HOW MUCH MONEY CAN YOU MAKE WITH A MANUFACTURED HOME COMMUNITY?

by FRANK ROLFE

An article I wrote recently, telling the story of my first manufactured home community that I purchased for $400,000 and sold around ten years later for $1,525,000, raised the ire of a self-styled industry “guru” who contended that such amounts cannot be made with a manufactured home community. Of course, a community we closed on a few weeks ago in Kentucky showed an appraised value of over $1,000,000 more than we paid  so it doesn’t seem that unique to us. But it does raise the question of how much money you can realistically expect to make with a manufactured home community.

How much money do you want to make?

People have different goals. Some people are only concerned with trying to get a higher return on their cash, which is currently getting 1% in a CD. Others are trying to create substantial wealth, far beyond a simple return on their down-payment. It’s a free country, so there’s no law on what you have to make from a manufactured home community purchase.

What you make is totally based on what you buy.

If you are buying communities at 7% cap rates which are 100% occupied, with no room for pushing rents or sub-metering utilities, then it is unlikely that you will create much value other than a 10% or so cash-on-cash return. You’ll run the park for a while, maybe make a small rent increase over time, but you’ll probably sell it back for that same 7% cap rate years later, and have a very small amount of profit going to you at closing. On the other hand, if you buy manufactured home communities at a 10% cap rate, and with significant room to push rents, bill-back utilities and fill lots, and then, after successfully putting all those factors into motion, sell that now 18% cap rate purchase for a 9% cap rate, you will have created a huge amount of value, which you will receive as a cashier’s check at closing. That’s one way that you can create $1 million of value with a manufactured home community.

Don’t forget about buying $1 for 50 cents.

Sometimes you can buy a manufactured home community on the front end, that’s already running well, for less than it’s worth. This is normally a result of a seller who has failed to perform proper accounting on his property, including expensing items that should be capitalized, or not collecting the rent because they are too friendly with their tenants.

Benjamin Franklin summed it up.

Benjamin Franklin once said “diligence is the mother of good luck”. What I think he meant is that your success or failure is based on how you buy the property on the front end. If your goal is to create a significant amount of capital by buying a property that has great numbers going in, with the possibility of even better performance over time, then you can make a lot of money with a manufactured home community. If, however, you buy a community with lousy numbers and no possibility of improvement, then you will make no money  or even lose your money.

But this is not a “get rich quick scheme”.

Buying and operating manufactured home communities is far from a “get rich quick scheme”. But that does not mean it’s not a “get rich scheme”. The only reason to get involved in this industry is to make money  it’s not a sexy business that sounds good at a cocktail party, nor is it really that much fun. But I think it’s safe to say it’s never a “quick” business. Holding and operating a community for 5 to 10 years is anything but “quick”.

As the industry becomes more professional, the opportunities will diminish.

 Of course, one of the reasons that there is so much money to be made in the manufactured home community business is that the industry is dominated by moms and pops, who are not the most sophisticated sellers. There are roughly 50,000 manufactured home communities in the U.S., and the majority of these are owned by the original founders or folks who have had them for decades. There are hardly any new communities being built, so this supply is static. As professional investors buy out these moms and pops, the profitability of manufactured home communities  based on going-in cap rates and potential income growth will decrease. This means that there is some sense of urgency, and it is not a given that opportunities will always be as ripe as they are now.

There are two types of business models in this industry.

There are public companies that prefer to buy “finished” goods that are stable but have a lower return, and others who seek out “turnaround” opportunities that are non-stabilized, and offer higher returns for those who take the time, effort and risk to stabilize them. There is no reason that these two business models cannot happily co-exist. And also no reason that the lower returns of the one niche should apply to the other. The industry “guru” who believes that it is impossible to make significant money in this business has been hanging around with the guys at the public companies for too long.

Conclusion

I am proud to make significant returns with manufactured home communities. I firmly believe that there is still plenty of opportunity in this industry. Those who think otherwise either don’t really know what they’re talking about, or don’t have what it takes to be a successful community owner.

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