Both Dave and I got into the mobile home park business with smaller properties, and many of our early purchases were tiny communities. Even in recent times we have no issue with buying a great deal with a smaller lot count. However, there are many things about small parks that we have learned over the decades and wanted to share those with you to help you craft the right buying decision. As you’ll see, there are some important tips for buying smaller parks that will make your plan more successful and your experience in ownership more enjoyable.
Episode 150: Thoughts About Buying Small Parks Transcript
They say the best things come in small packages, but is that true with Mobile Home Parks? This is Frank Rolfe with Mobile Home Park Mastery Podcast. We're going to be talking about our thoughts about buying small parks. Now, what is a small Mobile Home Park? For the purpose of our discussion, I would say it's a Mobile Home Park that ranges from about 10 to 20 lots with a value typically under $500,000. Let's just use that for small. Now, it's not always true. Some will say, "Wait a minute, now I've got a 10 space park and I take offense at you saying that small because that's worth $2 million." And if you live in Los Angeles, that might well be true. But for us, trying to talk on the big old generic world of Mobile Home Parks, we're going to have to shoot for the middle here and just talk about the kind of park that I think we all know what I'm talking about, that small Mobile Home Park of 10 to 20 laws, which is worth about a half million dollars and under.
What are the strengths of small parks? They have some certain strengths. Number one, when you buy a small park, you have a higher level of comfort because you feel like you're starting small and therefore you can learn the business. It's kind of a test. It's kind of a trial run of your Mobile Home Park investing career to buy that small park. And you feel okay with it because the numbers are also smaller, so you feel like the risk is lower. Number two, you have less competition for the deals because most people don't like buying parks quite that small. They prefer a little bit bigger than that. But however, when you find those small parks, typically you can strike a really good deal with mom and pop because they don't have a lot of alternatives.
How good a deal? Well, I'll never forget my first small park, 15 lots in Lake Worth, Texas. I bought 15 mobile home lots and a stick built three bedroom, two bath home for the whopping price of about $62,000 as I recall. And I know that Dave, my partner's First small park was in Carson, Colorado, and I believe it was roughly 10 lots and he bought that for $50,000.
So yes, when you get into the small parks, you often get really, really good deals because there's not that many people competing for them. Also, you can often get seller financing. That's what I got on my first small park there in Lake Worth, Texas. I got it with only $5,000 down and the guy carried everything else non-recourse, you typically do not get seller financing deals quite that sweet when you get larger. Because again, there's a little more competition on there.
Also, you can sometimes get just phenomenal locations on these small parks. Now, why is that? Well, most of them are older. Most of them date from the 50s and the 60s, sometimes early 70s, back in an era when people didn't hate Mobile Home Parks, so they let you build them in all kinds of nice areas. Look at the park I had in Lake Worth, right in a main part of town, right off the commercial corner there, a location they would never even dream of allowing today. But often you find these small parks in all kinds of locations that are very attractive. I remember one right next to the Dallas Arboretum, just amazing. I mean, here's the Arboretum, here's a fairly tony part of town with lots of nice high end stores, and there's this little 15 space Mobile Home Park. So sometimes yes, you can find some really neat locations.
Also, you can often buy these in a condition where you can get a really good price because they're physically ugly, in very poor condition and a lot of that can be fixed with your own sweat equity. So if you say, "I don't have a lot of capital, want to get in the park business and I want to go ahead and improve that park with my own hard labor of going out there and mowing and painting and sawing." A lot of small parts can allow you to do that, plus it's on the right scale that you can actually do the work. It's not so large that you can't in a series of weekends, go out and probably improve a whole lot of things.
Also, small parks typically have city utilities because they're normally in very urbanized locations. And also the cost of providing private utilities is so high that most people are not going to build a small parking unless it had city utilities.
Also, you can often find these with a lower risk. Just the general risk threshold of the location, the occupancy and everything just tends to be lower. A lot of times they're small parks are little jewels. They've got all the right stuff. They've got good infrastructure. They've got good density. The age of the homes is good. The location is great and the economics is often good.
If small parks are so good, do they have any weaknesses? Yes, they do have some weaknesses. Let's go over that. Number one, just the opportunity cost of your time. It takes the same amount of time for you as the owner to own a 20 space park as it does a 200 space park. Some people would say, "Well, yeah, small parks are kind of cool, but I'd rather buy a big old park and spend my time on something that's really, really large." And that would be typically true.
Also, sometimes when a park is small, you don't have the ability to really bring in good management because you can't pay for it. If you have a 15 space park and your budget is typically on a park that $150 a month to the manager, you are not going to be able to run a big job on monster.com, a big job placement offering and attract any kind of talent. You'll have to go with somebody who already lives in the Mobile Home Park. You may not find your dream manager living in the Mobile Home Park, but you have to go with it. You have no other management option.
Also, it's harder to sell a small park, mainly because it's hard for people to get a loan. And we're all about exit strategy. And when you have a small park often it's hard to get a loan because a lot of banks don't like doing loans under $750,000, that's where the sweet spot of lending begins. If you have a little $300,000 park getting a bank to make a loan on that's tough. Think it from their perspective, they can go out and do a single family home with no risk and no criticism from anyone within the bank and match that same loan amount.
Now let me tell you this, here's a tip. The only thing you have to offer that that single family home doesn't have is daily deposit balances, DDAs. Which means if you deposit all your rent in the bank, that's an extra perk they get from doing the park over the home. But that's kind of about it as far as the perks that they get.
Also in a small park, you have lower cash flow, which means you have lower scale, which means it's a lot less interesting to buyers going down the road. Most people out there want to buy a Mobile Home Park that makes probably 40, $50,000 a year of net income. That way when they ultimately get it paid for they've got a great retirement nest egg. But if your park only makes $10,000 a year or $20,000 a year, there's a lot fewer people who find that exciting, so that may be another problem for you to do.
It's also harder to get a loan when you go to refi that park down the road, even not only is it hard for you to get on the front end when you try and get the loan, even at the end, it never gets any better because the park is still small. Although you've done a lot of great things and now you want to get your money out of the park to reward you for all those great things you did of raising rent and filling lots and cutting costs, the problem is going to be, you probably may not be able to get a refi loan. And if you can get a refi loan, you can't get a cashout refi loan. Cashout refi loans come from the world of conduit and agency lenders. Those started at a million dollar loan price point. So you will not be big enough to make that happen.
Also, it may be hard for you when you have a small park to repopulate it with new homes. Many small parks are a little more awkward in layout and sometimes almost physically impossible to get the new home and the truck in there to replace any home that's not there as far as filling your lot. Sometimes bringing homes into fill vacant lots in small parks is difficult. And also you can't get on the 21st Mortgage CASH Program that all park owners love that finances 100% of the amount of the home and its installation, because they're going to require you to have at least 10 vacant lots to do the program, and if your park is only 10 lots total, and you've got eight occupied, you won't meet the minimum parameters.
All right. So where do you find small parks? You find them the same place you find big parks. Find them from brokers, direct mail, cold call, online. Not a lot of differences there. You'll find as far as buying the parks and managing the parks, not a whole lot of differences other than the items we've already gone over.
So what are some other thoughts about small parks that we've had from the last 25 years of owning small parks? Number one, you may have to use a higher expense ratio because small parks often have a minimum threshold lot insurance and other items. And because you have fewer lots, you have fewer lots to support that cost. Think about it for a moment. If you go travel out to visit your every six months, if you're buying a 100 space park, you can spread that over a hundred lots, but on a 10 space park, only over 10. That one item just traveling out there may take out a large part of your net income, so that's issue one.
Another item. You've got to make sure you got that city permit handled properly on the front end because typically small parks are where all the city friction comes. They don't like that small park there. The small parks typically are in areas that are perhaps a little better than where most other Mobile Home Parks are located at, the city doesn't want the park there. They have the same negative stigma that all America has, and they want to have something to redevelop there that's a little classier or better.
Also be careful on the density. Small parks are typically a little older and your homes may be so close together that you don't have grandfathering protections. You'll have to deal with the Fire Marshall, who has the ability to undo grandfathering in case of health and safety. Also make sure that you buy these things at a higher CAP rate because they're smaller. As a result, it's harder to sell them down the road. You're going to have to offer them when you go to sell them a higher CAP rate than you would many other Mobile Home Parks. If a big Mobile Home Park would sell at an eight cap, you're probably going to have to get at least a 10. And if the park's really small, as much as the 12% CAP rate, and then offer that again down the road. So that's something you also needed to handle.
Also, don't forget that when you come to small parks, because of all the things we've discussed here, the fact they're lesser in demand, they have their own unique problems and things. You got to negotiate those things really hard. All the small parks that we've ever bought, we feel like we got a really good deal on. We've never walked away out of deal on a small park at a closing where we thought, "Oh man, I wonder if we overpaid for that." And that's simply because you don't have the ability, you don't have the luxury to overpay on the small parks. Really, you're making your money on the front end.
That park that I bought for $62,000, it wasn't that impressive in the end because it wasn't a very large park. I ended up selling it back to the city. I think I got it about $150,000 as I recall for the park. That's a pretty good return on investment, but it's still not a really giant amount of money, that is probably not going to set you up for life so you can retire and move to the Caribbean.
Once again, you just have to acknowledge it's a small park. It has some positive attributes. It has some negative attributes. Be smart when you buy them, negotiate hard on them, don't over pay for them, but can you buy a small park and be successful?
Yes, you absolutely can. I know many people who bought small parks. Let's show some hands here, myself, Dave Reynolds, my partner, and many, many other people. And that first small park did well enough and gave them enough comfort to then go buy a larger park and maybe another park after that. And who knows how many parks beyond that. They definitely have their purpose in life, there's definitely a point to buying small parks. Just be very careful, just weigh the items I've discussed and make sure that your very first park purchase is a good and successful one. It would be a shame for you to be soured of the industry by buying a small park and saying, "Oh, I hate this industry," only because it was a small park, which has its own unique challenges and you didn't acknowledge those challenges when you bought them.
If you're buying a small park as an experiment, if you're buying it because it meets your capital constraints, if you're buying it because you want to get in small, reduce that stress and learn about the industry as you go, if you're buying it because it's a great location that you really want to own, if you're buying it because you're going to get a great seller finance note on it, those are all great reasons to buy a small park. When you see those small parks always feel free to make offers on them. If the deal is attractive, go ahead and do it. We've done it many times over the last 25 years. I know many people who have in their stable, even bigger portfolio owners, a handful of smaller parks. Smaller parks are two thumbs up as far as we're concerned. This is Frank Rolfe, the Mobile Home Park Mastery Podcast series. Hope you enjoyed this. Talk to you again soon.