First and foremost, the mobile home collateral is considered personal property when it is located in a park. It has, historically, been a quickly depreciating asset. The costs associated with lending on this type of asset push many banks out of the market altogether. This leaves park-owners and private investors as the driving forces behind the mobile home rental arena as far as mobile home park financing is concerned.
A conventional financing program will not typically consider income from park-owned mobile rents for the debt service ability of a real estate loan. There are some higher rate alternative programs out there, which consider all park income – both mobile home rent and pad rent. The most common problem buyers have with these types of parks is the numbers sellers or Realtors provide them. They will often times consider all income when determining cap rates, value, etc. The incomes from mobiles are never used in determining an appraised real estate value. This is due to the fact that mobiles in parks are not real estate improvements. One cannot simply throw several different types of incomes together in the blender and determine a value based on a single cap rate. All parts are not equal. The income stream generated from park-owned mobile homes run different risks of interruption or loss than the income stream generated by a mobile pad. A safer income stream deserves a different valuation and also a different loan interest rate – a reflection of risk.
The easiest way to picture these types of parks is in two components. You have the real estate component, which consists of dirt and any verifiable land improvements. Typical mobile home park improvements may include mobile pads, RV pads, clubhouses, laundry room, pool, office, etc. The real estate value is largely determined by the normal operational income generated from real improvements. You also have the personal property component or chattel. Personal property may include mobiles, equipment, appliances, etc. There are finance products available for these chattel portions at higher rates, shorter amortizations, and shorter fixed periods than one might expect with a normal real estate loan.
These different streams of income deserve their own separate determinations for investment value. An income derived from rental real estate such as a mobile home park pad is viewed as more reliable and valuable than an income derived from personal property such as with a mobile home rental. The cap rate for a passive investment such as a mobile home park (considering pad rents only) may be in the 8% range in some markets whereas the cap rate for a more business intensive project such as mobile home or RV pad rentals may be in the 12% range for that same market. Obviously the actual cap rate will vary greatly across different markets, but a more risky income will still warrant a higher cap rate than a less risky income. This type of thinking suggests that $1 of income from a mobile pad is more valuable than $1 of income from a mobile home rental.
Just because two income streams are generated through real estate improvements does not mean they are equal still. Although RV pads can be valued as real estate, they are still more work intensive and their income streams less reliable than a mobile home pad and therefore warrant a higher cap rate in valuation. This is apparent in the market vacancies any underwriter will utilize in determining the stabilized cash flow of an RV rental property.
From an investor standpoint, reliable or easier-to-produce income is more valuable than income that takes more time to create or is less reliable. From a lending standpoint, reliable or easier-to-produce income 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 the flexibility to lenders of being sold much like any other bond security traded on the market today. This type of money has become much more prevalent in recent years. Many national lenders today, with products typically more aggressive than a local bank may offer, employ this type of lending structure. Very similar in investor consequence, a CDO or CDS structure may also be employed today.
The issue of different asset-types (real estate and personal) being sold simultaneously often leaves inexperienced buyers in the middle of a purchase contract with a need for additional cash to cover mobile value since most lenders can only offer loan dollars against the real estate value. Real estate loans are not the answer without considering some type of cross-collateralization, which is atypical of most conventional finance options. One of the most common solutions is to have the seller carry a note for the value of some or all of the mobiles. If seller financing doesn’t pan out, there are a number of private investors who may be able to offer a variety of options depending on the situation. The key phrase to remember in securing financing on property such as a mobile not considered real estate is, “Chattel Mortgage.” In commercial real estate, this term is typically reserved for a situation where a mobile home is in a park and not occupying its own tax lot.
There is an occupancy issue to consider. There is usually less incentive keeping a mobile renter in the park. A tenant owning their mobile is much less likely to move out than a mobile renter. The costs and efforts to move a mobile are often a factor helping to safeguard long-term occupancy for tenants owning their mobiles.
There is also an added expense to consider. Any person in a rented mobile is less likely to take care of it. Mobile owners are responsible for the maintenance and repair of the home. When a mobile can no longer be rented due to use, the owner must pay to dispose of it.
There are many different benefits and detriments to owning mobiles in a park. Parks can be very profitable when they collect mobile rent on top of pad rent. The determining factor of whether or not to employ this type of rental style park is usually, “How much do you want to put into the project?” If you are looking to get into a property and put the time and work into it, park owned mobiles could be a great way to maximize cash flow – be sure to approach the financing appropriately. For the passive investor who likes to collect checks every month, a pad rent only park is the route of choice – expect to receive the most competitive rates and terms.