Dear Stephanie: Why exclude rental income from park owned homes in NOI?

Dear Stephanie,

I’ve been in the MHP business as a small owner-operator for about a decade, and something that has never quite made sense to me is when calculating how much a park is worth, why do investors and lenders not want to count the rental income from park owned homes in the net operating income? It is an actual cash income, so I would think that it has some value in the calculation and ultimate value of a park.

- Perplexed in Pasquotank

Dear Perplexed,

It seems like it would be, I know. But there is good rationale behind what otherwise seems illogical. That rationale is: lenders are hesitant to use the income from park owned homes because it, in effect, collateralizes the used mobile homes, and over time skews the actual value of the homes. The ground lease (think “Land-Lease-Lifestyle” as George Allen, our Investor Profile this quarter calls it) is actually the “true” income for the park, with the current street value of the homes if sold for cash being added in. Financing a park while including this income, in essence, makes a 1995 metal/metal 3/2 Oakwood look like it’s worth $30,000, which we all know is not the case! Mobile homes are like used cars, and rarely experience appreciation. The difference between a mobile home and a used car, in this example, and the magic of a mobile home is that it can bring in $200-$300 per month for years, be sold for quick cash to an investor, or just as easily sit empty and generate nothing if not managed properly. The key is to find lenders who will admit a percentage of this income in their underwriting. This is why when we do our underwriting we always separate the difference between the lot rent and park owned home income – but show it as “other income” in our analysis.

Thanks for reaching out!

Stephanie

Do you have a question we can answer about mobile home parks and MHP investing? Please contact Stephanie at Stephanie@McAnuffGroup.com.

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