Investing in mobile home parks can be a potentially lucrative opportunity, but it comes with its complexities. Completing thorough due diligence is essential to ensure a likely successful investment. This guide will explore the key questions investors should pose to general partners (GPs) before committing capital, the essential due diligence documentation required, the minimum requirements for a thorough mobile home park due diligence process, and common costly mistakes made by operators.
Key Questions to Ask Before Investing in Mobile Home Parks
When considering investing in mobile home parks, it’s crucial to vet the general partners thoroughly. Here are some essential questions to ask:
What is the GP’s Track Record?
Understanding the GP’s experience and success rate is critical. Ask about their history in managing mobile home parks, including the number of parks they currently manage, past performance metrics, and any challenges they have faced and how they resolved them.
How is the Property Secured?
Inquire about the security measures in place for the investment. Is the risk spread across multiple properties, or are you investing in a single property? Understanding the security and diversification of the investment can help mitigate potential risks.
What is the Due Diligence Process?
Request detailed information on the due diligence process followed by the GP. Ask about the specific steps they take to evaluate a property and ensure its viability. This includes understanding both the offsite and onsite due diligence procedures.
What are the Market Dynamics?
Understanding the market where the mobile home park is located is essential. Ask the GP about the local market conditions, including demand for affordable housing, median home prices, and economic stability.
Essential Due Diligence Documentation Needed for Investing in Mobile Home Parks
Before investing in a mobile home park, there are several critical documents that are necessary:
Rent Roll
The rent roll provides a snapshot of the current occupancy and rental rates. It should include details such as tenant names, lot numbers, rental amounts, and lease terms. A historical rent roll can also help identify trends and turnover rates.
Financial Statements
Request at least three years of financial statements, including profit and loss statements, balance sheets, and cash flow statements. These documents provide insights into the property’s financial health and potential profitability.
Utility Bills
Utility bills for the past year can reveal the property’s operating expenses and potential issues with utility infrastructure. This includes water, sewer, electricity, and gas bills.
Lease Agreements
Review all lease agreements to understand the terms and conditions under which tenants occupy the lots. Pay attention to clauses related to rent increases, maintenance responsibilities, and compliance with local regulations.
Permits and Zoning Information
Ensure the trailer park complies with local zoning laws and has all necessary permits. This includes verifying the zoning designation, any variances, and the status of any non-conforming uses.
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By Andrew Keel
Minimum Requirements for a Thorough Due Diligence Process When Investing in Mobile Home Parks
A comprehensive due diligence process is critical for identifying potential risks and ensuring the investment’s likely success. Here are the minimum requirements:
Offsite Due Diligence
- Document Review: Analyze all provided documentation, including rent rolls, financial statements, and lease agreements.
- Market Analysis: Conduct a thorough market analysis to understand local demand, economic conditions, and competitive landscape.
- Regulatory Compliance: Verify compliance with local zoning laws, building codes, and environmental regulations.
Onsite Due Diligence
- Physical Inspection: Conduct a detailed inspection of the property, including infrastructure (roads, utilities, etc.), common areas, and individual lots.
- Utility Assessment: Evaluate the condition of utility systems, including water, sewer, and electrical infrastructure. Consider hiring experts to conduct video inspections of sewer lines and other critical systems.
- Tenant Interviews: Speak with current tenants to understand their satisfaction and any issues they may have encountered.
Quantification of Deferred Maintenance
- Cost Estimation: Identify and quantify deferred maintenance items, categorizing them into different cost brackets (e.g., under $10,000, $10,000–$50,000, and over $50,000). This helps in creating an accurate budget for necessary repairs and improvements.
Common Costly Mistakes During Due Diligence
Even experienced operators can make mistakes during due diligence. Here are some of the most common and costly errors:
Underestimating Infrastructure Issues
Neglecting to thoroughly inspect and evaluate the condition of the trailer park’s infrastructure can lead to significant unexpected expenses. This includes not assessing the state of sewer lines, water systems, and electrical components.
Inadequate Market Research
Failing to conduct comprehensive market research can result in investing in a market with insufficient demand for mobile home park spaces. Understanding local economic conditions, median home prices and demand for affordable housing is crucial.
Overlooking Legal and Zoning Issues
Ignoring potential legal and zoning issues can jeopardize the entire investment. Ensure that the mobile home park complies with all local regulations and that there are no pending legal disputes or zoning changes that could affect its operation.
Insufficient Financial Analysis
Not thoroughly analyzing the mobile home park’s financial statements and rent rolls can lead to misjudging its profitability. Ensure that all income and expenses are accurately recorded and that there are no hidden liabilities.
Failing to Quantify Deferred Maintenance
Not adequately quantifying deferred maintenance can result in significant unexpected costs. Ensure that all potential maintenance issues are identified, documented, and included in the investment budget.
Conclusion
Investing in mobile home parks can be highly rewarding, but it requires thorough due diligence to help mitigate risks and ensure the likely success. By asking the right questions, obtaining essential documentation, following a comprehensive due diligence process, and avoiding common mistakes, investors can make informed decisions and potentially maximize their returns. Always remember that due diligence is an ongoing process, and staying vigilant can help secure your investment in mobile home parks.
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Disclaimer:
The information provided is for informational purposes only and is not investment advice or a guarantee of any kind. We do not guarantee profitability. Make investment decisions based on your own research and consult registered financial and legal professionals. We are not registered financial or legal professionals and do not provide personalized investment recommendations.
Tristan Hunter - Investor Relations
Tristan manages Investor Relations at Keel Team Real Estate Investment. Keel Team actively syndicates mobile home park investments, with a focus on buying value add, mom & pop owned trailer parks and making them shine again. Tristan is passionate about the mobile home park asset class; with a focus on affordable housing and sustainability.