You have an older mobile home park that you want to upgrade, with a goal of improving the cash flow on and thus the parks value upon resale. You have made the list of needed improvements and come up with a budget for making the improvements to the existing infrastructure, signage and updating the parks existing structures. The goal is to increase monthly rental revenue to pay for the new upgrades.
One significant problem is the number of older mobile homes owned by the park. If you reduce the number of housing units owned by the park to 30% of the total. That would reduce your operating cost, increase income from lot rentals and improve the resale value by making the park more finance-able. Your goal is to end up with newer housing stock most of which are owned by the tenants.
Rent to own program, (or lease with purchase option) might be part of the solution. Using various finance sources, manufactures finance programs, industry lenders, banks, cash and even private lenders you come up with financing to buy the units. You will offer the houses for sale or on rent to own terms. (You will need to be come a mobile home dealer.)
Order your new homes and set them up to the new standards that you have established. Front and back landings, skirting to match the house colors, a storage building for each unit, basic landscaping.
Assumptions: you are paying 10%-20% down, you are borrowing money at 8% or less, your lot rent is $375 a month, your retail markup is 25% on new home sales. That your security deposit is 1.5 times the rent.
For Example, you buy a 32’ x 44’ or a 16’ x 76’ house that cost you $35,000 plus $9,000 for setting up, landings, skirting, storage room appliances and air-conditioning. Your landed cost is $44,000 marked up by a factor of 1.35 this gives you a retail price of $59,500 a 25% markup. ($44,000 X 1.35 + $59,500).
The customer now has a choice.
The customers can buy the house and rent the lot, or they can choose to lease the home with an option to purchase it anytime in the next 3 years.
- They can buy the house for $59,500 and rent the lot for $375.
- They can rent the home for $600 a month plus $375 lot rent for a total of $975 amonth.
- They can rent the house for $1,075 a month with $150 a month as a potential credited towards the purchase in the next 36 months. Upon purchase, they would get their security deposit and the $150* a month rent credit, credited towards the sales price of $59,500. If they do not exercise the purchase option in 36 months, they must sign a new rental agreement or move. If they decide to buy they will have two payments, the house payment, and the lot rent. * They only get the $150 a month credit if they buy the house or if they buy another one in your park if they opt not to buy it is forfeited.
Benefits for the buyer:
- They get to occupy a new home.
- If they choose to exercise their purchase option, one day the house will be paid off reducing the monthly housing cost.
- Pride of ownership.
- Time to improve their credit score.
Benefits to the Park:
- The park gets a more committed tenant
- Increased rental income that a new house commands.
- Improved aesthetics of the community.
- A profit on the house sale.
- If most of the rent money (not applied to the lot rent) went towards loan note reduction, a substantial part of the parks cost of the house would be paid by the end of the lease.
- If the new home replaces one of the park’s older trailers, then the park gains from a reduction in maintenance cost and liability.
The goal of this article was not to be a complete dissertation on Rent-to-Own but rather to get you thinking about the possibilities. Success comes from overcoming the obstacles to achieve the benefits.
Jim Glasgow © 2018