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How To Understand The Power Of Leverage When Investing In Mobile Home Parks

How to appreciate and harness the power of good leverage in investing…

Leverage remains the most misunderstood and most underutilized ally for investors today. But it also remains the most powerful tool available to savvy investors who get how to use it efficiently and wisely.

There are several types of leverage available to investors and a number of them come into play for mobile home parks investors whether they realize it or not. This includes; leveraging other people, and the market. Then there is financial leverage. Some fear it like the plague, some abuse it and go broke. Others continue to use it as dynamic force for hacking wealth and income, in a sound and sustainable way.

So how much does leverage really matter? What types of financial leverage are available to mobile home park investors today? How are sophisticated investors using leverage differently? What is the right balance of leverage for you right now?

Leverage vs. No Leverage

We are all very aware that too much leverage, used in an unsustainable way can be risky. It’s no secret that there is a sizable percentage of the population which hasn’t been taught to use financing well. They are constantly sold on financing deals which end up being more costly and counterproductive. However, there is undeniably a distinct difference between good and bad leverage. Even the most adamant anti-debt gurus like Dave Ramsey continue to promote real estate financing as the one exception to the rule, and a sound financial move.

The bottom line is that financing is just like money. In itself it is not good or bad. It is how you use it.

So let’s just look at the cold hard numbers and math of using leverage versus no leverage to invest in real estate…

Scenario A: All Cash Purchase

Property purchase price: $100,000

Annual gross income: $10,000

Annual gross cash on cash return: 10%

10 year gross return: 100% / $100k

Scenario B: 90% Financing – 10% Cash Investment

Property purchase price: $100,000

Annual gross income: $10,000

Annual gross cash on cash return: 100%

10 year gross return: 1,000% / $100k

Scenario C: Multiplying the Initial Investment

Taking the initial $100k, and purchasing a larger property with 90% leverage, or 10 smaller properties with 90% leverage, really unleashes the power of this financial tool.

Property purchase price: $1,000,000

Annual gross income: $100,000

Annual gross cash on cash return: 100%

10 year gross return: 1,000% / $1M

If you had $100k to invest, would you rather earn a 10% or 100% annual returns? Would you rather generate $10,000 a year, or $100,000 a year in income with that capital?

Yes, there will be debt service, taxes, and other expenses. Yet, there are also tax deductions, and appreciation to be factored in. Would you rather enjoy 5% appreciation on a $100k property, or a $1M property? Even at a fraction of the improvement, the ROI and power of leverage for investing in mobile home parks cannot be ignored.

Ways to Leverage Your Mobile Home Park Investments

There are multiple ways to leverage mobile home park investments including:

  • Bank loans
  • Commercial mortgage lenders
  • Seller financing
  • Investor partnerships
  • Friends and family
  • Real estate crowdfunding
  • Hybrid combinations of the above

Among these leverage options there are many creative ways to structure deals:

  • Lease options
  • Wrap around mortgages
  • Cross-collateralization and blanket mortgages
  • Bridge loans
  • Lines of credit
  • Balloon mortgages

Whatever your personal credit and financial situation, and belief about debt versus equity there are ways to structure mobile home park deals and gain leverage in a sound and flexible way. If you don’t like debt, even non-recourse loans, then use equity funding. If you don’t like having partners or splitting the pie, then use debt financing. Or mix it up with the two of them.

The Pros and Cons of Full Leverage vs. No Leverage

‘Full’ leverage might conjure up mental images of 125%, subprime mortgage loans, but that’s not what we are talking about here. Investors are absolutely wise to build up equity over time, and preserve their flexibility to sell and restructure financing in the future, while increasing net cash flow.

Full leverage can be defined as having full access to any capital invested, and enjoying liquidity. We see this when startups make it to IPO. Look at Mark Zuckerberg. He pulled together $1,000 to start Facebook, and made it to IPO, which gave him Facebook stock worth around $45B in 2015. He has more than fully leveraged his initial investment, and can now sell and donate that stock to philanthropic efforts. Similar results can be achieved by refinancing as value accumulates in a mobile home park, or by bringing in partners, or leveraging equity to acquire additional parks.

Note that high loan to value (LTV) financing isn’t always a bad thing either. However, there is a big difference between maxing yourself out with no protection from the down side, and no flexibility, versus those that have very manageable debt and enough financial reserves to ride out any soft periods. Staying leveraged can even reduce risk. It reduces exposure to risks of damage, natural disasters, and malicious lawsuits. The diversification that full leverage offers reduces performance risks, and increases consistency and overall long term returns.

Put simply; a plan to achieve full leverage can ultimately provide the best combination of high returns and low risk.

Pro Tip: Understand your season in life, and the level of leverage which will give you the most peace of mind. If you are hungry for growing income and wealth then a more aggressive structure may be necessary. If all you seek is wealth preservation and slightly enhanced passive retirement income later in life then you may enjoy a more conservative approach.

How Rich Do I Need To Be To Invest In Mobile Home Parks?

Surely I need to be rich to invest in a Mobile Home Park?

Do you really need to already be rich to invest in mobile home parks? Or are there opportunities for those still building their wealth and income?

Who is Mobile Home Park Investing for?

Today we mostly hear about seriously wealthy and sophisticated investors trending towards mobile homes. Names like multi-billionaire Warren Buffet are instantly associated with it. As are top talent from Wall Street and Silicon Valley who are cashing out of their stressful old lives in favor of this passive income and wealth building vehicle.

This creates an aura and impression that you already have to have a few million in the bank from some big trades, or IPOs to participate in mobile home park investing. It is true that this can be a great place for wealthy global investors to protect their capital, grow what they already have, and achieve attractive yields and cash flow. But it isn’t an exclusive club or prerequisite. At least not yet.

In fact, when surveying the new investment landscape, this is one of the few great investment opportunities that is still open to both accredited, and non-accredited investors. And via direct investment, without all the fees too. The JOBS Act was implemented in 2012 to help widen access to investments to all individuals in America. Yet, sadly at the time of this report the portals and platforms set up to capitalize on this still restrict investment to the same old exclusive club. Mobile home park investing may be the best opportunity for those looking to invest like the pros, without all the junk.

So just how much money do you need to start investing in this niche? How can you find more if you need it?

How Much do Mobile Home Parks Cost?

To really put the debate of how much you need to invest in mobile home parks in perspective it helps to know how much they cost. There are obviously parks selling for several million dollars. But, few might realize that there are mobile home parks for sale for $60,000 or less too. That’s less than the cost of an extra parking space in some cities.

Price ranges for mobile home parks vary widely depending on where they are located, how many sites they have, features, and other factors. So if you live in New York, San Francisco, Los Angeles, or Miami, it is important to know that there are some incredibly inexpensive opportunities out there if you look. You may need to look out of your city or state, but there are affordable deals to be had.

For those that want to just dip their toes in and have no credit, or money at all there are even individual lots available for purchase.

How Much Money Does It Take Out Of Pocket?

While financing a mobile home park acquisition isn’t always as simple as getting a regular home loan, where you have endless lenders begging you to fill out a 2 minute application online, there are options. So you don’t even have to pay all cash for these investments.

Some of the better funding sources for this type of real estate may come from:

  • Local community banks and credit unions
  • Commercial real estate lenders
  • Private mortgage lenders
  • Crowd and peer to peer funding

Owner financing is also reasonably common and popular when it comes to selling mobile home parks. You may be able to find a park with an acceptable number of units in a good market for as little as $19,000 down, with the balance payable in installments to the previous owner. This helps them sell faster, and may help them minimize their tax liability, while maintaining a stream of income. It’s a win-win. Though do make sure to do all of your due diligence, and ensure you are getting competitive rates and terms, and are not crushing your cash flow.

In addition to down payment, and deposits, there may be closing costs. These can vary widely, but can often be financed in.

Capital Reserves

No matter what type of real estate you are investing in it pays to have some reserves. Reserves help cover emergencies and vacancies, as well as future maintenance and replacements. Most lenders typically look for borrowers to have 3 to 6 months of operating expenses as reserves. So this is a good benchmark to shoot for. If you don’t have that much, make it a goal to get there as fast as you can by setting aside a portion of the monthly rents.

Note that along with the immediate returns and cash flow from buying a performing income property one of the perks is receiving tenant deposits and prorated rents at closing. You can’t spend the deposits, but they do offer cushion in case any residents do default.

Finding the Money

For those that are still short on the down payment and out of pocket expenses to acquire a mobile home park investment, there are still a variety of sources to be tapped.

This includes:

  • Partnering up
  • Co-investing with friends and family
  • Unsecured loans and lines of credit
  • Asset based lending and bridge loans based upon other investment properties you own
  • Rolling over retirement funds to a self-directed IRA

Summary

While mobile home park investing is obviously attractive to the uber-wealthy, you don’t have to be on the Forbes’ richest list yet to participate. Most will find that it takes a lot less to invest in this asset class than they thought. It’s really a matter of looking around, and using creativity and know-how to structure deals that create win-win solutions for both buyer and seller.

A scale weighing terms vs price when investing in mobile home parks.

Terms Versus Price

If someone were to ask you, what’s better on a deal — Terms or Price?

When it comes to investing in Mobile Home Parks, cash flow is what allows you to control the asset for the duration. Cash Flow is the name of the game.

One of my biggest lessons learned when getting into MHPs is how to structure deals.

I know they don’t teach this in High School, or Real Estate Clubs for that matter. I nearly lost our first park by not knowing how to structure the deal so that it cash flows from day one. Something to keep in mind is that the projected numbers really are what sellers say. If you expect to have $5,000 a month in rents, you can plan on $4,000.

Remember, the park has to pay its own way or in the long run your likely to default on the park. When the seller is carrying back the note, they expect to be paid. If you fall a few months behind on your mortgage the seller is likely to try get their park back and you lost your down payment and the asset.

One of you key focuses need to be on how much the monthly payment will be. As crazy as this sounds you can see in the 3 examples that it’s possible to pay an extra $150,000 for a park and have a $1,000 lower mortgage payment.

Case Study:1
$500,000
Amortized over 12 years
7% $5,141

Case Study:2
$600,000
Amortized over 20 years
7% $4,651

Case Study:3
$650,00
Amortized over 25 years
6% $4,187

Depending on what you investment goals are (i.e. buy the property, pay it off in time and have all of the cash flow or even refinance down the road it’s crucial to remember how to structure deals.)

I have found that most individuals are attached to how much they can buy a park for as opposed to terms. On the flip side, most owners think the same about the purchase price. This can be of a huge benefit to you. I would personally be happy to pay an extra $50,000 on the purchase price if it gave me a better cushion for long term asset control.

Happy young couple discussing with a financial agent their new real estate investment

Tax Advantages Of Investing In Mobile Home Parks

The Tax Advantages of Investing in Mobile Home Parks

Taxes are one of life’s inevitabilities. Although taxes have been called “the price we pay for a civilized society”, it can hurt to see a lot of our earnings vanish into government coffers. Most people would agree that paying a fair tax is a reasonable request, but investors also have a right to pay ONLY the taxes required of them… and not a penny more.

This is in line with Warren Buffett’s “number one rule for investing – don’t lose money.” Investors need to understand the opportunities to legally pay only the taxes they owe, as well as the advantages, benefits, and tax breaks available for investing in mobile home parks.

So, what are the tax advantages of buying mobile homes, and investing in mobile home parks?

A dollar saved in taxes is worth a dollar earned. When those savings are compounded year after year, tax savings may be even more important than earned dollars. This is why sophisticated investors prioritize taxes when investing. So are there tax advantages to be found in mobile homes? How can they be maximized?

Tax Breaks for Mobile Home Buyers

Mobile home buyers, like other home buyers are entitled to an array of potential tax breaks. This may include:

  • Capital gains tax exemptions
  • Mortgage Interest Deduction (MID)
  • Mortgage insurance premiums
  • Property taxes

Seller Financing

Seller financing is quite common in the mobile home world. This can come into play when selling individual mobile or manufactured homes, and when selling entire mobile home parks. As the proceeds of the sale are spread out over time, sellers are able to minimize their tax burden (and potentially tax rate) in any given year. Some of this income and returns may be pushed off to years when tax rates are even lower. However, there is always the potential for using 1031 exchanges for real estate investors that are moving into other similar investments. This can also be an attractive strategy for those interested in moving from other types of property investments to the benefits of mobile home parks.

Green Improvements

There may be both state and local tax breaks and special financing programs for those looking to make improvements, and especially green and energy efficient improvements to mobile homes and parks. While manufactured home manufacturers are working to become greener, there is immense room for improvement at existing parks and in existing homes. This is the opportunity to do some good for the environment, the community, mobile home tenants, and your net profits, all at the same time. Solar power, battery backups, rainwater harvesting, and better insulation are all examples of potential green improvements.

Investing in Real Estate as a Business

Warren Buffett’s mentor Benjamin Graham said “investment is best when most businesslike.” Those that derive most of their income from being a landlord, or spend most of their working time in real estate, can be privy to additional tax breaks, exemptions, deductions, and write-offs.

These tax benefits and breaks may include:

  • Depreciation
  • Home offices
  • Travel and entertainment expenses
  • Insurances
  • Legal and professional fees
  • Property management
  • Other operational investments

These breaks can potentially provide another whole layer of tax savings, with paper losses which can even be rolled over into following years to offset future income taxes. Just make sure you work with your accountant to create a smart tax plan that maximizes these savings, and avoids waste and budget items that won’t offer net savings at tax filing time.

Self-Directed IRA Investing

Savvy investors are increasingly using self-directed retirement accounts to add even another layer of tax protection to real estate investments. Today, mobile home park investors can open new self-directed retirement accounts, or rollover existing IRAs and 401ks to self-directed accounts. This gives investors control over where their money is invested, while retaining all of the tax benefits, and preferred status and security of retirement account classification. This means tax deferred or tax free returns. This can add double digit net returns each year. That is money that can also be reinvested with the same tax benefits each year. This means a compounding snowball of savings and gains that can put mobile home park investors far ahead of others. uDirectIRA and Entrust are two of the self-directed retirement account administrators currently assisting investors in this space.

Accelerated Depreciation

Tax deductions for depreciation is where mobile home park investing really stands out as a superior tax saving, cash flow and net return maximizing vehicle. Mobile homes enjoy an accelerated depreciation allowance. This enables investors to depreciate their investments in just 15 years, or about half the time of apartment buildings and other income producing commercial properties. This is includes an extra 50% special bonus deduction under the Modified Accelerated Cost Recovery System aka MACRS 150. This helps investors recoup their investment faster, pay less tax in prime years, and maximize cash flow. This alone can provide mobile home park investors with a substantial edge in returns against their peers. This additional perk also acts as a buffer, and reduces risk, by creating a fatter cash flow cushion.

Tax Planning & Strategy

Taxes may not be fun for many individuals. Unless you are a tax accountant you’d probably far prefer being on the golf course, on a cruise, relaxing by the beach, or making big new real estate plays. But, paying attention to taxes can create far superior investment performance. And if you can enjoy better returns with a few tweaks, why not? Sophisticated individuals take the time to sit down with a tax specialist, create a long term tax plan, and have tax saving tactics to put into play annually, and when making new investments. Once this is in place all of the mind numbing technicalities can be left to those who specialize in the numbers, while investors get to enjoy more of the rewards they desire. And this report just scratches the surface of potential tax tools. There is reinsurance and trusts, as well as smarter annual spending, that can all yield big differences.

Summary

Mobile homes, and mobile home parks offer a wide variety of potential tax breaks. From the entity used to make the acquisition to the type of leverage used, to how improvements are classified, and professional assistance, there are many ways to save taxes, and enjoy more tax breaks. Then there is accelerated depreciation which gives mobile home park investors an envied, but often overlooked advantage in the market, and in wealth building, asset protection, and passive income generation.

References:

 

Money changes hands in a seller financed deal

Seller Financing For Mobile Home Park Investing

Seller financing is more common in the mobile home park sector than other real estate classes. Why is that? What are the pros and cons of owner financed real estate for buyers and sellers?

Seller Financing 101

Owner financing has been a staple in the real estate world for years. In general it comes in and out of fashion depending on various factors in the market such as interest rates, ease of access to mortgage credit, and how robust the market is, as well as what other alternative investments are available.

There are several arrangements that are often lumped in under the category of ‘seller financing’. In its purest sense in this arena it typically takes the form of an owner ‘taking back’ or giving a private mortgage loan to the new buyer. The note and mortgage should be recorded in public records at the time the title to the property is transferred. Terms typically mirror conventional mortgage loans when it comes to interest and monthly payments. However, private financing often comes with a shorter balloon period. That means the loan will need to be paid off or refinanced when it matures. This could be in a couple of years, 10 years out, or longer. Generally it will provide enough time to improve and season the enhanced performance of the property.

Seller Financing for Mobile Home Park Owners

Why would a mobile home park owner offer seller financing?

There are a number of reasons for sellers to consider offering financing including:

Minimizing Tax Liability

One of the reasons that many current park owners have held onto their holdings for so long is to delay any tax implications until they are in a much lower tax bracket. There are other tools for deferring and eliminating taxes on gains such as 1031 exchanges and self-directed IRAs, but not all are aware of them. By offering financing and creating a new note sellers break up their receipt of the proceeds, and may pay less tax.

Superior Returns & Security

What else are you going to do with the cash? Gaining a large lump sum of cash now may sound great, but that can create other challenges. How do you protect that capital? How do you earn a decent return on it? Banks haven’t proven reliable, and they certainly aren’t paying any interest. The stock market offers little protection, and if you already have some money in the market you need diversification. Holding a mortgage means solid, predictable returns and cash flow, with the security of a piece of tangible property that you already know very well.

All the Pros without the Cons

You can still all the benefits of your mobile home park investment, without having to worry about management or maintenance.

Get a Premium Price

If others aren’t offering financing, this can be a great way to stand out, and potentially negotiating a higher sales price. That’s on top of extending the returns with ongoing interest.

Note that the Dodd Frank Act has restricted the ability for many to offer seller financing on the sale of residential properties for owner occupants. This shouldn’t impact sellers of mobile home parks for investment purposes according to Florida law firm Barnes Walker. However, many real estate investors are terrified of making a mistake, and have pulled back on this strategy without knowing what the act really applies to. That means a great advantage for those that do know the difference and use it.

Seller Financing for Mobile Home Park Buyers

Owner financing may not always appear to be the cheapest deal, but it can also come with some sweet perks not everyone considers.

Reduced Acquisition Costs & Profits

Going to a mortgage lender or commercial bank costs money. It can cost a lot of money beyond the interest. Some loan brokers will even ask for upfront fees. None of these costs applies to obtaining seller financing. That can make thousands of dollars difference, and maybe even more when acquiring real estate. That keeps holding costs down, yields up, and goes right to the bottom line when it comes time to resell.

Avoiding Hassles of Bank Financing

Fees aren’t the biggest pain of going to the bank. Mortgage lenders are still very picky. Sometimes their data driven approach to underwriting can result in many conditions and demands that seem to make little common sense to borrowers. It can sometimes feel like being paper-worked to death. The rewards are still well worth it if you don’t have other financing options, but seller financing cuts out the stress, speeds up acquisitions, and makes the investing process far more enjoyable.

Keep Credit Free

Mortgages that show up on your credit report can cause temporary dips in your scores, and eventually limit the credit others will extended to you. Seller financing generally won’t show up on your credit, even if you sign a personal guarantee.

Alternative Funding Options

It’s always worth asking about seller financing, even if it isn’t being advertised. If it isn’t available, and using commercial mortgage financing isn’t attractive, there are other options to explore.

Consider exploring:

  • Assuming existing financing
  • Leveraging IRA money
  • Crowdfunding
  • Partnering up