When exploring passive investing in mobile home parks, one of the most important — yet often overlooked — aspects is the type of financing used. Debt plays a major role in how a deal performs, how risks are allocated, and what could happen if things do not go as planned. For passive investors, understanding recourse vs. non-recourse financing can be helpful in assessing risk and aligning investment decisions with personal goals.

In this blog post, we’ll break down what each type of debt means, how it may affect returns, and what passive investors might consider when evaluating opportunities.

Understanding Debt in Mobile Home Park Investing

Most mobile home park acquisitions involve some level of debt, often referred to as “leverage.” Operators use financing to purchase a property with a combination of equity (investor capital) and loans from banks or other lenders. This structure allows for potentially enhanced returns because the property’s cash flow and appreciation are spread across a smaller equity base.

However, debt is not just about improving returns. It also introduces risk. If a property underperforms or experiences a major downturn, debt obligations still need to be paid. This is where the type of debt — recourse or non-recourse — becomes crucial.

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What Is Recourse Financing?

Recourse financing means that the borrower (and sometimes the guarantors) are personally responsible for the debt, even beyond the collateral property.

How Recourse Works

If the mobile home park fails to generate enough income to service the debt, the lender can take additional steps to recover the owed money. These steps could include going after the borrower’s personal assets, such as bank accounts or other real estate holdings, until the full amount is satisfied.

Why Recourse Loans Exist

Recourse loans are common with local or regional banks and are typically easier to obtain for smaller deals. Lenders like recourse loans because they have a stronger safety net. Since borrowers are personally on the hook, they have extra incentive to manage the asset effectively and avoid default.

Pros and Cons for Passive Investors

• Potential Pros:
  • Easier for operators to secure, which may lead to more deal flow.
  • Can offer slightly better interest rates due to the lender’s additional security.
• Potential Cons:
  • Creates additional risk for the operator and possibly for guarantors.
  • If the deal goes badly, there could be personal financial consequences for the sponsor — which might distract from operations or future projects.

For passive investors, recourse loans may still be acceptable if the operator has strong financial capacity, a good track record, and a conservative business plan.

What Is Non-Recourse Financing?

Non-recourse financing limits the lender’s ability to pursue anything beyond the collateral property. In other words, if the mobile home park cannot support the debt and the property must be sold, the lender typically cannot go after the borrower’s personal assets to recover any remaining balance.

How Non-Recourse Works

In the event of a default, the lender’s main remedy is to take back the property through foreclosure. Once the property is sold, the borrower’s obligation usually ends, even if the sale price does not fully cover the loan balance.

Carve-Outs and Exceptions

It is worth noting that most non-recourse loans have exceptions — often called “bad boy carve-outs.” These clauses allow the lender to pursue the borrower personally if there is fraud, misrepresentation, or certain other prohibited actions.

Pros and Cons for Passive Investors

• Potential Pros:
  • Protects the sponsor’s personal assets, reducing the risk of catastrophic loss.
  • May provide peace of mind to passive investors knowing the worst-case scenario is generally limited to the property itself.
• Potential Cons:
  • Can be harder to obtain and may require a larger property size or more experienced operator.
  • Often comes with higher interest rates or stricter underwriting requirements.

Key Differences: Recourse vs. Non-Recourse

Why Debt Structure Matters for Passive Investors

When you invest passively in a mobile home park syndication, you rely on the operator to manage both the property and its debt obligations. The type of financing can affect:

1. Risk Exposure

With recourse loans, the operator’s personal risk could impact their decision-making. They may be more conservative or more aggressive depending on the situation. Non-recourse loans provide more separation, potentially aligning incentives with protecting the property’s value rather than the operator’s balance sheet.

2. Refinance and Sale Options

Certain lenders have prepayment penalties, defeasance, or yield maintenance provisions that affect when and how a property can be refinanced or sold. These factors may influence when passive investors receive their capital back.

3. Operator Selection

Not every operator has the ability to qualify for non-recourse debt. Choosing operators with strong lender relationships can be a sign of experience and credibility.

What Passive Investors Can Ask Operators

When reviewing a new mobile home park investment opportunity, consider asking:

• What type of loan is being used — recourse or non-recourse?
• If recourse, who is guaranteeing the loan and what is their financial strength?
• What are the loan terms (interest rate, amortization, fixed vs. variable)?
• Are there prepayment penalties or lockout periods that could delay an exit strategy?
• What is the loan-to-value (LTV) ratio, and how conservative is it relative to the property’s current income?

These questions can help clarify the debt structure’s impact on the investment and give you a clearer picture of potential outcomes.

Balancing Risk and Return

There is no single “right” answer when it comes to recourse vs. non-recourse financing. Each option has its trade-offs. Recourse loans may be more accessible and offer slightly better pricing, while non-recourse loans offer stronger protection against downside scenarios.

As a passive investor, the goal is not necessarily to avoid all risk but to understand it. By learning how debt works, you can make more informed decisions, align with operators whose strategies you trust, and choose opportunities that fit your personal risk tolerance.

Final Thoughts

Debt is a powerful tool in mobile home park investing. When used wisely, it may magnify returns and allow operators to acquire and improve more communities. But debt also introduces obligations that continue regardless of property performance.

By understanding the difference between recourse and non-recourse financing, passive investors can better evaluate investment opportunities and build a portfolio that balances growth potential with acceptable risk levels. Always review offering documents carefully and consult with a qualified advisor before making any investment decision.

Are you looking for MORE information? Book a 1-on-1 consultation with Andrew Keel to discuss:

• A mobile home park deal review
• Due diligence questions
• How to raise capital from investors
• Mistakes to avoid, and more!

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 research and consult registered financial and legal professionals. We are not registered financial or legal professionals and do not provide personalized investment recommendations.