Over the past several years, mobile homes parks have become a popular investment. However, many real estate investors never put serious consideration into renting mobile homes as an investment.
Of course, there are some significant differences between renting mobile homes and other rental properties.
Is a mobile home considered real estate?
The land a mobile home sits on is real estate, of course, but in some cases, the home itself is considered personal property. However, there are exceptions to this.
The distinction between real property and personal property is made by the state the property is in. Most states consider it personal property in situations where the person who owns the mobile home is renting the land it sits on. On the other hand, if the same entity owns both the mobile home and the land it sits on, it may be considered real property.
Whether a mobile home is considered personal property or real property may affect the property taxes in states that levy tangible personal property taxes. When a mobile home is considered personal property, the land is assessed real property tax and the mobile home is assessed personal property tax.
As far as the Internal Revenue Service (IRS) is concerned, mobile homes used as rentals are considered real property. Therefore, they follow the same 27.5-year depreciation schedule as other residential rental properties.
How does mobile home investing work?
There are two primary ways mobile home investing works:
- You can place the mobile home on a piece of land you own and rent it all to a tenant.
- You can own a mobile home located in a mobile home park and charge the tenant mobile home rent and lot rent.
If you own the land, there's not much difference from owning a single-family home, other than some of the maintenance and depreciation issues we'll discuss later. You provide a home to the tenant, the tenant pays you rent, you take care of the home, and hopefully you make money.
If the home is in a mobile home park that you don't own, lot rent will have to be paid to the mobile home park owner. If you own the mobile home, it's likely you'll be responsible for the lot rent. Lot rent is what mobile home owners pay for the piece of land the home is parked on. Lot rent usually includes water, sewer, and use of the private road and common areas.
Lot rent is usually inexpensive compared to rent in a single-family home or apartment. The park landlord doesn't have the capital invested into the structure and doesn't have the responsibility to maintain the home, so they don't have as many costs to cover.
The rules differ among mobile home parks as to how rentals are handled. Some mobile home communities don't allow any outside investors to own a mobile home rental in their park at all. Other communities want to approve the occupants before you're able to sign a lease agreement with the mobile home tenant.
Before jumping into a mobile home investment, be sure to talk with the property manager about how rentals are handled.
Pros of renting mobile homes as an investment
1. Low cost of entry
One of the most attractive things about renting mobile homes is that they cost very little compared to other property types. While a brand new mobile home out of the factory can cost almost as much as a standard home, investors are often able to purchase second-hand mobile homes for under $10,000. In some cases, people are willing to sell their mobile home for less than $1,000 just to get out of paying their lot rent.
The low cost of purchasing a mobile home makes it easier for some people to start investing in real estate. With some legwork, somebody can start investing in mobile homes for under $5,000.
2. Higher ROI
When the initial investment is low, the potential return on investment (ROI) is high.For example, if you purchase a mobile home for $2,000 and net just $100/ month after lot rent and expenses, that's a 60% return.
3. Costs less than building
If you have a piece of vacant land, placing a mobile home on it may be a much cheaper option than building a house. However, you'll need to check local ordinances to see whether you're allowed to place a mobile home on the land.
Cons of renting mobile homes as an investment
1. Mobile homes don't appreciate
One of every investor's favorite things about real estate is that it almost always appreciates over time. Even if a property doesn't have much appreciation, it rarely loses value over time.
The same is not true for mobile homes, though. A manufactured home is a lot like a car in the sense that the value begins depreciating as soon as you buy it. You'll rarely ever sell a mobile home for as much as you've put into it.
The cost of a mobile home is more of an expense than an investment, because you'll rarely get your original investment back. Renting mobile homes is all about cash flow.
2. Mobile homes are high maintenance
Most manufactured homes aren't built to the same standard as stick-built homes. They're mass-produced in a factory and only have to meet Department of Housing and Urban Development (HUD) requirements, not local construction codes. Mobile homes begin to wear out after time and require a lot more maintenance than most other types of homes.
3. Lot rent
If your mobile home is parked in a rented lot, you'll have to pay the lot rent whether you have a tenant or not. When it comes to renting a mobile home in a park, the lot rent usually makes up the majority of the rent payment. One month of lot rent may cost as much as you earn in mobile home rental income in two months.
4. Difficulty financing
It can be very difficult to get a loan to purchase a mobile home. Financing mobile homes is a large risk for a bank because of how quickly they lose value. If they're in a mobile home park, they'll also have the burden of paying the lot rent if they have to repossess the home.
However, since mobile homes can be purchased so inexpensively, you can often buy them without needing bank financing.
How to start investing in mobile homes
If you want to start investing in mobile homes for cash flow, you'll first want to understand the local market for mobile homes in your area. Contact property managers of local mobile home parks to see how they handle rental situations, or if the park rules even allow them at all. You'll also want to get a good understanding of what typical lot rents are in the area.
The sale process of mobile homes varies among states, so find out how title is transferred from seller to buyer. You'll also want to find out what sort of rental ordinances apply in your area.
Real estate agents are rarely involved in the sale of mobile homes because of the low sale price. This means you'll have to look at marketplace sites or Craigslist to find homes for sale. The property managers may even let you know who wants to sell.
Inspections are more important than ever when it comes to mobile homes. Many of them are prone to water damage and mold. It's also common for there to be structural issues since they sit on a frame instead of a foundation. Some of these repairs may cost more than the cost of the home.
All types of real estate investments have their risks, but mobile home rentals have some of the highest risks of any of them. Maintenance and lot rent have the potential to quickly put you at a loss for the year, so be prepared to lose money while you figure it out.
Renting mobile homes has the potential to provide significant cash flow if you have the appetite for the risk. Like with all other investments, do your research, talk to other investors, and consult your accountant. Mobile homes aren't for everyone, but it may be the opportunity you need to get your feet wet with real estate investing.
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