Are Mobile Homes Good Investments?
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Originally Posted On: https://www.dohardmoney.com/are-mobile-homes-good-investments/
Due to their typically low up-front investment, people often ask me about buying mobile homes. More precisely, I frequently hear: Ryan, are mobile homes good investments?
Mobile homes tend to be fantastic in terms of return on investment and awful with respect to return on time. But, they’re a great way to start in real estate investing. For new investors, I recommend purchasing, rehabbing, and selling them on contract (i.e. seller financing) to maximize profit.
I’ll dive into some more details about mobile homes as investments in this article. Specifically, I’ll cover the following topics:
- What Are Mobile Homes?
- Best Mobile Home Investing Strategy
- Additional Mobile Home Considerations
- Final Thoughts
Are Mobile Homes Good Investments?
I’ve owned mobile homes as investments in the past, so I have a lot to say about this strategy. But, before discussing investment approaches, I need to clear up some naming confusion. The terms mobile, manufactured, and modular get thrown around interchangeably, but some important distinctions exist.
- Manufactured homes: These homes are built in a factory, and then they’re transported to the physical home site. Upon arrival, they become largely indistinguishable from homes built on-site. As such, people generally don’t move these homes after they’ve been initially placed (though they technically can). From a regulatory perspective, these homes need to be constructed in accordance with Housing and Urban Development (HUD) federal building codes.
- Mobile homes: These home types are simply manufactured homes built before June 15th, 1976. After that date, they became obsolete as a result of HUD policy changes. Today, the name manufactured home has replaced mobile home.
- Modular homes: Similar to manufactured homes, these homes are built in factories prior to delivery to a home site. However, these homes have chassis – either permanent or temporary. “On-frame” modular homes have a permanent chassis, while “off-frame” ones have a temporary chassis. This distinction will determine how builders assemble a modular home at its destination site.
When discussing mobile homes, I’m actually talking about manufactured homes. But, despite manufactured being the currently appropriate term, mobile remains commonly used among investors. But, regardless which term you use, the important takeaway for investors is that mobile homes are not on chassis like modular homes. Typically, you find a mobile home permanently installed on a slab or foundation. But, mobile homes can be relocated from one place to another. This is rare, though, as you generally can’t justify the cost of moving a home once placed.
Best Mobile Home Investing Strategy
As stated above, mobile homes represent great investments in terms of ROI, while awful in terms of return on time. Let’s start with the numbers. Investors can potentially purchase a mobile home for $3,000 to $5,000, put the same amount into rehabbing it, and rent it for $750/month, or $9,000 annually. At face value, these are great numbers – grossing $9,000 in rents on a $10,000, all-cash investment.
But, numbers start to lose their appeal once you consider your expenses. Even if tenants pay utilities, you potentially face major operating expenses with park fees. Many mobile home parks charge major monthly fees, ranging anywhere from $250/ to $1,000/month. Even on the lower end of that scale, you take a major hit to your ROI. And, some parks don’t even allow rentals, making this approach moot anyway.
Managing a mobile home rental can require a ton of time, too. Many of these tenants need to be more actively managed, to include chasing people down for rent. This can be an absolute nightmare. You eventually reach a point where the solid returns don’t outweigh the time you need to put into a property.
Instead, I recommend a modified fix & flip investment strategy with mobile homes. Using the above numbers, say you can purchase and rehab a mobile home for $10,000 and then sell it for $15,000. This represents an incredible 50% profit margin ($5,000 profit / $10,000 investment).
However, mobile homes don’t always qualify for traditional financing, and many buyers can’t pay all cash for one. Enter the modified fix & flip approach. In these situations, you provide seller financing, acting as the bank for a potential buyer. Ideally, you can collect a down payment of at least your invested cash. Then, everything you collect on top represents profit. And, you can structure the deal so that the buyers pay the park fees themselves, saving you this major expense.
If you pursue this strategy, make sure you retain the deed for the mobile home. That way, if someone defaults on the seller financing you’ve provided, you can evict them from the property. However, when this happens, you – as the owner – will need to take over payment of park fees, which can add major holding costs to a vacant property.
Additional Mobile Home Considerations
Before diving headlong into the above strategy, investors should understand these considerations, as well.
Mobile Homes Depreciate Like Automobiles
Traditional homes typically appreciate – that is, increase in value – over time. Conversely, mobile homes behave more like automobiles in that they tend to depreciate – or lose value – over time. This means that investors generally don’t look to mobile homes for a buy and hold approach, as the resale value will typically be less than the purchase price.
Mobile Homes on Their Own Land
However, buying a mobile home on its own land can help offset the above decline in value. Land generally increases in value – or at least retains value – over time. If you buy a mobile home with the land it sits on, you’ll hold more long-term value. Furthermore, mobile homes on their own land do not need to pay park fees, which can make these far better investments.
Look for Quick Returns on Investment
Due to their depreciating nature and the frequently high park fees, investors should try to make as much money from a deal in as short a time as possible. The longer you hold a mobile home, the less valuable it becomes and the more you need to pay in operating expenses. These realities combine to decrease ROI over time. Instead, successful investors look to get as much out of the investments – either through pure fix & flips, limited period rentals followed by resale, or seller-financing – as quickly as possible.
I firmly believe that mobile homes serve as great first investments. They typically require a ton of active involvement, which gives new investors a fire hose of experience right from the start. But, you need to keep a few things in mind.
First, if you plan on renting out a mobile home, make sure that either A) it’s on its own land, or B) the park where it’s located allows rentals (most don’t). Next, if you want to fix & flip a mobile home, you’ll typically need to seller-finance the deal if the buyer can’t pay cash. This can generate significant ROI, but the strategy also comes with risks. If the buyer defaults, you risk not being able to resell the property and needing to start paying park fees. Accordingly, investors should strive to receive a down payment covering their initial investment. That way, you’ve at least recouped your costs if the deal goes south.
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