Precision in the Park: How to Correctly Underwrite a Mobile Home Park

Underwriting a mobile home park (MHP) is vastly different from underwriting an apartment building or a single-family home. Because you are primarily in the infrastructure and land business, the metrics that matter most are often hidden beneath the surface.

If you underwrite incorrectly, you risk buying a “money pit” disguised as a cash-flowing asset. Here is the professional framework for underwriting a mobile home park with precision.

1. The Golden Rule: Separate Lot Rent from Home Rent

The most common mistake beginners make is “globalizing” the income. They take the total rent collected and apply a standard cap rate. This is a fatal error.

In a professional MHP underwriting model, you must separate income into two buckets:

•Lot Rent: This is the stable, high-value income derived from the land. This is what you apply your market cap rate to.

•Home Rent (POH): Income from Park-Owned Homes is volatile, high-maintenance, and depreciates. You should typically value POH income at a massive discount (often 2x-3x annual earnings) or value the homes separately as personal property.

“Never pay a ‘land cap rate’ for ‘home rent.’ You are buying two different businesses: a real estate business and a trailer rental business.”

2. The Expense Ratio Reality Check

While a well-run park might have a 30-40% expense ratio, you must underwrite for the reality of the infrastructure. If the seller claims a 20% expense ratio, they are likely deferred-maintenance specialists.

Key expense benchmarks to include:

•Property Management: 7-10% (even if you manage it yourself, underwrite for a professional).

•Repairs & Maintenance: $200-$400 per lot per year for infrastructure.

•Water/Sewer: If not sub-metered, this is your largest and most volatile expense.

•Property Taxes: Don’t use the seller’s current tax bill. Underwrite for the re-assessed value based on your purchase price.

3. The Infrastructure Audit (The “Underground” Risk)

In an apartment, you check the roof. In a park, you check the pipes. Your underwriting must account for the type and condition of the utilities:

•Master-Metered vs. Direct-Billed: If the park is master-metered for electricity or gas, you are taking on utility risk. Underwrite for the cost of sub-metering or the potential for massive leaks.

•Septic vs. City Sewer: Septic systems are “ticking time bombs” in underwriting. If the park is on septic, you must budget for frequent pumping and eventual replacement.

•Pipe Material: If the park has “Orangeburg” or thin-wall PVC pipes, you should budget for a total line replacement within your hold period.

4. Market Analysis: The “Lot Rent vs. 2-Bedroom Apartment” Test

How much can you actually raise the rent? To underwrite the “upside,” compare the total cost of living in your park (Lot Rent + Home Payment) to the cost of a 2-bedroom apartment in the same submarket.

If the park’s total cost is less than 50% of a local apartment, you have significant “runway” to increase lot rents. If the gap is narrow, your ability to grow NOI is capped.

5. Occupancy and “Ghost” Lots

Don’t just look at the number of pads; look at the economic occupancy.

•Vacant Pads: Do they have utilities? Are they overgrown? Bringing in a new home can cost $40,000+. Underwrite the capital expenditure (CapEx) required to fill every vacant lot.

•Abandoned Homes: These are liabilities, not assets. Underwrite the cost of removal or renovation.

Underwriting Checklist: The “Big 5” Metrics

Metric	Target / Benchmark	Why It Matters
Expense Ratio	35% – 45% (Normalized)	Prevents over-optimistic cash flow projections.
Lot Rent Ratio	> 80% of Total Income	Ensures you are buying land, not a trailer rental business.
Rent Gap	< 50% of local 2BR Apt	Measures your ability to raise rents safely.
Infrastructure	City Water/Sewer (Preferred)	Minimizes catastrophic utility repair risks.
POH Ratio	< 25% of total units	Reduces management intensity and maintenance costs.

Conclusion

Correct MHP underwriting is about de-risking the downside. By separating home income from lot income, accounting for infrastructure “surprises,” and benchmarking against the local housing market, you can identify the true value of a park.

Remember: You aren’t just buying a stream of checks; you’re buying a small utility company and a piece of scarce land. Underwrite the pipes and the dirt, and the cash flow will follow.