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! Amy
Amy, 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
Another Comment/Question:
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.
Thanks, Bret
Bret,
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.
http://www.irs.gov/pub/irs-pdf/p15.pdf?legacy=1
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.
Thanks, Dave
Another Comment:
Dave,
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.
Best regards, Brian
Brian,
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
Dave,
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.
Glen
Glen, 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!
Dave
Another Comment...
Dave,
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.
Thanks, Duane
Duane, Great point and another reason one should make sure they
follow all the laws Federal and State! Thanks for the comment!
Dave
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:
Hi Dave,
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, George
George, 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! Dave
Another Comment...
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!
Dave
Another Comment...
Dave,
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. Lee
Lee,
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.
Dave
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:
Dave,
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. Sharon
Sharon,
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.
Also, I am going to post a copy of the lease and rules on the site.
Here is the link...
http://www.mobilehomeparkstore.com/ebooks/lease-download.htm
Thanks, Dave
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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MobileHomeParkStore.com
PO Box 457
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