Our Weekly Mobile Home Park Investing Tips. Along with comments from investors. Enjoy!
Mobile Home Park Tip #6
Another important question that I receive quite often is do you treat your managers as employees or as independent contractors? The answer to this question is almost always that I treat them as employees. You can check the different ways the IRS gives you to choose between an employee vs independent contractor but in 99 out of 100 times the typical manager should be treated as an employee.
If you treat an employee as an independent contractor and get caught you are liable for penalties and interest and the back taxes.
Most people that are asking this question want to hear a different answer because they would rather just write on check to the manager and be done with it. Some people may only give their manager free lot rent. They don’t want to have to set up state and federal payroll taxes which they are responsible for as an employer and hassle with all the reporting. I will admit that I didn’t like the answer either but it is the right way to do things.
If you want to take your chances with the IRS you may never be caught but there is something that is more important to consider other than just the hassles of setting up the payroll taxes. This has to do with the potential of your manager getting injured on the job. Even though you have them sign an independent contractor agreement and it states that they are not an employee, what happens if they get hurt performing their ordinary management duties? That agreement will often be thrown out in court when it is determined that they meet all of the IRS guidelines (or state guidelines) of being an employee. So not only will you then be responsible for the back taxes, you will most likely be a defendant in a lawsuit.
Since you treated them as an independent contractor you probably failed to get worker’s compensation insurance and will now be held liable to pay for their medical bills, lost wages, and other damages.
It doesn’t matter whether you give your manager $50 off of their lot rent or $2,000 per month, you need to setup your payroll correctly and obtain valid worker’s compensation insurance. The risks are not worth taking. If you don’t want to hassle with the payroll, there are services out there that will do everything for you.
Mobile Home Park Tip #7
Comment from Last Tip:
Dave – I really enjoy these tips also. We are out of town owners and we have a park manager that lives in our park. We have a local bank account and all of our residents make their deposits directly into our park account. The manager does not handle the rent or security deposits. We also do all contracts (MH rental, lot rental, home sales agreements) either by mail or in person. For us it is better if it takes a few weeks for the paperwork to get done rather than have a mistake on a legal document. This system gives us some sense of control and also eliminates the possibility of theft. Although we do have to follow up on collections, this is actually rather rare and we don’t mind doing it. Our bank is extremely cooperative and mails us every deposit slip with the tenant name or unit number. We also get electronic copies of all deposit slips with our statement – just in case something gets lost in the mail (which can happen).
Thanks for the comments on the tips and for discussing your system. It seems that it is working well for you and I have tried similar strategies in the past. The problem I usually had was with the bank wanting to work with me on this. I am assuming your park is in a smaller town and you have a small town bank. Keeping the rent collections and paperwork in your control will definitely cut down on opportunities for theft and mistakes. If you are not more than a few hours from the park and have the time to do so I would also agree with this system. Thanks again for the comments and continued success with your park!
Dave & Frank,
On the issue of contractor vs employee, perhaps you can also address casual labor. We sometimes use park residents for lawn mowing, snow plowing, repairing park owned homes, and odd jobs around the park so they can earn money and it is usually cheaper for us than hiring from the phone book. Do we have to add all of these people to the payroll even if they only work a few hours per month? I’m guessing other park owners are also in this situation.
This is an excellent question and I have struggled with this as well over the years. I have used so-called part time labor many times. There are really two issues to look at. The first is whether or not you have to collect payroll taxes on this casual labor. The general rule for the IRS is that anyone that should be treated as an employee should be setup as such and payroll taxes should be withheld. In the real world, if you hire the teenager down the street to pick up trash or mow a lawn in your park, you will probably not set him up on your payroll system if it is a one time occurence where you pay them $20.. However, if they are doing this type of work every week, then it would be advisable to go by the letter of the law. Here is a link to Publication 15 on the IRS website for more info.
The real issue to me is whether or not this casual labor person will be covered in case they get hurt. If you are going to hire this casual labor then make sure you have worker’s compensation and that your policy will cover this labor. If you have a worker’s compensation policy that covers your park manager that policy will be assigned a class code that covers certain types of work. If your manager does only office work and your policy is assigned the class code that pertains to office work, then you may not be covered if you hire other types of work done. If Mr. Bailey in space 15 is looking for some extra money and says he will go through and cut down some branches or install some skirting on one of your rental homes and cuts off his finger or worse, you better hope that you are covered for this under the worker’s compensation insurance. My insurance agent in Texas said it all boils down to the class codes of the policy and I would guess most states will have similar rules.
In summary, I would guess many park owner’s out there have these little instances of casual labor and the real issue to me is that I don’t want to risk a large lawsuit just because I was helping out a resident or teenager earn some extra money. Be sure that they are covered in your worker’s comp insurance policy.
It has always been my understanding that the key factor in determining an employee from an independent contractor is the amount of control you exercise over their day to day activities. Do you set their hours of work? Do you direct the method in which they work? Have you given them a guideline of policies and rules that they must adhere to? If so, they are probably an employee. In my parks, my involvement is basically in setting business objectives and reviewing results. Are my rents collected? Is the park clean and safe? Are the homes in good order? Are expenses in line with my projections? My managers work as they deem necessary to accomplish the objectives, are given no instruction on how to accomplish their tasks (unless help is solicited) and are paid straight commission on the rents they collect. It may sound like a loose run organization, but for me, it has been effective. The key and the challenge is in finding the right manager who is experienced, self disciplined and honest with a strong work ethic. If you do the hard work on the front end of hiring right, and you may have to do it several times before finding the right fit, your manager would pass muster on an IRS review of their independent contractor status. The primary benefit though is not in the ease of pay and being able to forgoing withholding, etc. The primary benefit is the peace of mind derived from having a competent individual who absorbs the headaches for you.
As always, I enjoy reading your tips and find the thoughts expressed interesting.
Thanks for the comments and you really hit the nail on the head. If you find and hire the right person for the job, you will be on the right track. Just as in buying the park, you need to spend the time and diligence on finding the right manager. In my experience, a good manager will be the determining factor of whether or not I enjoy owning a certain park.
Great comments and insight!
Mobile Home Park Tip #8
Comment From Last Tip
The next step from Amy’s rent collection system is to have each resident set up an automatic transfer from their checking account to the owners on or before the ‘rent due date’ and, of course, give them a discount on the rent for their help in doing this.
I agree this is a great logical next step. It seems like many people already have their bills automatically withdrawn from their checking account already, and it would be great if we could have all the rent in by the first automatically. Thanks for your comments!
As always, I enjoy your tips and all you do for the business. One issue that owners should be aware of. When you treat a manage or anyone that only works under your direction, that is not licensed. If they ever go to collect unemployment benefits, the state will make you go back and pay all the taxes (even the employees share) not sure if all states apply to this. With my experience I have all of my employees on payroll.
Great point and another reason one should make sure they follow all the laws Federal and State! Thanks for the comment!
Mobile Home Park Managers… Continued
How Much Should You Pay the Manager?
First and foremost, the answer is that you should pay them enough to keep them motivated to complete the jobs you expect to be done. If you want them to keep office hours for 40 hours a week and be on call every night and on the weekends, they should be making at least as much as if they were working full time as a receptionist in a typical office.
I think the first step that you should take is to decide what you expect of the manager. The basic duties will fall into office and maintenance.
In the office category this will include such things as collecting, logging, and depositing rent, answering questions and dealing with emergencies, calling plumbers & electricians, renting lots and homes and filling out the paperwork.
In the maintenance category this will include preventative maintenance (caps on sewer drains, filling in potholes, heat tape, etc), routine maintenance (mowing, cleaning up trash and tree branches, fixing small plumbing problems, etc), and in some cases more specialized maintenance (digging up water & sewer lines, running a sewer auger, trimming trees, and so on).
For the office category, I will typically come up with a level of time that I feel needs to be spent on this item on a monthly basis and then multiply this by $8 – $10 per hour. So, if I feel like a 100 space park will require 80 hours per month for office work, the pay would be $640-800 per month.
For the maintenance category I use the same rationale but increase the pay rate to $10-$12 per hour. So, if on average the park will need 40 hours per month of preventative and routine maintenance, then the pay would be $400 to $480 per month.
If the manager or maintenance person is qualified to do the more specialized maintenance, I would not have a problem paying $15 per hour on this type of work. A typical plumber will charge at least $100 for a visit and one hour of work. The key here is that you only have your maintenance personnel do this more specialized type of work if they are QUALIFIED and your carry the proper Workman’s Comp. I have done this both ways in which I would put them on a salary based on the average extra work they will complete or else on an hourly wage for these duties.
For the added grief of being on call on the nights and weekends, the manager will typically get free lot rent and possibly some utility allowances.
When all of this is said and done, this all boils down to about 5-7% of the gross monthly income. In the case that the park has several rental homes, then it may be as high as 10% with the extra job of cleaning and repairing these homes.
One mistake that I have seen many park owners make is to require that their managers hold office hours from 9-5 every day during the week. I have been into many of these offices and other than the manager playing computer games or watching television, the office is empty. On most of my parks, my manager’s either do not have designated office hours or they have them for an hour or two a day during the first week of the month.
Mobile Home Park Tip #9
Comments from the Last Tips:
I have a small park in PA and I live in NY I send the tenants pre addressed envelopes, I send them 13 envelopes in January of every year, I have a PO Box in NY it works great, we handle all of the funds.we also use the rent manager computer system to keep track. I have been enjoying your cds as I drive to work, I noticed you do a lot of park flipping, what about buying and enjoying the cash flow.
Thanks for the comments on the cd’s. I am glad you are enjoying them. As far as your comment, I have tried this a few times in the past. On one park where we had a very limited type manager, it worked great. I even had a few people send me 12 checks for the year all dated the first of each month. They must have liked the extra 11 envelopes with postage. Most of my parks now I have a manager collect the rent. However, in your case as with many other owners, this can be a good way to collect the rents. As far as the Rent Manager program, I have used it to varying degrees of success. When we ran it from my office it worked well. When I had to train the managers to run it, it was not as successful.
As far as keeping some parks and not flipping them, I will eventually find a few parks I really like and take it easy. But for now, I am having too much fun with all the challenges of turning them around!
Thanks again for the comments!
One person suggest automatic transfers from the resident’s account to the parks. Beware that if an automatic transfer is set and there is no money in the account, both the park and the resident’s accounts may be charged bank fees. And the charges are steep-could be $40, a lot for a $150 rent. Many residents don’t always have money in their account on the 30th depending if it falls on a Thursday.
Rob, thanks for the comment and observation. The automatic transfer option would work a lot better when you have responsible residents and this is not always the case. You would have to educate the residents and make sure they authorize the transfers in writing and agree to pay any bank fees if the money is not in the account. Great Observation!
Re: employee payroll,
This is a frightening subject for almost all employers – – – – as well it should, be due to the “alphabet soup” of gov’t requirements and timeliness of making the tax deposits. The risks involved when people do their own payroll are very high for the employer. Especially if a disgruntled employee or contractor wants to cause a problem.
Suggestion: Have owners look into using a Professional Employer Organization (PEO) to administer their payroll services. [Google PEO] It can be a very pleasant surprise for both the employer as well as the employee(s). The PEO will handle all the necessary reporting paperwork, W2′s, tax deposits, Workers Comp insurance and claims and, very often, can offer a complete benefits program as well. (This may take a little shopping around because most PEO’s want clients w/ an employee base of 10 employees or more.)
Very few people take time to truly understand the concept of PEO’s and the protection they give to small business owners. Please keep in mind this is NOT “just a payroll service” that writes checks. When payroll is outsourced to a true PEO, the PEO really become the HR department for the employer.
Thanks for another great comment. I have used a company called Paychex (at Paychex.com) a few times in the past and have been very satisfied. This or a similar PEO is a great way to take the nuisance of payroll checks and other HR issues out of your day-to-day operations.
Thanks again for the comment and participating.
Mobile Home Park Down Payments – From Steve Murden of Star Capital
The source of down payment funds to purchase a mobile home park is a question posed by a number of investors on a regular basis. There are many creative buyers looking for ways to acquire a property with as little out-of-pocket as possible. The general rule in commercial lending is the funds for down payment must be in cash, 1031 exchange accounts, or open lines of credit and evidenced prior to closing. The closing attorney or title company will require that the funds required for closing determined by the settlement statement are to be deposited into their escrow account in order to record the note and disburse funds.
We have seen many investors use equity lines or business lines of credit as their source of funds for down payment, closing costs, and reserves. These are considered equivalent to cash in a bank account. There is typically no seasoning requirement on these lines as long as they can be proven to be accessed by closing. Since mobile home parks are an income producing property and the net income they generate is typically required to support the debt service, the additional personal liability the borrower will be taking on by accessing the line of credit will not affect underwriting and is taken into account when the final approval and loan commitment is issued. We have closed loans in which the property does not support the debt and we take into account the borrower’s personal income and liabilities to approve the loan. In this instance, the additional monthly payment on the line of credit does have an impact and must be considered in the debt-to-income calculation.
Many times a borrower will ask whether they can collateralize unrelated real estate that they currently own. This is not an acceptable structure in traditional commercial loan programs. A local bank may consider this on a case-by-case basis. We suggest that the borrower work with their bank to create an equity line or cash-out refinance on their property prior to closing. Based on the current lending environment, there is very little “out-of-the-box” flexibility when it comes to the amount of cash in a purchase. Prior to the sub-prime mortgage problem, a few lenders would consider up to 10% of the purchase price to be collateralized by an unrelated property as a note created by the seller.
In circumstances where the borrower will take title as an LLC, partnership, or other corporate entity, lenders are able to take into account the total liquid assets of all members/owners of the entity. We have closed loans where one or more of the members of an LLC want to contribute a portion of the down payment funds, but do not want to be personally liable on the note. If these individuals have less than a 10% ownership position, we do not require that they sign as a personal guarantor, but will evidence their liquid assets and use these funds to meet the down payment requirements. The borrowers with 10% or greater ownership will be documented and will sign as guarantors.
We are continuing to finance smaller parks up to 90% LTV at higher than market rates where this makes sense from a cash-flow basis. For competitive interest rates, expect to have 20% to 25% in cash at closing for the down payment.
By Steve Murden of Star Capital Corp – 1-877-297-2230
Mobile Home Park Tip #10
Comments From Prior Tips:
I noticed some of comments and questions this week were about Leases and Rules. We purchased a park from Dave almost 6 years ago and he had in place the best set of Rules and Regulations and an excellent Lease. I have used almost sentence in them for my benefit in applications, moving homes in, evictions, going to court, automobiles, pets, junk, yards, leaves, water etc. They have been looked at by the County Attorney and he says it is the best he has read.
I have attached them for Dave (in case he forgot which ones he left here).
I would recommend them and use them to the 9th degree.
I also have a great plan for asquiring abandoned mobile homes in Kentucky. We have taken over at least 7 abandoned homes through the court system with no problems. Other park owners who have been here 30 and 40 years come to me and ask how to go about acquiring an abandoned home. It’s working!
I have forwarded the Lease you left in place here and the Rules. I have forwarded the Lease with Option to Purchase also, BUT, have changed it and removed all the words that said, buy or purchase, as that was a real source of contention with the Judge and with the Kentucky State Manufactured Home Inspector. It cannot contain any words that refer to purchase or buy. Can only say Lease with option and that it can be sold for $1 at the end of the lease.
Just thought these things might come in handy.
I really enjoy the tips and comments emails…..they are great.
I don’t quite agree with the commentary on being softer on the Rules. We have been hard and it’s worked and we haven’t lost anyone. And we have been able to really clean up the park since we have been strict and our abiding by those Rules and not backing down. It gets them out if they don’t want to be clean….
Just a thought.
Thanks for taking the time to respond to the tip program and for the great comments. I appreciate you positive feedback on the Leases and Rules that I left at the park you purchased. I need to take you and the county attorney out to lunch!!!
I can’t take all the credit for the lease and rules as I had a prior manager and an attorney help in writing them. I have revised them a little over the years and usually to conform to different states. As in your experience, I have never had a problem in court with the language. I have also removed the language you mentioned “buying or purchase” in my lease options. While I never had a problem in court, I found out that language was not appropriate in most states.
As far as being hard on the tenants I agree with you that you need to lay out the law and set an example for people to follow. You had quite a bit of work to do when you bought the park and maybe I will be able to visit and see how the park has come along. It was a nice piece of property for sure and I learned alot from my experience in owning it. My biggest mistake as you are aware was in looking entirely at the low down payment aspect and not really thinking about the other terms (especially the long term prepayment penalty) with the previous seller. I will apologize publicly for that one. I wish you continued success with the park and look forward to your comments and insights in the future. I am sure we would like to hear more about your program for acquiring title to an abandoned home.
Raising the Rent when the Rent is Way Under Market…
I have purchased several parks in the past in which the rent was way under market. For example, the rents in a park that I am buying are $110.00 per month. The average rents in the market are closer to $185.00 per month. For the sake of comparison, in the park I am buying, the residents pay all the utilities. In addition, in the comparable parks, the market rent of $185.00 per month also assumes that the residents are paying all the utilities.
The first issue is how much should I increase the rents and when? While there is no right answer I am planning to raise the rents on day 1 to just below the market rents ($175.00 per month). Next year I will raise them again $10 to $15. The only reason that they are not up to market in the first place is that the prior owner’s never implemented a standard rent raise program and soon were outpaced by the market. Their last rent raise was last year ($10 per month). Before that, they had not raised rents in 6 years!
I am not worried about losing any of the residents for a couple of reasons. First of all, why would they move to the park down the road that is already charging $185+ per month? Most of the parks are comparable in the area and the occupancy is high. Secondly, most of these residents know that they have been getting away with these low rents for years, and while they may fuss a little, they will expect an increase.
I ran into this same situation a few years ago in another park I had purchased and I decided to increase the rents to market in 3 steps. I purchased the park and the rents were $105.00 per month. The rents went up to $150.00 right away, to $200.00 one year later, and will be going to $240.00 this coming year. Then they will be at market. During these rent raises we have lost about 4 out of 100 residents and have filled those lots from people bringing homes into the park.
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By Dave Reynolds and Frank Rolfe
Dave Reynolds and Frank Rolfe are mobile home park investor and together own and operate over 100 parks. Frank also leads regular Mobile Home Park Investing Bootcamps through www.MobileHomeUniversity.com.