Mobile Home Notes: Profitable, But…

by Del Ashby

One of the ways to find “good cash flow notes” is to generate them through business transactions of your own. The
mobile home business has been touted as one good way to do that. As with most things, they also have a
downside.

You can purchase the individual mobile home at wholesale, on a rented lot, and resell it at retail. The
resale profits can be held on paper with some or all of your acquisition costs recovered through the down
payment from your purchaser. The yields on these of transactions can be quite high. I would not
discourage you from doing them as long as you:

1. Take the time to learn what you are doing, as you would with any business.

2. Recognize that mobile home paper is not real estate-secured but is UCC paper.

3. Understand that you must be able to carry the lot rent, insurance, utilities and other expenses if the
buyer defaults.

4. Make certain that the lot owner or park management would allow the unit to remain on the lot
when bought or sold. Also check to see that they would permit you to rent the unit if you couldn’t resell it
right away.

5. Recognize that these units are often sold to less than first-class customers. Check your buyers/
tenants out carefully, get an adequate down payment and be prepared to deal with significant repairs.
Repairs can be very expensive and more importantly, they can delay the selling or re-renting of the unit.

6. Understand that while yields are high, the small size of each transaction severely limits the profit
or cash-flow spread possible on each transactions.

7. Account for the value of your time. The fact is that in addition to your financial investment, you
also have an investment of your precious time. You can attribute some value to the learning experience,
but in small deals watch that your loss of time doesn’t turn into a $5 per hour job.

To me, mobile homes could be a good part-time, weekend way to learn the business with minimum
capital invested but with the recognition that you will probably want to graduate rather quickly. You might
be able to build a little portfolio of these notes and sell them as a package to get operating capital for
something larger.

For example, I am currently looking at several parks for possible purchase. In the process of
evaluating a 29-unit park, a subtle curve ball came my way that you should know about. The most
common method of evaluating commercial property is “NOI” or net return on investment (before debt
service) where the term investment does not mean your cash into the deal but rather total purchase price.

In this case, there were 29 lots with lot rent set at $155 per month. Of these, there were nine shown as
lot and mobile home combinations. These combinations were rented at anywhere from $175 to $425 per
month. The total monthly rent for all nine mobile/lot combinations was $3,250.

On the surface, that produces an income of $3,100 (20 X $155) plus the $3,250 for a total income of $6,350. Expenses were reported to be $906.35 per month. That leaves $5,433 per month net, or $65,323 per year. Based on an
NOI of 10 or 10% return on investment, the property should be worth $653,230.

Here’s the curve ball. If we examine the impact of the 9 rented mobile units, we find that the lots
they are on at $155/mo. would ordinarily contribute $1,395/mo. (9 X $155) to the income statement. If we
deduct the $1,395 lot rent amount from the $3,250 for the combined rents, we find that the mobile units
without lot rent are contributing $1,855/mo. Annualized, that’s $22,260 of income. On an NOI basis that
says the rent from the mobile alone is adding $222,600 to the “value” of the park.

Would you pay $222,600 for 9 used mobile homes? Especially when two of them are 1989 and the rest of 1970’s vintage
junkers that you should have hauled away? The removal and disposal (what are you going to do with
them?) would of course be at your own expense.

Clearly, if you evaluate the park with the trailers included you almost made a $200,000 mistake.

Moral: Always evaluate any business without inventory and then evaluate the inventory as a separate item.
Obsolete inventory, equipment, parts and supplies are often used to pump up the reported value of a
business. Don’t fall for it.

If you were considering buying a note on the park, what would that $200,000 difference make in the
loan-to-value? Somehow I don’t think you or your investor would want that kind of money secured by
those old junkers!


Del Ashby has been a note investor for over two decades and is the author of the book “Make Money Trading Mortgages.”

For more information on mobile home notes, get Lonnie Scruggs’ books “Deals On Wheels,” “Making Money With Mobile Homes” and his “Deals On Wheels Home Study Course.” Click here for information.

1 thought on “Mobile Home Notes: Profitable, But…”

  1. We have made a lot of good connections investing in and working with mobile home notes over the years. I enjoy working with park owners, dealers and small lenders and this niche has been good to me!

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