Mobile home parks can be an incredibly attractive real estate investment. High demand for affordable housing keeps demand and occupancy rates consistently high, leading to great income generating potential. Low cost per unit makes acquiring a large number of units affordable, especially when compared to apartment buildings or other multifamily properties. And park ownership involves a significantly lower burden of responsibility for repairs and maintenance, because park owners typically own the land but not the units on the land. If owning a mobile home park strikes you as a great way to invest your money, you should become familiar with the different options available for financing the purchase of a park.
Seller financing is one of the best options for buying a park, providing a variety of benefits that other financing options may not have. Flexible credit requirements, small or no down payment, and flexible loan term and amortization are just a few of the possible perks of seller financing. Because it can be such a powerful tool for buying a park, we've dedicated a whole post to seller financing.
However, seller financing is not possible for many mobile home park acquisitions, so we put together a list of other options for financing a purchase of a park.
Bank financing is the most traditional way to buy a park, and because banking is so tightly regulated by the government, it's generally the safest option. It's highly unlikely that you'll be a victim of unfair or abusive lending practices when borrowing from a bank. On the other hand, bank financing typically has the strictest requirements in terms of your credit score and the amount of money you'll be require to put down. Generally you'll need to put 20% down, which can be a substantial amount of money to have up front, especially if you are looking to purchase a large park. You'll need to convince a bank that the loan is a solid investment, and it will need to pass through the bank's loan committee. Generally bank loans for mobile home park purchases will be recourse loans, meaning the bank has claim on your other funds and assets in the event of foreclosure, if the park doesn't sell for as much as you owe on it.
You'll generally want to shop several banks to try to find the best deal on a loan, and the size of the loan will determine the banks where you're likely to have the most success. Larger regional and national banks typically won't be interested in loans less than $1 million, so they won't be a good option unless you are buying a larger, more expensive park. Local banks are more likely to be interested in smaller loans, and will usually know the local market, so may be more easily convinced to give you a loan if you are shopping for smaller, less expensive parks.
CMBS or Conduit Loans
Commercial mortgage backed securities (CMBS) loans, also called conduit loans, are one of the most attractive loans for buying mobile home parks. CMBS loans are a type of commercial real estate loan with somewhat flexible underwriting guidelines, allowing for borrowers who can't meet the liquidity and net worth requirements of other types of commercial real estate loans. This loan type is generally only an option if you are looking to buy a large park with a price of at least $1 million, and in some cases $1.5 or $2 million. The benefits of CMBS loans include low, fixed interest rates, and non-recourse structure. CMBS loans have prepayment penalty structures, meaning you will pay substantial penalties if you seek to repay the loan ahead of the established payment schedule.
A wraparound mortgage, often simply called a "wrap" is a type of secondary financing, where you assume the mortgage of the seller. This type of financing can be attractive because it may avoid credit checks or large down payments, but there may be risks involved. Many mortgages don't allow this type of arrangement, so this type of financing can be risky if the seller is intending to have you wrap their mortgage without telling their lender. If the original mortgage does allow for a wrap or similar mortgage assumption arrangement, you will typically need to meet the requirements of the original lender. In either case, the seller may charge a spread, charging you an interest rate slightly higher than the interest rate on the original mortgage. If a seller is offering a wrap, it's generally a good idea to have an attorney read the original note to determine what is allowed, and the risks you may be exposed to.
Master Lease with Option to Buy
In a master lease with option to buy arrangement, you lease the mobile home park from the owner at a flat monthly rate for a given number of years, and assume management of the park. At any time during the lease, you have the right to buy the park at a predetermined price. This structure is most beneficial when you are trying to buy a park that is poorly managed, and has a net operating income too low to appraise well or support any type of financing. Your goal is to improve occupancy rates, cut costs, raise rents, and improve the management of the park enough that you have a substantial positive cash flow relatively quickly. Once the park is generating a significantly greater net operating income, it will appraise for a much higher value. This higher appraisal value with allow you to secure financing for an amount greater than the purchase option price initially agreed upon by you and the seller, effectively giving you a very small or zero down payment when you buy the park.