Allow me to apologize in advance for all the terrible, terrible jo- JUST KIDDING I APOLOGIZE FOR NOTHING.
Here at the ol’ FU machine (which you can never touch), we’re all about helping you kids invest in weird stuff to make you cash money, baby. A few weeks ago we took a look at private businesses, and I’ve mentioned several times how I invest in private mortgages. I also have several rental houses, but these days I’m more inclined to go the REIT route.
Real estate, as an asset class, is pretty popular, especially up here in Trudeau loving (SO HANDSOME DAMN YOU) Canada. With the real estate market seemingly good for a 3-5% capital gain each year, it’s easy to see why. Especially in Toronto and Vancouver, people are flooding into the market faster than you can say bubble. These investors are comfortable with anemic cap rates, assuming they’ll just make up for it with appreciation.
That’s probably not going to work out well. But hey, props for trying.
But there’s still one real estate investment that continues to be out of favor, offering up great returns when compared to just about everything else out there. Let’s take a closer look at investing in trailer parks.
Two trailer park girls
GO ROUND THE OUTSIDE, ROUND THE OUTSIDE, ROUND THE OUTSIDE
Oh, don’t act surprised. You knew that was coming.
There are a number of attractive perks to owning a trailer park, including:
- Attractive cap rates
- Absentee ownership
- Redevelopment potential in the future
- Little competition from other buyers
There are usually two aspects to owning a trailer park. Tenants own their own trailers and then rent the land. You collect lot rent from them. These tenants often have problems selling their mobile homes when the time comes, and so park owners often buy them up for a song. The park owner then gets a terrific return on the rented mobile because they don’t have to pay lot rent.
Basically, it takes some specialized knowledge to run a trailer park. Not a lot, but some. At least here in Alberta, there’s a different act that governs trailer parks than what governs regular tenants. For the most part, these laws are the same, but there are some important differences.
If you want to increase the rent on a physical house you rent out, you only have to give three months notice on a month-to-month lease. In a trailer park, you have to give a year’s notice to increase lot rent. And if you want to force somebody to move their trailer, you also have to give them a year’s notice.
Typically, the park owner pays for water and sewer as well as trash collection, and tenants pay their own heat/power. The park owner is responsible for maintaining any common areas, including roads. The park owner will want to approve any sales of trailers as well, but that’s usually only a formality. Dirtbags might live in trailer parks, but if they can come up with the cash to buy a place they’re typically not so bad.
Many trailer parks have live-in managers. In exchange for a free place to live, a manager takes care of collecting the lot rent, coordinating any repairs, making sure Bubbles and Ricky don’t get up to no good, and so on. It’s the same model used in many apartment buildings.
Even after accounting for the lost rent in putting in a manager, there are attractive returns offered from trailer parks. Cap rates of 15-20% used to be common, but those have some down some with low interest rates. I spent a little time looking online, and it wasn’t hard to find stuff in the 10-15% cap rate range. Nicer parks with newer trailers tended to be more in the 8-10% range. Quite often, sellers were open to financing them too, albeit at interest rates of 6-8%. Banks do not like them, so if you do decide to invest in trailer parks, you might be forced to use seller financing.
Here’s a trailer park for sale in Maine.
So right now, if you bought the place for $100,000, you’d get a cap rate of just over 11%. Not bad.
But there’s some potential there. It has three vacant lots. Say you spent another $100,000 on three newer mobile homes (source: there are a million for sale for under $33,000 on eBay) and managed to get $550 per month in rent for them.
At $1650 per month and say an extra $200 per month in expenses, you’ve increased your cash flow to $28,860 on an investment of $200,000. You’re looking at a cap rate of 14.4%, and that’s even after keeping the one trailer the park already owns for a manager to live in. Or, if you just attracted three new owners to park their units in your park and didn’t spend the extra cash on bringing in your own trailers, you’re looking at $18,660 in total cash flow, which works out to an 18.6% cap rate on the original $100,000 invested.
And to be honest, I’m pretty sure you don’t need a full-time park manager for 18 units. You could probably get a property manager to do it for less than $550 per month, which would free up the ability to rent that existing trailer. If you did that, filled up the three vacant pads, and hired a property manager at say $250 per month, your cap rate would increase to more than 20%.
That’s the beauty of investing in trailer parks. It’s a bit of work, but where else can you get a mostly passive investment that has a cap rate of 20% per year? Even if you did nothing, you’d immediately get 11% on your money.
The world is filled with trailer parks with this kind of potential. If you can find one close by, I suggest taking a long look at it. You just can’t beat those cap rates with any other kind of real estate.