By George Allen, Realtor®, CPM®Emeritus, MHM
The clearly, loudly stated “Good parks don’t rent!” exclamation, by an audience member owner of a landlease community, momentarily silenced a spirited discussion at a recent manufactured home finance seminar in Indianapolis, Indiana. A low murmur of agreement emanated from some in the auditorium, a few heads snapped back in surprise at the statement, and a couple folks shook their heads in disagreement. It was obvious to me, the time had come to revisit this variegated subject, of whether ‘to rent or not to rent’ new and resale homes on rental sites in landlease (nee manufactured home) communities.
When I took over four ailing Midwest ‘mobile home parks’ way back in 1978, as my college professor Dr. Grigolia used to say, I ‘learned my onions’ by managing 1,200 rental homesites. Back then we called them lots, pads, spaces and stalls. And on 350 of those sites my employer owned 350 rental mobile homes, many of which were 14 X 70 duplex units, with two families living in each one.
No question about it, these properties were the wild wild west of the trailer world! The firm that developed these four Wheel Estates had ‘gone rental’ in a last ditch effort to save their investment, when the mobile home business went belly–up post 1976, upon implementation of the infamous HUD Code. Remember? In four short years, between 1973 and 1976, annual volume of new mobile home cum manufactured home shipments plunged from a record high of 579,960 down to 246,120 homes! So, almost overnight, tens of thousands of new mobile home parks, no longer had gushing sources of new mobile homes to put on vacant rental homesites.
The rental strategy (kinda) worked for them! The firm bought all the inexpensive, singlesection (nee single wide) homes it could find; sited them within these four properties; and, leased units by the month, garnering enough cash flow to meet their mortgage payments. By the time I arrived, there wasn’t any ‘curb appeal’ left, property rules enforcement was difficult at best, and rent collection? You have no idea how tough that was. But, with the help of four new, specially selected (i.e. thick skin and willingness to work hard and long) on–site managers, along with changing monthly rent payment to weekly; and in time, conversion of ‘rental units’ to ‘contract sales’, the properties were turned around and operating in the black, when sold to a new investor two years later.
Frankly, I haven’t dabbled in ‘rentals’ since, but for a few brief ‘consults’ with property portfolio clients, either contemplating getting into the rental home business, or needing a Management Action Plan, or MAP, on how to get out of the business.*1
The ‘when & why’ of rentals, in what we now refer to as landlease communities? Depends on the economics (i.e. employment picture and Area Median Income or AMI, for starters) and demographic characteristics and related circumstance of one’s present or anticipated local housing market *2, and one’s corporate situation and philosophy. If prospective homebuyers don’t have sufficient downstroke to purchase a new or even a resale home, they can generally afford to rent a manufactured home in a landlease community; hence, why this income–producing property type has the perennial rep for being ‘recession proof’. On the other hand, if the business entity owning said property has raised monthly homesite rent well above what the local housing market will bear, there are two alternatives: reduce site rent and or rent homes! (When was the last time you saw or heard of a LLCommunity ‘reducing site rent’? Apartment communities do it all the time.) Not including ‘selling and self-financing homes on–site’ here, as the general impetus for that business model has been the lack of outside, third party chattel financing for most of the past decade.
There are indeed local housing markets where ‘rentals’ work well. For example: near military bases, sometimes colleges, where there’s seasonal farm labor, in Sunbelt regions, and where there are other forms of transient citizenry – even RV’ers. In fact, a handful of landlease community portfolio owners/operators prefer the rental home business. Here’s what the founder of one firm penned five years ago; and I confirmed the continuing practice, with the second generation owner, just weeks ago:
“George, always enjoy the Allen Letter. I want to give you a slightly different take
on rental mobile homes. You may have heard me say this when you were here. We started buying rental homes in 1971, and have gradually increased their
number. I think we own about 350 rental homes now. Probably will have 400 by end of the year, because we have just placed an order for 34 more new ones, and
will place another order before the end of the year. We vary from your recommendations, relative to ‘rentals’, three ways: 1) We do buy as many or more new homes than used ones; we do this because we want really good tenants with
good credit scores, and we do not want to depreciate the value of our parks. We try to compete directly with apartments, stressing that with a mobile home, you get a yard, good parking, no one over your head or right beside you, and more floor space for the money. 2) We only collect rent monthly because we don’t
accept poor credits; and 3) we do not try to convert rental to sales because we make more money on rentals and we have found renters are more often than not, disinterested in converting. Just thought I’d send you these thoughts since I know you don’t expect everyone to follow the exact same path. Hope you and your
family are well.’ KD (lightly edited. GFA)"
In this instance, don’t miss the fact that ‘rentals’ have been the successful business model, even culture, for this firm for 40 years!
The ‘why’ of rentals, opens the door to what’s Good and Bad about the practice. And while the following lists aren’t exhaustive, they will acquaint you with Pro & Con Perspectives:
• Easy to get into the business if and when ‘repo’ units and used homes are readily available in or near the present or anticipated local housing market. Also has been shown to work well using new, inexpensive Community Series Homes (‘CSH’) designed and manufactured especially for LLCommunity in – fill. *3
• Quick and steady cash flow when done right, giving credence to the label: Cash Cow. But be careful and mindful of the risk involved! ‘Rentals’ have indeed been the clear Savior of many struggling firms, but the abject death knell for others.
• Flexible. Need the cash flow today but not tomorrow? Want to shift one’s disposition strategy before marketing property for sale? Then convert ‘rentals’ to contract sales!
• Is oft more management and labor intensive than with the traditional groundlease property
• Generally more maintenance expenses involved, not only in ‘getting unit ready to rent’, but ongoing as well, since tenants have no equity interest in the home.
• Who pays utility expenses such as gas, electric, water and sewer? Generally more economical when this responsibility is put on the tenant, but only IF they pay said bills in a timely and complete fashion. Often wastefully expensive when management opts to pay utility bills, but doesn’t closely control usage of same. This can be a difficult decision, and difficult to change, once made.
• Potential threat to local reputation. At times this is a primary consideration; however, when a matter of business survival, maybe less so. Check ahead with your favored lender or loan broker.
• Probability of lender disinterest, when ‘rentals’ are present during acquisition financing and or refinancing of existing operation.
• As mentioned earlier, lack of equity interest in rental unit by tenant has consequences, hence the strategy to convert worthy tenants to homebuyers via contract sale or a similar arrangement.
• Creates two classes of citizenry in one’s landlease community; the homeowner/site renter versus ‘renters’. Also an unfortunate reality in resident–owned communities, where not all residents become stakeholders when property converted from landlease to condominium, co–op, or subdivision.
• A poor disposition strategy. Unless a prospective landlease community purchaser has a strong liking for rental units, or doesn’t know any better (i.e. ‘What he/she is getting into…’), don’t expect to sell a ‘rentals’ laden property at full value. The Valuation Calculation Worksheet (‘VCW’) for Landlease Communities *4, after estimating the ‘per site value’ of occupied and paying sites, suggests cutting that amount in half, when valuing vacant sites, and when there’re ‘rentals’ in place – until separate profit and loss statements justify raising the reduced site value estimate.
And then there’s the matter of TIPs one learns in the rental business over time, beyond those embodied in the PRO and CON lists just described:
• Keep cost accounting records for rental unit operation separate from ground lease operation.
• Do not allow outside (passive) investors to buy, site and rent homes on–site. Why? Where do you think the bromide, ‘Out of sight, out of mind!’ originated?
• How to price rental units? This varies from market to market, per local practice, and business philosophy. Some owners/operators compete head to head with conventional apartment communities, charging same monthly rent rate for a manufactured home, as competing two and three bedroom apartment units in the same local housing market! An alternate pricing method is to peg ‘site rent plus home rent’ either per the Schwep Rule @ 15 – 20% below similarly – sized apartment rent; or, per the Schraeder/Smith Rule @ $50.00/month less than similarly – sized apartment. Your choice.
I own a mid–sized landlease community in central Illinois, and though my physical occupancy hovers around 85%, I have no desire or plans to add rental units anytime soon. Why? Even with a capable, experienced and motivated on – site MHM – certified manager in place, the property – in this case, at four hours drive, is too far away to risk letting a rental presence get out of control. And when I market the property for sale, I don’t want to argue the value of rental homesites with and without rental units in place. However, if the local housing market economy tanks on me, watch how quickly I buy ‘repo’ and used homes to set up on - site as rental units….
It seems everyone is afraid of the federal S.A.F.E. Act regulatory shadow and its’ uneven implementation state by state, and probably for good reason. After all, for more than 50 years, folk simply knew the best type affordable housing and lifestyle in the U.S. was the ‘manufactured home sited in a landlease community’ combination. Well, that appears to be a – changing, with the new national focus on finance regulatory matters. One possible way to skirt the S.A.F.E. Act, nationally and statewide, and continue to be in the truly affordable housing business, might be to implement True Leases, rather than ‘contract sales’, lease to own, lease option, rent – to – buy and other seller – finance and captive finance alternatives. Want to learn more about True Lease? Watch here for a follow – on piece, on this very subject, in a subsequent issue of this newsletter. GFA
1. To learn how and when to use a Management Action Plan or MAP, read Landlease Community Management, available from PMN Publishing via (317) 346-7156. $75.00 postpaid.
2. For local housing market demographics and AMI, go to zipskinny.com
3. For list of HUD Code home manufacturers producing CSH models, via respective Business Development Managers (‘BDM’), effect contact per end note # 1.
4. VCW worksheet, and instructions in its use, available FREE by effecting contact per end note # 1.
George Allen, Realtor®, CPM®Emeritus, MHM
Consultant to the Factory – built Housing Industry &
The Landlease Community Real Estate Asset Class
Box # 47024
Indianapolis, IN. 46247