I Get No
Respect
When I was born, the doctor said to my father,
" I'm sorry, we did everything we could but he still pulled through." – Rodney Dangerfield
Rodney
Dangerfield is famous in the world of comedy for the line “I get no
respect.” Mobiles homes, trailers, are
the Rodney Dangerfield of the housing industry.
The mobile
home is truly one of the most brilliant and disrespected ideas in housing and
investing in our day.
When Bill
Clinton was running for the office of President and women kept coming forward
claiming he had sex with them, many of those women were discounted with such
terms as “trailer trash” and “what you would expect if you walked through a
trailer park with a twenty dollar bill in your teeth.”
Even banks
give trailers no respect. Most banks
won’t lend people money to buy a mobile home.
In fact most mobile home buyers can only get their financing from one or
two providers.
This scarcity
of lenders spells opportunity for investors.
Mobile home
buyers are typically people who have little or no money for a down payment and
they either can’t afford the high closing costs of traditional home buying, or
their credit rating is too low to get approved.
They buy a mobile home because it seems like a fantastic value.
They can buy
a three or four bedroom home with 1,600 to 2,400 square feet of living space
for a fraction of what it would cost for a stick built home of similar
size. And, mobile home manufacturers
will cite a book full of statistics to convince buyers that mobile homes are
built to higher quality standards than stick built homes. Maybe one day, the rest of the world will
believe those statistics. Until then, if
the place has steel floor joists, you are going to have a hard time finding
financing.
The biggest
problem with mobile homes is that they truly depreciate. When you buy a stick built home for
investment, you get to claim depreciation.
Often at the same time you are depreciating the house on your taxes, the
market value of the home is appreciating.
For a mobile home, just like for your car, the value of the home does
not go up with time, it truly depreciates.
I was
recently giving financial counseling to a woman in my church. She was contemplating buying the mobile home
she was currently renting. I advised her
against it on two counts.
1) Mobile homes go down in value over
time. They will fall to a floor value, but they don’t appreciate in value.
2) The home she was looking at buying
was sitting on a rented lot. When you
buy a mobile home on a rented lot, you had better be prepared to move it to a
lot that you own. Otherwise, even when
you pay off what you owe on the mobile home, you will have to keep paying a
sizable chunk of money each year for lot rent.
And if you don’t pay the lot rent, the park can take ownership of your
home with ease.
I told her
that mobile homes are not a great investment for a home owner, but they are
great investments for investors.
When I see a
mobile home, I see a big ATM. But, there are right ways and wrong ways to
invest in mobile homes. I have done
both.
My
biggest mistake was to buy a cheap
mobile home in a mobile home park that I did not own. The cheap part was a good idea, but having it
on top of someone else’s dirt was a really bad idea and it was even worse
because it was inside someone else’s mobile home park.
Why was this a mistake?
1) I had to pay lot rent every month
until I got someone else to buy the home.
If I didn’t pay the lot rent, the management could seize my property for
the rent owed.
2) The park management had veto power
over any buyer, unless they were going
to move the home out of the park. Park
management always reserves the right to deny people the right to rent a property
inside their park and they can deny people who want to move their mobile home
into the park. That means you have to
get their approval for any buyer or renter you bring to the table.
3) The park management had their own
homes they were selling which they would show to prospective buyers in direct
competition with my offering. When your
mobile home is competing with homes owned by the management company, you are
fighting an uphill battle to get your home sold or rented.
I still
managed to make money, even on mobiles home in someone else’s park. But it was a lot harder than it should have
been.
Now, I only
buy mobile homes that I am going to move onto land I own, or I buy them and the
dirt under them. This makes life much
easier and makes the investment more profitable.
The other
thing I do when investing in mobile homes, is I try to avoid being a
landlord. Of course I do that on nearly
all my investments.
If you are
happy being a landlord, then you can ignore these next few points I make. The problem with being a landlord is that
anything that goes wrong with the place, you have to fix it, regardless of
whose fault it may be. This means that
your operating expenses (the costs of keeping the property going) are higher
than they are for an owner occupant. If
you run your rental investment properly, you will always set aside reserves
from the revenues to be used for maintenance, repairs, and vacancies. That way
you always have cash on hand to deal with the expenses that must be paid to
keep or get a property rented.
I prefer to
sell my mobile homes to owner occupants.
In an ideal situation, I sell them the home and rent them the dirt (the
lot) beneath it.
Why sell the home and rent the
dirt?
When I sell
the home, either outright or using a contract for deed, either way I shift the
operating expenses such as taxes, repairs and maintenance on the trailer from
me to the owner occupant. This means I
can actually charge less money and make more money. That sets up a win-win.
I like to
rent the dirt for purely selfish reasons.
The average American moves every 3 to 5 years. This means that your owner occupant is likely
going to look to move in just few
years. If he owns both the trailer and
the dirt, he will sell both and move on and your cash flow will likely end,
unless you managed to finance the new buyer.
And, you won’t get the down payment, that will go to the seller.
Very few
mobile home owners are willing or able to go to the trouble and expense of
moving a mobile home. All-in costs of
disconnect, moving and reconnect can run to $5,000 or more. Most don’t have that much money sitting
around to do that. So, they are looking
to get out and get into a new place for
little or no money down.
If they move
out and try to sell the trailer, you have put yourself in the position of the
mobile home park management. They cannot
let someone else come in and occupy the trailer because the renter or buyer
must be approved for the lot rental agreement.
If they move
out they are still obligated to pay the lot rent. If they fail to pay the lot rent, it is a
fairly simple court procedure to seize the trailer for unpaid rents and now you
own it again.
If you want
to be nice, you can offer to forgive them their debt and take title to the
trailer in lieu of repossession. Yes,
with a mobile home it is repossession not a foreclosure. And repossession is a much simpler, faster,
and less expensive process than foreclosure.
Either way,
when your owner-occupant moves out, chances are very good that you will regain
ownership of the home for little or no cost.
Now, you can fix it up and sell it again. The difference is that the second time
around, your cost basis in the investment has been completely or almost
completely wiped out by the prior occupant.
That means that nearly every dollar you get from the new buyer is pure
profit.
Here is what
the numbers can look like:
- · Suppose
you buy a mobile home on its own lot for $20,000 and divide the cost evenly
between the land and the home.
- · You
sell the home (not the lot) to an owner occupant with a sale price of
$30,000. If you get $2,000 down and finance
the rest at 11% interest that is a monthly payment of only about $250 for the
home.
- · You
rent the lot to the buyer for another $250 per month.
- · The
only expenses you have are for taxes on the land since the owner occupant is
paying for insurance, taxes on the trailer, repairs and maintenance. If your land taxes are high, you might be
paying $1,000 per year for the dirt.
- · $250
+ $250 = $500/month x 12 months = $6,000 per year. Less the taxes you pay on the land ($1,000) =
$5,000 plus the down payment ($2,000) you received puts you at $7,000 for year
1. Now your cost basis has been reduced
to $13,000.
- · In
year 2 you of this scenario you will clear $5,000 and your cost basis falls to
$8,000.
- · In
year 3 you add another $5,000 in income and your cost basis drops to just
$3,000.
- · This
means that by the end of year 4, you have realized a 100% return on your
original investment and have earned $2,000 in pure profit, to put you at an ROI
of 110% of your original investment.
- · If
the owner-occupant decides to move at any point after this, you are well
positioned to take over the place for little or no expense and turn around and
sell it for $30,000 again. But this
time, your cost basis will effectively be zero so you will be making money from
day 1.
And it can be even better than this.
A friend of
mine bought a trailer for $3,000 and was able to charge $300 per month in
rent. Do the math! It means his investment was paid for in just
10 months, less than a year. Every
dollar after that was profit!
The other
beautiful thing is that long after the banks and the tax man feel that the
value of the home has fallen to zero, you can keep selling or renting this home
to people who don’t want to share walls with other tenants in an apartment, but
don’t have good enough credit or finances to buy a stick built home. Many of these mobile homes are still
habitable after more than 30 years of continuous occupancy.
Now you may
be able to see why when I look at a mobile home, I see an ATM.
Because my
company currently owns mobile homes, I see a lot of these for sale every
day. I buy many of them. Some, I set up as passive investments for
those who want the benefits without the hassles. Others, I sell to other investors.
If you are
interested in exploring opportunities to invest in mobile homes, just put your name and email in the form in the box below this article (or use your Facebook account to register). Over the next month, you will get three free
e-books with education about investing in real estate and getting your money to
work for you without relying on banks.
After that, if you are still interested, we can talk in detail about
what you are looking for and how I can help you get where you want to be.
Why does it take 30 days and 3
e-books before we can get down to brass tacks?
The laws of
the United States and the State of North Carolina put limits on who and how I
can talk with people about investments.
Any investment in real estate other than for your personal dwelling is
considered a security and as such is regulated by the SEC and other
governmental entities. Without becoming
a licensed securities broker, and becoming subject to a ton of additional
regulations, I am limited by law to
discussing investment opportunities only with friends, family and
associates. And, the lawmakers have
determined that if we have had at least 3 communications over a 30-day period
without discussing returns or specifics of any actual offer, then you qualify
as an associate or friend. So, between
the three e-books and our exchange of emails over the next 30 days, we can
clearly show the SEC that we have become friends or associates before we ever
talked about any specific investments or rates of return that you might be able
to realize from investments with me or any of my companies.
Before I
close, I would like to revisit one point from above. I mentioned that the lack of financial
institutions who will lend to buy mobile homes represents an opportunity for
investors. This is a classic example of
turning adversity into opportunity.
Many people
would look at the lack of lenders and see only the lack and back away. I see a lack of lenders and a high and
increasing demand from buyers for low-cost housing. This creates an opportunity for investors to
use a little cash and put it to work in a way that turns it into a lot of cash.
Under the
scenario I described above, if an investor had as little as $60,000 they could
buy 3 or more mobile homes and within four years have added 3 more. That could turn an initial $60,000 investment
into a cash flow of $30,000 per year. If you only have $20,000 in your self-directed IRA or investment portfolio, then start with just one mobile home. In a few years, you will see that as you plow you money back into your business, it will begin to grow like crazy.
Now that is
turning lemons into diamonds.
Tom S.
Tom Sheppard is the author of "Fire Yourself: Get the Job You Want" available from XLibris Press.
Tom has been successfully investing in real estate since 2001 while working part time. In 2008 he left a six-figure job as an enterprise project manager with a major national bank to manage his real estate business full-time. His goal is to help 100,000 people find peace of mind by finding quality, affordable homes.
He is currently looking to expand his network of funding partners who are helping him achieve this goal. If you would like to know more about how you can Do Well By Doing Good (TM), go to www.CharlotteWealthPartners.com
