Editor’s Note: Welcome to the companion article to Episode 15 of the MHP_IRL podcast! The purpose of this article is to expand your podcast listening experience with additional content. Companion articles will unpack larger concepts that we talk about during each episode that will give you practical and most importantly, actionable advice that you can apply to your MHP investing journey.
Park owned homes versus tenant owned homes….
*sigh* I can feel the tension already.
Understanding the major core differences between park owned homes and tenant owned homes could be the line between making and losing money. It could be the line of continuing to work for yourself or going back to working for someone else.
If you could do me a favor and just trust me when I tell you that this topic is important, I would appreciate it. Fully understanding the pros and cons of park owned homes and tenant owned homes can help you decide what strategy best suits your goals.
In this article, I discuss the nine core differences between these two models.
Core Difference 1: Quality of the Tenant Base
Mainstream conventional tenant owned home wisdom would have you believe that a homeowner takes pride in their home where a renter does not due to lack of ownership. This way of thinking would have you further believe that pride of home ownership then permeates into the culture of the community, which raises the quality of the neighborhood.
Here’s the thing, while there is a lot of truth behind the conventional wisdom, I disagree that this way of thinking should be a rule of thumb because (news flash) it isn’t. In fact, pride of ownership, when it comes to homeowners, can be a massive pain in the butt.
You get homeowners who are entitled.
I’m sure you’ve heard this, or something like this before, “Well I own this home so I have the right to __________.”
This could have been said in a range of things.
This is my home so you need to build me an asphalt parking pad.
Stop my neighbor from painting his house blue.
Install french drains to divert water from my house to your land.
You need to cut these trees down now because they will kill me and my family if they aren’t down in the next 24 hours.
Whatever it is, entitlement is a kicker and can leave a sour taste in both party’s mouths.
You get homeowners who generally don’t care or can’t afford to care.
I’ve had plenty of homeowners that couldn’t care less about their home, their community or the fact that they were living in filth. The worst part about this is that it’s their property, and there is very little you can do to intervene. Your notices and fines won’t always remedy the situation.
And, unfortunately, sometimes these homeowners can afford to or have time to clean because they are struggling to work three jobs.
To go on with the convention argument, a renter by nature doesn’t take pride in where they live because they don’t own it.
I can’t disagree more. I have some incredible renters that ACTUALLY fix smaller issues on the home AND help around the community with common area maintenance.
Why? They take pride in where they live even though they don’t own it.
Simply put, you don’t actually have to be the owner of something to take pride in it.
Take me for example...I am a huge Carolina Panthers fan. I don’t own the team (wish I did!), but I find myself saying things like “my team and our fans” and similarly people who rent from me say things like “my home and our community.”
Now, that isn’t saying I don’t have trouble with renters. Renters on the whole have given me more stress than homeowners. If I took the time to do the math, I bet the numbers would show that renters are much more likely to lack pride of ownership than homeowners.
However, I truly believe pride is a state of mind, not a signature on a title.
Core Difference 2: Control
If you want to have a smooth, in working order mobile home park, control is a BIG issue you need to think about. Park owned homes will allow you more control than tenant owned homes.
Why?
With tenant owned homes, it’s much more difficult to get them out and they know it. Because they know it, it’s much more difficult to get them to comply with home and yard upkeep, as well as general behavior.
Tenants really do have the upper hand. There is nothing stopping a tenant from moving the home out other than the expensive cost of exit. But, it does happen.
And, as much as you preach that you have screened all of the people who live on the property, people will move in and out and a lot of times there’s not a lot you can do.
I’m sure you’re thinking, “Ryan, this happens in park owned homes, too.”
You’re right, it does. But, a tenant might sell their home to someone right under your nose. And trust me when I tell you, it can be difficult, if not impossible, to block a sale.
Core Difference 3: Evictions
By law an eviction has to be done as a repossession case in the magistrate court. With a park owned home, you’re attempting to repossess your home. With a tenant owned home, you are repossessing your land.
If someone can’t afford a few hundred dollars to stave off an eviction, what makes you think they’ll have thousands of dollars to move their home off your property?
What if they can’t sell? If they don’t sell, you’ll be stuck with an abandoned home that could take months, if not years, to obtain a title to. That’s months of no revenue.
What if they were in the process of financing that home? You might have to deal with the lender on a foreclosure or a short sale, which is a nightmare. The lender holds the lot hostage with their home while not paying you lot rent, while you have to bid against mobile home poachers trying to rip the home from your property.
Now, contrast that knowledge with this—depending on the state, you can have a renter out of a park owned home within 45 to 60 days. You can even negotiate a peaceful exit and have them out earlier and the home left in better shape if the exit was handled well.
And bonus! If you find out a renter snuck in someone that is less than desirable, depending on the state, you can non-renew the lease and start fresh with a new family. That would not be the case with a tenant owned home. Non-renewing a tenant owned home and making them move their home off your land can be tricky and extremely time consuming.
Core Difference 4: Returns
When done right, park owned homes can be more profitable.
Think about it like this, if you can achieve $300 more per month by renting, that is $3,600 more annually.
I’ve mentioned before that in some markets, traditional rental rates are sky high whereas the market for lot rent just hasn’t caught up yet. Leaving a delta, in some cases, $700 or more per month. A delta of $700 per month is $8,400 annually.
Now, let’s say that you have to replace a roof, an HVAC, and do a major rehab all in the same year, which is going to cost you $10,000. This is a worse case scenario, but with the right renters, that can pay for itself within a year or two.
If you have the know-how, the right team in place, and a good understanding of the market, you have the potential to make way more in terms of profit with a park owned home model.
Core Difference 5: Net Operating Income (NOI) Variability
According to Investopedia, net operating income (NOI) is a calculation used to analyze the profitability of income-generating real estate investments.
NOI = All revenue from the property - all reasonable necessary operating expenses.
Park owned homes carry more variability when it comes to operating expenses. More things could go wrong in a park owned home community.
Have you ever had a house that’s been quiet, in good working order, for years turn into a nightmare overnight? It’s not fun and requires a lot of work.
Yes, this can happen in a tenant owned home, but the cost may be on them.
Core Difference 6: Financing
*Oomph” Financing is nothing if not a pain.
I can remember a time when banks did not like the idea of park owned homes. Even back in 2019, the stigma was getting better, but it was still hard to get a bank interested. Why is this a problem? Because it limits your ability to obtain financing.
And get this, banks don’t even like rent to own and lease options.
Let me tell you a horror story.
I’ve had banks hold all of the titles as collateral. Meaning we couldn’t execute a park owned home to a tenant owned homes conversion strategy because the titles all came with a lien. This even happens with refinancing opportunities.
But, it makes sense. A tenant owned home model is less risky so naturally it will command more favorable debt terms.
If you’re new to the industry, and don’t have the connections and bank track record, you could seriously have trouble finding financing on a heavy park owned home opportunity.
Core Difference 7: Management
The idea that you’ll find the manager living within the community sounds great in theory but is hit or miss in reality.
Our first full time hire was an in place manager that lived in the community. We’ve also purchased communities where it’s obvious no one living there would be a good fit.
Both park owned home communities and tenant owned home communities need to have a manager that knows what they’re doing. But, with more experience comes a demand for a higher salary.
Now, one thing you should be asking yourself is, “what if my manager quits?”
If you own a large community, you might not have a problem finding a replacement. The bigger the community, the bigger your pool of candidates regardless of the park owned home or tenant owned home model.
However, let’s say you have a small tenant owned home community that’s several states away, in a market you don’t understand, you might want to consider how difficult it will be to find or even replace a good manager.
Core Difference 8: Scalability
Park owned home communities have more going on thus presenting a human capital problem. It’s hard finding good employees and your team will need to be larger and more talented. With more trips to the store, your books will have more activity. Meaning you’ll need a bookkeeper or a full time accountant sooner.
Like I mentioned earlier, even well run parks need skilled managers whereas tenant owned home communities can get by with serviceable ones. And finding a trustworthy, knowledgeable yet reasonably priced maintenance worker can be like finding a unicorn.
Even when you find someone, they can only do so much in one day. Meaning if you break into a new market, or add scale in your current market, you’ll have to find help.
Core Difference 9: Liability
No matter your structure, you’re inheriting liabilities. Be it dog bites, trees falling, septics breaking, roads crumbling….the liability is there.
BUT, if you don’t own the home, that dramatically limits your liability. BUT, just because you don’t own the home, it doesn’t absolve you from liability all together.
Not being able to control the condition of the home can present unique issues.
For example, at a tenant owned home in one of our communities, a tenant had her sewer pipe burst and sewage was draining into the streets. Thankfully, the tenant was wonderful and we worked out that we would pay for the fix and she would pay us back.
But think about it….had she been unreasonable and left the pipe unfixed, sewage would have continued to run down the streets.
There is way more liability with park owned homes, but the lack of control with tenant owned homes may expose you more than you think.
The Takeaway
This topic is so incredibly important that I need this to be said. Both models have pros and cons that need to be weighed against your goals.
What are you trying to achieve? What is your long term strategy and more importantly, your end game?
If you can answer those and assess the nine core differences between park owned homes and tenant owned homes, I believe you can make a well-informed decision.