact service.
Conclusion
Mobile home park investing can be very rewarding, financially speaking. One of these reasons is the possibility of finding great deals. I was able to purchase this 36-space mobile home park with only $36,000 out of pocket.
This was in part possible because this mobile home park was a project park, rather than a turn-key investment. Creative financing was also a key component of the low immediate cash requirement. I was able to get 15% financing from the seller and 15% financing from a bank lender.
Being only $36,000 out of pocket left me with enough capital to add homes, thereby improving the park’s financials in a relatively short amount of time. Adding homes can be risky if housing demand isn’t strong enough and I was aware of this.
However, I was able to test the business model by adding a home to the park and selling it, before I closed on the park. This helped me prove that demand was sufficiently strong and it helped validate my business plan.
I am convinced mobile home park investing is one of the best real estate investments forms. In fact, soon after closing, I began looking for other mobile home parks to purchase.
Other investors have found great success in this niche. As such, demand for mobile home parks has increased and prices are going up.
Good deals can still be found, but finding such deals requires significantly more effort today than it did a few years ago.
