Wednesday, July 22, 2009

Investing 101: Mobile Homes Vs. Mobile Home Parks

Recently, I've been getting a lot of mail from people who are new to the mobile home business asking me if it's a good idea to buy a mobile home park. They've told me they've heard that mobile home parks are great investments - they have read articles and have gone to real estate forums.

Folks, the only way to learn a business is to experience it first hand. If you're not familiar with the mobile home business, the best way to get involved is to start small - do a deal or two and see if you like it. I say this over and over again. A lot of times, people get excited about the dollars and the returns they hear about when they don't think about the big picture and what's involved.

By doing a small deal, you will learn the basics of mobile home investing. From there, if you enjoy the business and truly want to pursue it in the future then you can go on to do bigger deals. But, if you start by getting into a big deal from the get-go and have no idea how to run a park, manage a park, hire people, buy and sell homes, market knowledge, etc. - then you will find yourself "stuck" and a good investment can easily turn into a bad investment if not properly managed.

I'll give you an example. I knew an investor who owned a few single family homes. He never did a "Lonnie" deal in his life. Though, he was convinced that mobile home parks was one of the best investments. So, he took a mobile home park bootcamp and went through the training. After the training, he bought his first park - a 60 space mobile home park.

After a few months, things were going well until one day he had a problem - a big problem. Some waterlines (including the main waterline) broke in the park. He had it looked at and found out it would cost him $60,000 to get it fixed. Well, he didn't have $60,000 cash laying around in his bank account. So, he ended up refinancing some of this single family homes and pulled out the cash from there. So, a few more months roll by and he gets a problem with his septic tank - this time it would cost him another $25,000. This time he has to take a home equity loan against his own house.

Turns out, this investor had so many issues come up that he ended up selling the park for a loss - it cost him too much time and money since he did not know the mobile home business first hand. When he bought the park, he did not have a team in place and was not prepared for the issues that came up. He also had a hard time filling his park and finding homes since his market knowledge was limited.

Here's what can happen when these infrastructure issues come up:

Video Link

Another investor I knew bought an 80 space park, again after taking a mobile home park bootcamp. The park was half full - this was a turn around project. She had never done a "Lonnie" deal either. Her experience was in rehabbing single family homes. Turns out, the spaces could only fit very small 12 feet by 50 feet homes - they do not make them this small anymore. She tried to find homes that would fit the spaces and was unsuccessful. Instead of re-spacing the lots as she did not want to do this as it would involve an entire infrastructure electrical upgrade, she decided to get mobile homes to fit the spaces custom made. Each home would be $12,000. Ok, problem solved right?

Turns out, these custom made mobile homes were only 1 bedroom. She tried marketing the homes for buyers but it was very difficult. She tried targeting the senior citizen market but soon found they too were picky and/or could not afford her prices as they were on a very fixed income. Like the first investor, she was not prepared for these issues that came up.

These stories are not meant to scare but to inform and increase awareness. It's much better and less risker to start off with a small deal than it is to get stuck with a big deal. If you make mistakes with a small deal, at least they are small mistakes. On the other hand, if you make mistakes with a big deal they can be big - huge and can possibly bankrupt you if you are not prepared.

I'll leave you with a story about The King, the Pawn and the Peon. I hope it will help you to see the importance of starting small and learning through your experiences. It is the small successes that will determine the large ones. And it is the small successes where I have learned the most.

Happy Investing!

1 comment:

Anonymous said...

Sounds to me like the two investors mentioned did not do proper due diligence on the parks they purchased. If they attended a bootcamp why weren't they taught to look into the utilities & to pay attention to the density. The bootcamp I attended covered these and other due diligence issues thoroughly.