Mobile home parks are a diverse asset class, historically offering stable cash flows and good returns for investors. A common question is, “How do I scale to $1 million with mobile home parks?” Many mobile home parks are owned by mom-and-pop operators who might not have the energy or expertise to maximize their investments. This creates opportunities for savvy investors to increase mobile home park value and cash flow.

In this blog post, we will discuss how a mobile home park is valued and how to add value through effective strategies. We’ll illustrate these concepts with examples of how value-add looks in a typical mobile home park investment.

Understanding Mobile Home Park Valuation

Mobile home parks are classified as commercial real estate, valued based on the income they produce. Two critical metrics in valuing a mobile home park are the Net Operating Income (NOI) and Capitalization Rate (Cap Rate).

Commercial asset values are typically determined by the NOI divided by an appropriate Cap Rate. While investors can’t directly influence the Cap Rate, they can control the NOI by increasing operating income and reducing operating expenses. Given that NOI serves as the numerator in the value equation, maximizing it is pivotal in boosting a mobile home park’s value. The NOI itself is derived from income minus operating expenses, meaning that increasing income or reducing expenses will likely elevate the asset’s worth.

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Increasing Occupancy: Infilling a Mobile Home Park

Increasing occupancy through infill can significantly boost a mobile home park’s value. Infill involves bringing in new or used homes to occupy vacant lots. This strategy adds income without a proportional increase in expenses.

For example, consider a mobile home park with 50 lots (20 vacant) purchased with a 6% cap rate.

Infill Example:

• Infill 20 homes, each adding $350 in lot rent per month.
• Annual Income: 20 homes x $350 x 12 months = $84,000
• Expenses (35%): $84,000 x 0.35 = $29,400
• Additional NOI: $84,000 – $29,400 = $54,600
• Added Value: $54,600 / 0.06 = $910,000

This example shows how infilling alone can potentially increase the value of your mobile home park investment.

Raising the Lot Rent

Many mom-and-pop-owned mobile home parks have lot rents well below market rates. Incrementally raising rents can boost the NOI and, consequently, the property’s value. Smaller increases are typically easier for residents to accept.

Rent Increase Example:

• Increase lot rent by $50 per month for 50 lots, assuming 100% occupancy after infill.
• Annual Income: $50 x 50 lots x 12 months = $30,000
• Expenses (35%): $30,000 x 0.35 = $10,500
• Additional NOI: $30,000 – $10,500 = $19,500
• Added Value: $19,500 / 0.06 = $325,000

Incremental rent increases can add significant value, as illustrated in this example. Repeating this process over multiple years can further enhance the asset’s value.

Billing Back Utilities and Submetering

Implementing utility bill-back systems can enhance a mobile home park’s value. Submetering water, for instance, requires an upfront investment but enables precise billing for each lot’s water usage, making residents more conscious of their consumption.

Utility Bill-Back Example:

• Assume the utility bill for the mobile home park is $45,000 annually.
• Savings: Billing back $45,000 reduces operating expenses.
• Additional NOI: $45,000
• Added Value: $45,000 / 0.06 = $750,000

By billing back utilities, you can potentially increase the property’s NOI and value.

Utilizing Every Square Inch

Mobile home parks offer various ways to generate additional income. Renting space for RV or boat storage, adding storage sheds, or leasing space for cell towers or billboards are proven methods to boost NOI.

Additional Income Example:

• Rent RV storage spaces generating $1,000 per month.
• Rent space for a cell tower at $250 per month.
• Annual Income: $1,250 x 12 months = $15,000
• Expenses (35%): $15,000 x 0.35 = $5,250
• Additional NOI: $15,000 – $5,250 = $9,750
• Added Value: $9,750 / 0.06 = $162,500

These additional income streams further enhance the potential value of your mobile home park investment.

Conclusion

Mobile home parks typically offer gold-mine opportunities for investors, with the potential for good returns and below-average risk. In the example above, simple yet effective value-add strategies significantly increased the example asset’s value by over $1 million. Repeating this process across multiple properties can set you on the path to potentially substantial financial returns.

While it may seem straightforward on paper, mobile home park investing requires dedication, commitment, and expertise. Conduct thorough due diligence, consult with professionals, and make informed investment decisions. If that isn’t the route for you, consider investing as a passive partner with an experienced operator to potentially maximize your returns with minimal effort.

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.