Financing Smaller Mobile Home Parks

By Steve Murden, Star Capital Corporation

Many first-time and experienced commercial real estate investors are turning to mobile home parks for strong returns on their investment.  Parks tend to have higher CAP rates than apartments and have similar stability with lower expense ratios.  There is an endless demand for affordable housing in just about every market in the country and manufactured housing meets the needs of low to moderate income tenants.

For many real estate investors, there is a limited amount of liquid assets available to purchase an income producing property and they must look at properties that are more affordable.  The properties below the $1,000,000 sales price are more reasonable to purchase and manage.  Financing is available for loan amounts starting at $100,000 up to 90% LTV.  This has opened the door for many investors that were purchasing single-family homes and basing the investment on appreciation rather than cash-flow.  Even a smaller park can produce a healthy return without a great deal of capital.

The decision many potential park owners must make is whether to acquire a park where all of the homes are owned by the tenants or one that may have a high density of homes owned and rented by the park.  The "pad-only" parks are much easier to maintain and operate, but do not produce the higher returns that can be achieved by renting out the homes.  The maintenance of the homes can be cumbersome for those without on-site maintenance or experience in repairing mobile homes.  Many parks have a mixture of tenant-owned homes and park-owned homes which can provide good cash-flow without taking on 100% of the maintenance of all of the homes.

Lenders do not consider the value of the mobile homes when appraising these parks which can create a problem with a seller basing the purchase price on the net income from both the pads and the rental homes.  If the homes are not taxed as real estate, they are not collateralized by the lender and their income and value are not included in the underwriting.  This leads to situations where the seller must be willing to carry a note on the trailers to meet the needs of the buyer and the available liquid assets to put into the transaction.  Lenders will finance the park based on the appraised value of the real estate and the notes on the homes do not affect the combined loan-to-value ratio.

We have structured many park acquisitions with a combination of debt on the park and seller-held notes on the mobile homes.  The buyer's strategy may be to increase pad rents over time and thus increase the value of the park to a point where at the end of the seller's note, they can refinance the park based on the pad rents and pay off the outstanding balance on both the park and the homes.  In addition, the buyer may create notes with the tenants to purchase the park-owned homes and sell these notes to note-buyers as a portfolio of performing seasoned loans.  The exit strategies for these seller-held notes vary, and we see investors getting more and more creative.

There are many smaller parks available for sale and they must be evaluated closely to determine whether they are a good investment.  Those that are purchased at a fair price with up-side potential can be a great addition to an investor's portfolio.  Many parks have not raised rents in a number of years and are in improving markets.   The buyer must consider the current cash-flows along with the long-term potential of the investment.  The acquisition financing is crucial to getting into the park and creatively structuring the transaction is necessary to meet the needs of both buyer and seller.  Understanding the available loans for these parks is an important aspect to negotiating the purchase.  With smaller loans available at high loan-to-values, there will be many opportunities for park-investors to acquire multiple parks and spread out the risks.

  Contact Steve Murden at 540-342-6520 or email stevemortgage@aol.com or visit his  website at www.starcapitalcorporation.com