WHY PRETTY MOBILE HOME PARKS OFTEN
HAVE UGLY RETURNS
By Frank Rolfe
Some mobile home park buyers have this erroneous idea that the goal
is to buy a great looking asset. They even rate the parks they look
at based on physical appearance. The star system is a good example.
Most people think a five-star park is always superior to a one star
park. However, the only real star system they should consider is
which park is a superstar on cash flow. Because at the end of the
day, all that really matters when you own a mobile home park is
making money. Parks that make money are great, no matter how ugly
they are, and parks that lose money are dogs, despite how cute their
entry may be. And, as a general rule, the prettier the park, the
uglier the cash flow.
So
why do pretty parks often not make money?
-
They cost too
much to buy. Pretty parks sell at the lowest cap rates.
Normally one digit, and a low one digit at that. 5% , 6% and 7%
cap rates are great for sellers, but can be complete failures
for buyers. It is quite difficult to make any money buying parks
at 6% returns.
-
They are
normally at full market rent, so you have no room to push rents.
Pretty parks normally have lot rents that are at the top of the
market. So the best a buyer can hope for is to gradually nudge
the rents up a tiny bit each year or so.
-
They are
normally fully occupied, so you have no occupancy upside.
Tenants are drawn to the park's aesthetics, and the vacancy
factor is normally 5% or less. So there is no way to
significantly increase operating income through filling lots.
-
They cost too
much to maintain. The landscaping alone on one of these
parks is higher than a one star park may spend on total
management. It requires a constant outlay of cash to keep a park
to the highest standard. When you feel you must re-pave instead
of patch roads, and plant seasonal color at your entry, you are
going down the path to lower margins.
-
They have
plenty of amenities, and they all cost money to run. Pools,
clubhouses, jogging tracks, playgrounds – they all sound great,
but cost a lot to maintain and insure. While they are staples of
five-star parks, they are causes of poor cash flow.
Are
all pretty parks bad? No, not if you bought them cheaply twenty
years ago. The only guy getting rich off these parks today are
the current sellers. As for the buyers, that's a lot of work for a
CD style yield. Personally, I'd rather buy a down and dirty, ugly
park that makes real money. But I wouldn't want to live in one!
|
