Investing in a mobile or manufactured home park can be lucrative and rewarding. With lenders becoming increasingly comfortable with mobile home park loans due to their predictable income and low default rates, there are many financing options available to borrowers. In this article, we will outline the main mobile home park financing options for investors, including bank loans, government loans, private money loans, hard money loans, commercial mortgage-backed securities (CMBS) loans, and seller financing. We will also cover some important details to help you navigate the process.
The Different Mobile Home Park Loan Options
When it comes to financing a mobile home park, there are several options available to investors. In our examples I am going to mention the lending term “recourse” and I want to make you aware of it ahead of time. Recourse loans allow the lender to go after the borrower’s personal assets if the loan is not repaid. Non-recourse loans only allow the lender to go after the collateral (in this case, the mobile home park). To help you choose the best financing option for your mobile home park purchase, investment goals and financial situation, consider the options below:
- Cash: The saying cash is king does not fall short with mobile home park investments. You may be able to negotiate better prices and offer quick closings. Some investors might choose to cash-out refinance after they buy the park, but not all investors have large amounts of cash sitting around to structure deals like this.
- Bank Financing: Traditional banks are one of the most common sources of mobile home park financing. Banks typically offer a wide range of loan products, including traditional loans and Small Business Administration (SBA) loans. To obtain a bank loan, you will most likely need to demonstrate strong credit history and a solid business plan. Bank loans can be a good option for small and large mobile home park loans. Typically, these will be recourse loans with 25-35% down, 5-10 year terms, variable or fixed interest rates, amortized over 20-30 years.
- Government Financing: Fannie Mae and Freddie Mac loans are government-sponsored programs that offer competitive financing options for residential and commercial properties, including mobile home parks. They can provide attractive loan terms, but at the disadvantage of having stricter underwriting guidelines compared to other financing options. They might require borrowers to meet certain eligibility criteria, such as minimum credit score and debt-to-income ratio. These loans start around $1,000,000 and are made on large quality parks with stable occupancy. They are typically non-recourse loans at 75-80% LTV with fixed interest rates and terms up to 30 years.
- Private and Hard Money Financing: Private and hard money lenders are individuals or institutions that invest in real estate. The loans they offer are often easier to obtain than bank loans and have more flexible terms. However, they also can come with higher interest rates and shorter repayment terms. For this reason, some investors may choose to contact these lenders for bridge loans until they can get the park up to traditional banking standards. I can’t provide you with typical terms here because they vary between the different lenders.
- Commercial Mortgage-Backed Securities (CMBS): CMBS loans are a type of loan offered by commercial or investment banks and conduit lenders. They are placed in a pool of other commercial mortgages and sold to investors on a secondary market, which reduces the risk for the lender. CMBS loans are often used for larger mobile home parks with stable occupancy, and typically require a minimum loan size of $1 million. Typically, we are looking at loans that are non-recourse, 75-80% LTV, 5-10 year terms, fixed interest rates, amortized out 25 to 30 years.
- Seller Financing: Seller financing is an option for mobile home park buyers who are unable to obtain a loan from a traditional lender. The seller provides the financing for the sale of their property. The buyer makes regular payments to the seller instead of a bank. This is a very common scenario in the mobile home park industry. A lot of mobile home parks will not be considered “bankable” due to things like low occupancy and poor management. I have covered seller financing along with other creative financing options in depth in another article I wrote located here.
Using a Mortgage Broker to Obtain the Best Loans Nationwide
Mortgage brokers are professional intermediaries who specialize in securing loans for residential and commercial real estate investments, including mobile home parks. They have a wide network of lenders and can help you find the best loan options based on your specific needs and financial goals. The advantages of working with a mortgage broker include access to a larger pool of lenders, more favorable loan terms, and assistance in navigating the complex loan process from pre-approval to closing.
The process of working with a mortgage broker typically involves submitting an application and providing financial information, such as your credit score, income, and assets. The mortgage broker will then use this information to find the best loan options and will work with you to negotiate the terms and conditions of the loan. They will also help you prepare your loan application and documentation, such as your business plan and financial projections, and will communicate with the lender on your behalf throughout the loan process.
I am a big advocate of working with mortgage brokers for mobile home park acquisitions. They typically charge 1 to 2% of the loan for their services, but they know the players in the market. They have nationwide relationships with the lenders that provide mobile home park loans at competitive rates, and they can determine which of these lenders will be a good fit for your deal. This information is only gained by these professionals working in the field every day and is too time consuming for the average investor to research.
A good mortgage broker will save you more than they cost, not to mention the headaches of calling banks all day. I recently did a deal where my good friend and mortgage broker, Jeff Moss, was able to shave almost 2 percent off my interest rate by connecting me with one of his contacts.
Assessing Your Eligibility as A Borrower
Assessing your eligibility for a mobile home park loan is the first step in securing financing for your investment. Lenders will consider various factors:
- Personal Information: Lenders will want to see your current financial situation, including your income, expenses, and credit score, to determine if you have the ability to repay the loan. You will need to provide proof of your income, such as your tax returns, pay stubs, and W-2 forms. Maintaining a healthy credit score can show lenders that you pay your debts on time.
- Personal Financial Sheet: Your personal financial sheet, includes your assets and liabilities. Your assets might include your liquid cash, investment account balances, retirement account balances, real estate, and valuable personal property. Your liabilities could include credit card debt, student loans, mortgages, or vehicle loans. Lenders will usually include a section for your income as well to get a better understanding of how you manage your liabilities.
- Available Down Payment Funds: The amount of your down payment can affect the size of the loan you are eligible for, as well as the interest rate and other loan terms. A higher down payment can make you a more attractive candidate for a loan, as it shows the lender that you have a significant investment in the property and are committed to making your loan payments on time.
- Experience: Lenders like to see that you have experience managing mobile home parks or have the resources and support you need to be successful in this type of investment. A good business plan can go a long way.
There are a few banking metrics and ratios to be aware of that I will touch on briefly:
- Debt-to-Income Ratio: This metric compares your monthly debt payments to your monthly income. It helps lenders determine your ability to repay the loan. A DTI ratio of 43% or lower is ideal for most lenders, though some may consider a higher ratio if you have strong credit or assets.
- Loan-to-Value Ratio: This metric compares the loan amount you are seeking to the value of the property. A lower LTV ratio means that you have more equity in the property and are seen as less risky to the lender. Most mobile home park lenders prefer an LTV ratio of 75% or lower.
- Debt Service Coverage Ratio: This metric compares your property’s net operating income to its monthly debt payments. It helps lenders determine the property’s ability to generate enough income to cover its debt payments. A DSCR of 1.25 or higher is ideal, though some lenders may consider a lower ratio if the loan is secured by strong collateral.
Finding the Right Lender and Presenting Your Deal
Once you have assessed your eligibility, you can start looking for a lender. At this point you should have an idea of how much the mobile home park you are trying to buy is worth. If you want to know how to value a mobile home park you can go here. If the loan you are looking for is over $1,000,000 you might be eligible for CMBS or other government financing, and you can explore those options through commercial or investment banks. If the loan you are looking for is less than $1,000,000 then it’s time to get on the phones and start calling some local banks.
I have had good luck with pulling up a list of local banks on google, calling them up, and asking them if they lend on mobile home parks. If the answer is yes then you will inquire about their general requirements, lending limits, and how to apply. If the answer is no, then you walk away and move on.
You don’t want to waste your time with a loan officer who is trying to meet their quota and end up getting denied by the board a month later because they are scared of mobile home park loans. Don’t get discouraged during this step if the majority of banks tell you that they don’t finance mobile home parks. Keep dialing and I promise you will find one or two that are interested in your business. There is always the option of using a mortgage broker to handle this process for you.
Some banks will have a general application process that they filter everybody in through, but it is recommended to have a loan application package ready to hand the lender. Your objective is to show that you are a professional, organized buyer with a strong business plan for the property. Remember the bank is all about mitigating their risk. They receive a small interest rate on the money they lend to you, so if there is any reason to believe you or the property presents a risky investment then your odds of obtaining the loan are not good.
In the loan application package, we want to give just enough information that the lender needs to make their decision. There is no need for a one hundred page binder here. Keep it simple and easy to follow. Here are some items that you might include:
- An address, description, and your own appraisal of the park.
- Include some good pictures of the park.
- A map showing the location of the park. Google earth is good for this.
- A plat map that shows the location of each lot, number of lots, ancillary structures etc. You might be able to obtain this from the zoning department or the seller.
- A purchase contract and the total amount of the loan requested.
- Proof of down payment funds. This could be a bank statement.
- Profit & Loss statements from 2-3 years out if you can obtain them from the park owner.
- Tax returns for the park from 2-3 years out which should ideally line up with the profit & loss statements.
- The current rent roll and a sample lease.
- A business plan explaining improvements that will be made to increase the income, decrease the expenses, fill vacant lots etc. This could be in the form of a pro forma on the income and expenses.
- Any 3rd party reports that further your case such as environmental surveys, engineering reports, and possibly an appraisal.
- Your personal tax returns, W2’s, and paystubs.
- Credit report with explanations for anything unusual.
- A personal financial statement that lists your assets and liabilities. You can usually ask the bank for one if you need a template.
Importance of the Appraisal
Once you have found your lender, submitted your application package, and the loan is underway, an appraiser will be hired. An appraisal is a critical component of the mobile home park financing process, as it determines the value of the property and affects the loan amount that you can obtain. If the appraisal comes in lower than expected, you may need to provide additional collateral or find a different source of financing.
Let’s look at an example:
- You are purchasing a mobile home park for $1,000,000.
- The bank is going to lend you 75% of the value of the park.
- You have $250,000 set aside for the down payment and a little bit extra for closing costs.
- The appraisal comes in valuing the park at $900,000.
- The bank will loan you 75% of $900,000 which is $675,000.
- This means that the down payment required is $325,000 or $75,000 more than you budgeted for.
If you didn’t budget for this scenario, then you can see how this would be a problem. You do have the option of appealing this appraisal and trying to get the price raised or a new appraisal if you believe there was a mistake. You could argue that there weren’t many comparable sales, the appraiser was inexperienced with mobile home parks, or they didn’t understand your plan to add value.
The best defense however is a good offense. Usually, the appraiser will call you before they head out to your property in order to get as much information as possible from you to aid them in their valuation. This is where you want to load them up with all the upside the property offers.
You tell them that the demand in the market is so high that filling vacant lots is going to be a breeze and the reason there’s any vacancy at all is because the park is poorly managed. You’re going to give them your plan for selling the park owned homes and therefore reducing the majority of the maintenance costs. Then you tell them day 1 you’re going to raise the rents to market rate and the income is going to increase drastically. I think you get the idea. They are putting their license on the line, and you want them to view the property as you do to ensure a more favorable outcome.
Final Thoughts: Mobile Home Park Financing
As a review, there are many mobile home park financing options for investors, including bank loans, government loans, private money loans, hard money loans, commercial mortgage-backed securities (CMBS) loans, and seller financing. Each financing option has its own advantages and disadvantages leaving it up to the investor to choose which one is the right fit for their mobile home park investment. Once you develop a proven track record, finding financing will become even easier as you will develop relationships and lenders will see you as the expert.
Whatever you do, don’t give up on your search for financing. There are so many mobile home park loan programs these days that just about any park is able to be financed. If you just can’t seem to get a bank to offer you a loan, then consider working with a mortgage broker. They know the best mobile home park lenders in the business and can guide you through the loan process.
If all else fails then you will have to convince the seller to finance the park for you, because if you have done the work, you can be sure that the next buyer will surely have the same issue. Finally, keep in mind when buying a mobile home park that the right financing can turn a good deal into a great one producing higher than expected returns. I hope this article has helped you understand a bit more about mobile home park financing. Feel free to reach out with any questions!