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 mobile home 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 mobile home 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.