First, the mobile home collateral is considered personal property when it is in a park. Historically, it has been a rapidly depreciating asset. The costs associated with lending these types of assets push many banks out of the market altogether. This leaves park owners and private investors as the driving forces behind the mobile home rental market when it comes to mobile home park financing.
A conventional financing program will not typically consider rental income from park-owned mobiles toward the debt-servicing capacity of a real estate loan. There are some alternative higher fee programs, which consider all park revenue, both mobile home rental and pad rental. The most common problem buyers have with these types of parks is the numbers that sellers or real estate agents provide them. They will often consider all income when determining capitalization rates, value, etc. Mobile revenue is never used to determine the appraised value of a property. This is because the mobiles in the parks are not real estate improvements. One cannot simply mix several different types of income into the blender and determine a value based on a single capitalization rate. All parts are not equal. The revenue stream generated by park-owned mobile homes carries different risks of interruption or loss than the revenue stream generated by a mobile platform. A more secure income stream deserves a different valuation and also a different loan interest rate, a reflection of risk.
The easiest way to imagine these types of parks is in two components. You have the real estate component, which consists of land and any verifiable improvements to the land. Typical mobile home park improvements may include dollies, RV pads, clubhouses, laundry room, pool, office, etc. Real estate value is largely determined by the normal operating income generated by the actual improvements. It also has the component of movable or movable property. Personal property may include mobile phones, computers, appliances, etc. Financing products are available for these pieces of personal property at higher rates, shorter amortizations, and shorter fixed terms than you would expect with a typical home loan.
These different streams of income deserve their own separate determinations for investment value. Income derived from rental real estate, such as a mobile home park rig, is considered more reliable and valuable than income derived from personal property, such as rental of a mobile home. The cap rate for a passive investment like a mobile home park (considering only pad rentals) can be in the 8% range in some markets, while the cap rate for a more business intensive project like mobile home or RV rig rentals can be in the 8% range. the range of 12% for that same market. Obviously, the actual cap rate will vary greatly between different markets, but riskier income will still warrant a higher capitalization rate than less risky income. This type of thinking suggests that $1 of income from a mobile dolly is more valuable than $1 of income from a mobile home rental.
Just because two streams of income are generated through home improvement does not mean they are the same. While RV rigs can be valued like real estate, they still require more work and their income streams are less reliable than a mobile home rig and therefore warrant a higher capitalization rate at valuation. This is evident in the market vacancies that any underwriter will use to determine the stabilized cash flow of an RV rental property.
From an investor’s point of view, income that is reliable or easier to produce is more valuable than income that takes longer to generate or is less reliable. From a lending standpoint, income that is reliable or easier to produce contains less risk of interruption and therefore less risk of default.
Lenders will only accept real estate as collateral to secure a CMBS (Commercial Mortgage Backed Security). A CMBS is a loan that is secured against commercial real estate and offers lenders the flexibility to sell like any other bond security traded in today’s market. This type of money has become much more prevalent in recent years. Many national lenders today, with typically more aggressive products than a local bank can offer, employ this type of lending structure. Very similar in consequence for the investor, a CDO or CDS structure can also be employed today.
The problem of simultaneously selling different types of assets (real and personal property) often leaves inexperienced buyers in the middle of a purchase contract needing additional cash to cover moving value, as most Lenders can only offer dollar loans against the value of real estate. . Real estate loans are not the answer without considering some form of cross-collateralization, which is atypical for most conventional financing options. One of the most common solutions is for the seller to carry a note for the value of some or all of the phones. If seller financing doesn’t work out, there are a number of private investors who can offer a variety of options depending on the situation. The key phrase to remember when securing financing for a property, such as a mobile that is not considered real property, is “secure mortgage.” In commercial real estate, this term is generally reserved for a situation where a mobile home is in a park and does not occupy its own tax lot.
There is an occupancy issue to consider. There is generally less incentive to keep a mobile renter in the park. A tenant who owns their mobile is much less likely to move than a mobile renter. The costs and efforts to move a mobile phone are often a factor that helps safeguard long-term occupancy for tenants who own their mobile phones.
There is also an additional expense to consider. Anyone in a rented mobile is less likely to take care of it. Mobile owners are responsible for home maintenance and repair. When a mobile can no longer be rented by use, the owner must pay to get rid of it.
There are many different benefits and detriments to owning mobile phones in a park. Parks can be very profitable when they charge rolling rent in addition to platform rent. The determining factor to use or not this type of rental park is usually “How much do you want to invest in the project?” If you’re looking to get into a property and put the time and work into it, park owned cell phones could be a great way to maximize cash flow; make sure you approach financing appropriately. For the passive investor who likes to cash checks every month, a platform rental-only park is the route of choice – expect to receive the most competitive rates and terms.
