A lot of people have the wrong idea in their head when they buy a mobile home park. They picture themselves living on a lot and living off the income of the park. They approach park ownership like it’s a hobby. Problem is, it isn’t a leisure activity—unless you’re thinking of juggling. In that case, park owners do have to juggle quite a bit every day.
Keeping a profitable park isn’t an easy task. You’re going to have to deal with evictions, manage tenant disputes, do all the bookkeeping, pay for repairs, and vet tenants—just as a few examples. If that all becomes overwhelming, you might be thinking about cashing in your chips and selling. But that’s easier said than done. You could wind up in a situation you can’t afford to get out of because the only offers you get end with you taking a loss. Knowing the signs of when to sell will keep you out of trouble, so you’ll be able to make a profit if you have to get out of the mobile home park business.
The Problem with Even One Defaulting Tenant
There’s a classic scenario that leads to park failure, and that’s defaulting tenants. When tenants default, they abandon their homes. When that home doesn’t get filled, the lender might just choose to foreclose on it, leaving you with an empty space. That foreclosure lowers the value of your park, which can lead to a spiral—if you were to sell, the park would be worth more with 100 full units than with 99, because that buyer wouldn’t have to spend any money to get someone into that empty one. When you have a tenant who defaults, anyone who buys the park is going to want that home out before they buy, because they don’t want to inherit the headache.
And a defaulting tenant who’s living above their means isn’t going to go through the trouble of selling their home. They probably owe money on it, and it’s pretty unlikely they’ll make enough to pay off the loan. So they just leave it. Then, the bank doesn’t want to go to the trouble of selling it either, so they yank it off the space. An empty neighborhood isn’t as attractive to new renters and, before you know it, you’re not collecting as much rent. When your rent profits drop too far, you can’t afford to maintain your park, leading to unattended disrepair.
When Your Reserves Are Dwindling—or Nonexistent
Deferred repairs can lead to big problems later on. I remember in one case, an owner I knew couldn’t afford to repair a water leak. It was minor, so he decided not to worry about it. Plus, the repair cost about $25k that he didn’t have. So he put it off and put it off until that water leak caused rust throughout his whole park. By the time he got around to fixing it, the repair had ballooned to $350,000.
If he kept the right amount of reserves on hand in the first place, he would have been able to cover that problem while it was small. The issue is, I’ve seen a lot of park owners who are too relaxed in their accounting. They might just collect rent, let the wife manage the bookkeeping, and assume the place is going to run itself. But if you don’t have money on hand to cover even small repairs, you’re going to reach a point where you’ll have to sell—possibly at a loss. Keep a handle on this by thinking through the following:
1. How much money do you have in the bank for out of pocket repairs and updates? Too many lot owners don’t think repairs will cost that much, because they just own land, so they only keep a few thousand in the bank for repairs. But land needs maintenance too, and so do the water and sewer hookups underneath it. Repairs get expensive when they go underground. It isn’t a rarity to get a $350,000 estimate on a water or sewer system overhaul. Have enough money in the bank to cover the stuff insurance probably won’t? And, while we’re on the subject…
2. What’s your insurance deductible, and just what does your policy cover? Keep in mind there’s a lot of stuff policies don’t cover. A lot of stuff. Here’s a few things I know of that your policy probably doesn’t include:
- Flood damage: You have to have a specialty policy for flood damage, and those are only available in high-risk areas for floods.
- Loss of business use: If you have to shut your park down because damage makes it unusable, you can’t claim unpaid rent as a loss.
- Issues related to wear and tear: Think of that rust in the waterline case I mentioned earlier. That’s not a covered repair.
- Damage from ground movement: This one rules out payment for those cracks in the pavement that show up after a few years.
- Mold: This is actually considered wear and tear, so you can’t get it covered.
- Pest infestations: If you have a problem with mice, roaches, or even pests that damage property like termites, that’s not covered.
3. How much money is needed for the repairs to your lot that you currently know about? Repairs only get more expensive as time goes on. If you have any you know of, get estimates. Estimates are free and they can help you budget for fixes and updates as quickly as possible, instead of deferring them.
4. What’s your occupancy rate and can you maintain it? How many lots in your park are full, and what’s the term on those lots? Not knowing what lots are full and which ones need to be filled is a problem that snowballs fast. Stay on top of those vacancies by keeping up to date with residents. When it’s time to renew the lease, get in touch with them early to make sure they are renewing. If they’re not, and they’re not selling their home, then you’re going to want to start advertising for that empty spot.
5. How much profit are you putting away for reserves? You have to have deep pockets to cover a park, and those pockets have to keep growing. Inflation, wear and tear, and time are going to make repair costs grow. Aim to get your money into an account that will offer a return that keeps up with inflation. Keep adding to that pool by setting aside a specific amount from your park’s profits every month. And, as a word of warning, if your park isn’t turning enough of a profit to do that, you’re in over your head.
If you don’t know your finances down to the penny, then you’re probably living with little to no reserves. The problem with that is when you don’t have them, you can’t handle even small repair jobs, and they grow into big ones—or jobs that never get done.
In some cases, I’ve seen landlords so deep in debt they couldn’t afford to close the park because they couldn’t get anyone to buy it at a reasonable price. Think of the case where the park owner found out he had a $350k water problem. At the same time, he had a $500k loan on a park that was worth about the same amount. No buyer was going to pay him his asking price because of the water issue. If he wanted to get rid of his park, he was going to have to take a major loss that would have cost him just about everything. That’s why some park owner are stuck in a spot where they’re too broke to sell.
If I can see a path to filling up a park, I’ll usually buy it. So if you’re in a situation with defaulting tenants and deferred repairs, contact me. I might be able to make an offer that will get you out of the park business without taking a major loss. Give me a call or send me an email if you’re ready to get out from under your park, and find a cheaper hobby.