Unexpected expenses are a bit of a misnomer in the mobile home park business; you should always be expecting expenses. If you’re not, your park is heading for trouble. I’ve seen unexpected expenses close a park in the past and it will happen again in the future. That’s because too many park owners think they can operate without reserves.
While optimism is fine, foolhardiness is not. You can’t just assume that the park is never going to have a big problem just because it hasn’t in the past. Reserves are your safety net. You need them to cover those unpredictable expenses because, as I can tell you from experience, insurance rarely does. If you’re charging the right rates and managing your rental increases properly, then you should have plenty set aside in the bank to protect your park. If not, you still have time. A few adjustments now should help you to easily manage your park well into the unknown future.
Calculating Mobile Home Park Operating Expenses
All parks need a reserve. I don’t care if it’s a mom-and-pop operation with only ten spaces, or a big 125 space park. Those reserves should be set at a minimum of $125 per space, though $150 would be better if you have an older park since older parks tend to have more issues. And, you’re going to want to factor each of these scenarios in as well:
- Group septic vs. a separate septic system for each space: The problem with interconnected septic tanks is that if you have a problem with one, you have a problem with all of them. It’s pretty much like putting all your eggs in one basket. If one septic tank cracks, everything is going to leak into the ground. Then you’ve got a massive clean-up on your hands that will come out of your own pocket. Sewer access, or smaller individual septic systems won’t cause the same large-scale problem, but be limited to that one space.
- Maintenance kept up to date or deferred: Small problems grow bigger over time, and if you’ve been deferring maintenance, then you need to know it’s only going to get more expensive. Get quotes for that maintenance and adjust your reserves accordingly.
Once you know how much you need in reserves, you need to set that amount aside and not touch it. Those reserves aren’t there to cover minor issues, but instead, the issues that could threaten to shut down your park.
Collecting and Using Your Park’s Financial Reserves
A portion of every rent payment you get should be going into your reserves. Pick a fixed percentage. Me, I usually use the percentage of the rental increase for that year. So, if I raise the rent by 5%, that extra is going into a bank account that I don’t touch. Think of it as working capital.
Remember, reserves are there for emergencies. You shouldn’t be using them to cover basic maintenance costs for your park, but instead as a pool of funding if you have a major repair. So, you need to buy new lightbulbs for the clubhouse? No. You need to re-dig a water well due to contamination? Yes. Mainly, the reserves are there to cover things that would shut down your park if you didn’t fix them. Here’s a few to consider:
- Parking lot repair: You have to keep tenant’s homes accessible and if your parking lot is a mess of holes and broken asphalt, you need to fix it. This can be expensive and time-consuming, so reserves can be used to cover the cost.
- Abandoned home removal: Removing an abandoned home can cost anywhere from $3000 to $6000 depending on the size. If a tenant abandons a home that you have to junk, reserves will help you cover the cost so you can rent out that space.
- Fixing safety violations: It costs a lot to fix a wheelchair ramp if you’re told it’s too steep, with high-end ramps costing as much as $4000. Using reserves to cover the cost can get your park back up to code in a minimal amount of time.
- Cleaning up environmental issues: If you have a gas or septic leak in your ground, you’re going to have to invest a lot to fix it and there’s a strong chance that your park won’t be livable while you do.
- A sudden surge in vacancies: A natural disaster may make your park unlivable, or a bunch of tenants might just decide to move at once. If that’s the case, then your reserves are there to cover the cost of those vacancies.
For small, everyday maintenance items, you should be using your operating funds. Reserves are there for major repairs only, so you need to keep them separate. That means that you don’t just want to leave them in your regular checking account, or hold onto them in cash. Instead, you want a separate FDIC insured bank account.
Accounting for and Managing Your Reserve Fund
We all know that things get more expensive over the years; you want an account that keeps up with inflation, but doesn’t risk your money. A few good options include money market accounts or money market funds. I suggest these because you can gain a better interest rate, but still have liquidity that you need for an emergency. I personally just keep the money in my checking account because it offsets any banking fees and it’s easy to access and keep track of.
In some cases, a lack of reserves is what leads someone to want to close their park or need to sell. Either they can’t afford to fix an issue, or they just don’t want to deal with the hassle. If that’s the case, you might want to reach out to me. I’ve been known to pick up a park with deferred maintenance issues if I think I can make it pay off in the end. Give me a call or shoot me an email for more information.