Lot rent sits well under market at a mobile home park. How fast should an operator close that gap, and what does the paperwork typically promise?

Question

Take a 78-lot park where in-place lot rent runs around $270 and comparable parks nearby show $395 to $425. A business plan projecting $410 by month 14 is mechanically available if 71 of the 78 lots are month to month, subject to whatever notice period applies in that state, and notice periods and any local rent regulation vary state to state and sometimes by city, so that's always a question for counsel rather than a general rule. The case for moving straight to market: a 52 percent gap means every month of delay is money that doesn't come back, and residents who would leave over a single large increase were likely to leave over the next one regardless. Homes are expensive to move, so most residents stay even through a large jump, and refinance value in year two typically follows the rent roll immediately. The case for stepping the increase: a park where several homes move out at once creates abandoned homes and title problems, and infill costs real money. Large single jumps also tend to draw local news coverage and city council attention, and lot rent increases on residents without other housing options carry real reputational and regulatory sensitivity. Once a city starts drafting rent regulation, the exit multiple can change for every owner in that market, not just the one who triggered it. Both approaches are defensible on the numbers alone, and the difference between them shows up almost entirely in tail risk, which is exactly the kind of risk that's easy to leave out of a model built purely on rent comps.

hannah_west29 · Accepted Answer

I voted two steps, and the number that decides it is what the park costs you per vacant lot rather than what the increase earns you. Run it. 78 lots at $270 is $252,700 a year gross potential. At $410 it's $383,800, so the gap is about $131,000 a year. Going straight there in month two captures roughly $110,000 more in year one than a two-step schedule does, using month 14 as the second step date. Now price the downside. An abandoned home on a lot costs you the abandonment process, which varies by state and is sometimes slow, plus rehab or removal. Removal and disposal on an older singlewide runs $4,000 to $8,000 in most markets, and a replacement home delivered and set is $45,000 to $70,000 before anyone lives in it. Say each move-out you cause costs $12,000 all in if you rehab and resell the home, and costs you the lot rent while it sits. Eight extra move-outs from the single jump is $96,000 plus vacancy, which eats nearly all of the $110,000 you gained, and it eats it as capital instead of income, so it hits the refinance harder. So the whole question reduces to how many extra move-outs the single jump causes versus the step. If it's two or three, go now. If it's eight or more, step it. Nobody knows that number in advance, which is why the sponsor should be asked for the average home age, the resident income mix, and how many homes on those 71 month-to-month lots are actually saleable if someone walks. A park of 1998 homes with employed residents absorbs a $140 jump. A park of 1974 homes on fixed income does not, and the realistic version of that plan is $340 by month 14 with the rest at turnover. The regulatory tail you mention isn't in this math because it can't be sized. It only moves one direction though, and it moves after the news story, so nobody wants to be the park in the story.

Lot rent sits well under market at a mobile home park. How fast should an operator close that gap, and what does the paperwork typically promise?

1 reply