My dad used to proudly say that he grew up in “the hood”. If people happily wear the badge of growing up in an inner city ghetto, why don’t more people proudly declare that they grew up in a mobile home park?
Of course, nowadays they’re called “Manufactured Home Communities” (MHC), and they can be quite nice. However, those homes that may leave their Christmas lights on the porch all year long have more recently gained recognition as vital parts of our housing stock.
In June of this year, the U.S. Dept. of Housing and Urban Development (HUD) announced through the Federal Housing Administration (FHA) that they will provide a new loan product for manufactured home community financing. However, the new financing program is only available to certain mission-focused entities, such as resident-owned MHCs, cooperatives, non-profit entities, state and local governments, community development financing institutions, and Native American tribes. Those groups may be eligible to use this program to finance the acquisition of, or to improve, existing communities – including making updates to common area resources and helping to maintain rent affordability.
This announcement underpins the growing recognition of MHCs as an affordable home option for many, coupling the pride of home ownership with affordability.
For the investors among us, many may want to invest in this type of residential real estate, but the financing side could be more complicated than a traditional multifamily product.
First, understand the basics of what financing is looking for:
While some lenders may have different requirements, the list below highlights what is typically required for most manufactured housing community loans.
- DSCR of at least 1.25x or 1.30x
- Existing and stabilized
- 50+ pad sites
- 90% occupant-owned homes
- Skirting
- More than 50% doublewide
- Off-street parking
- All roads must be paved
- All hitches must be concealed
- No option to purchase pad sites on leases
Mobile Home Park Financing Options for Investors
1.Traditional Bank Loans: Commercial banks are a common source of financing for mobile home parks. These loans typically require a down payment of 20-30%, and the terms can vary based on the lender’s assessment of risk. Interest rates are often tied to the prime rate, and loan terms can range from 5 years to 25 years. However, some banks may be hesitant to provide mobile home park financing, particularly smaller community banks that may view them as a higher risk.
Generally, this option is best for shorter-term business plans, where you may choose to hold the investment for several years and then sell.
2.Government-Backed Loans: Fannie Mae/Freddie Mac: Government-backed loans offer flexible 5-, 7-, and 10-year terms and amortization periods as long as 30 years. Plus, these loans are non-recourse and have LTV allowances as high as 80% for eligible properties. These loans are best for a high-quality, stabilized product, as these organizations will scrutinize the property closely.
The Small Business Administration’s SBA 7(a) loans can be used for the purchase, renovation, or refinancing of RV parks (but not MHCs). If you are looking at an RV park or campground, these can be considered businesses and are eligible for financing through the SBA. These loans typically offer lower down payments (as low as 10%). SBA loans are not for investments, and standard MHCs would not qualify under the SBA.
3.Private Lenders and Hard Money Loans: For investors who need quicker access to capital, or are unable to secure traditional financing, private lenders and hard money loans are viable options. These loans are typically easier to obtain, as they rely more on the property’s value than on the borrower’s creditworthiness. However, they come with higher interest rates and shorter repayment terms, making them more suitable for short-term financing needs or turnaround projects.
Private money can also be a solution for an MHC that needs substantial rehabilitation and turnaround to reach a stabilized product. This can be a good solution for interim financing.
4.Seller Financing: In some cases, the seller of the mobile home park may be willing to finance some or all of the purchase. Seller financing can be particularly beneficial for buyers who are unable to secure traditional financing, or who want more flexible terms.
This is a great option for the seller who would be facing a large tax bill if they sold. Seller financing can help to spread out taxes over time and provide a steady, passive income stream for the seller.
5.CMBS: Commercial Mortage-Backed Securities provide financing options for mostly stabilized property types. They often start at $2 million, with LTVs up to 75%. After closing, they are packaged and sold on the secondary market by banks, lenders, and other institutions. This is a good option for large purchases with long-term hold. Usually, CMBS have substantial prepayment penalties (defeasance).
Strategies for Securing Financing
1.Tell the Story: Though often overlooked by investors, this can be the most crucial part of securing the ideal financing. Write an overview about why you as the investor like the deal. Are they location strengths that may not stand out to the average reviewer? Or perhaps you have a great relationship with the local municipality that wants to see the investment you will bring to the community?
Write a good story that gets to the heart of why this is a good deal, both financially and for the community, can make all the difference. Don’t overlook your opportunity to provide this to the lender.
2.Build a Strong Business Plan: A well-prepared business plan that outlines the potential for revenue growth, occupancy rate improvements, and expense management is essential. Lenders want to see a clear path to profitability and a plan for mitigating risks.
3.Prepare for Due Diligence: Lenders will conduct thorough due diligence before approving financing. Investors should be prepared to provide detailed financial statements, tax returns, a comprehensive property inspection report, and information about the park’s operations.
Conclusion
Mobile home park financing requires a strategic approach that considers the unique aspects of the property, the market, and the investor’s financial position. By understanding the various financing options available and preparing thoroughly for the lending process, investors can secure the necessary capital to enter this lucrative market.
Many investors that we have helped have noted their superior results and secured opportunities they would not have otherwise seen. Contact us today to discuss your strategy to grow your portfolio.
