Real estate investing has become a bit of a theme at LMM lately. Today we’re joined by Jefferson Lilly to discuss mobile home park investing.

You might be considering investing in real estate, but you’re probably thinking of buying single family homes or perhaps a duplex. But maybe you should consider investing in a mobile home park. Our guest today explains why.

Supply Is Shrinking

We are building more of every kind of housing except trailer parks. A lot of places have a NIMBY attitude towards trailer parks, they’re dirty, the people who live in them are criminals. So, many towns are changing zoning laws and building requirements to prevent more parks from being built. Because of these change and some parks being plowed under altogether, the supply is decreasing at a rate of about 1% a year.

The people getting kicked out of parks that are closing have to go somewhere and because of the shrinking demand, remaining parks can command higher rent for their space.

What Is A Mobile Home?

The mobile home industry expanded after World War II. Despite the name, “mobile” home, the homes aren’t meant to move around a lot the way an RV is. Most homes come straight from the manufacturer to the park. A lot is meant to be more or less a permanent home for a trailer.

The home is tied down, but it’s not on a foundation, rather it’s up on blocks with skirting around the bottom. Most people who live in mobile homes own them. This is great for an investor because none of the maintenance for things like roofs and toilets is the investor’s responsibility.

Jefferson prefers to invest in parks where every home is owned by the resident. If that’s not the case, they will arrange a rent-to-own agreement. People tend to take better care of their own things than someone else’s so again; this puts less burden on the investor.

Property Owner Responsibility

The owner is responsible for things like road, sewer, and lawn maintenance. The owner just owns the park in most cases, not the homes. For every $1 in rent, the owner keeps about .70, giving them about a 30% expense load which covers everything, including taxes and maintenance. For an apartment or single home landlord, that split is around 50/50.

To buy a home and get it market ready costs about $20,000 and it will rent for around $700, grossing close to 4%. You can make money buying and renting the homes, but owning the park is more lucrative and less hassle.

Jefferson buys most of his parks in the Midwest, places like Tulsa and Dayton, where he can get a cap rate of around 10%. Parks in California, where he’s based, have a cap rate of closer to 5%. Cap rate is the yield. If you buy a park in California that makes $50,000, it will cost you $1 million. In the Midwest, a park earning $50,000 will only cost you $500,000.

 Leveraging

Jefferson typically borrows 75% loan to value. On a $2 million property, $500,000 is the downpayment, and $1.5 million is borrowed. Many banks won’t go below 80% loan to value, though.

Some properties could be bought for cash, but the company is borrowing at around 5% for 20-25 years. That means they’re investing it in the deal at 10%. That $2 million property, with $500,000 in equity, earns 10%, or $50,000. The amount borrowed was $1.5 million at 5% interest but earn 10%.

Even after paying some principle, there will still be about $100,000 in cash flow from the borrowed money plus $50,000 in cash flow from the down payment, so earning back $150,000 on a $500,000 investment. That gets you to a 30% cash on cash rate of return.  If they had paid up front, the return would only be about 10%.

I Have $1000

If this is all sounding good, but you don’t have enough money to buy a whole park, there are ways to get involved.