Issue link: https://read.dmtmag.com/i/633345
FEBRUARY 2016 18 THE JOURNAL I'm Trying Really Hard To Understand Some People's Thinking On Fair Lot Rents BY FRANK ROLFE COMMUNITY CONSULTANT People ask me why I write so much about the industry, and don't instead get a nice hobby like golf. I myself wonder that on certain days, when I can't even begin to understand the logic of some community owners. And nothing makes me more confused than the concept of what constitutes fair rent for manufactured home community lots. I re- cently wrote an article that addressed the impact of higher interest rates on the industry, and pointed out that we are the best positioned to weather such an event for several reasons, one of which is the fact that our residents are typically on month-to- month leases and, as a result, owners can increase rents to maintain a healthy return. I also pointed out that the spread between apartment rents and community lot rents is gigantic, and we have plenty of room to increase rents going forward, if necessary. And here's the response I received via email from this thoughtful essay: "You people are delusional! Comparing lot rent to apartment rent is ridiculous. Don't we have to factor in the payment and upkeep on the home as well? Your whole program and formula for success in the industry is based upon exploiting the poor via the "month to month" leasing arrangement. You're not smart, but criminals! May God have mercy on your greedy souls when you meet HIM!" While I would expect such an email from a community resident who is having trouble paying his December rent, this email came from a com- munity owner (or at least that's what he claimed – and he included the name of his community, which I will not reveal). So let's discuss this issue a little more in depth and see if we can figure this thing out together. Lot rents are way, way, way too low in most markets Let's take the Austin, Texas market, for ex- ample. The average three-bedroom apartment rent in Austin is $1,483 per month. The average manufactured community lot rent is around $550 per month – that's a difference of nearly $1,000 per month. Let's take another market, like Omaha, Nebraska. The average apartment rent is $1,117 per month, and the average lot rent is $300 per month – that's a difference of around $800 per month. I can name over a hundred mar- kets in which the spread between apartment rents and lot rents are in the ballpark of $800 to $1,000 per month. I'm sure you can, too. The majority of manufactured homes out there have very low operating costs In the typical community, at least 80% of the homes are free and clear of any liens. They have no mortgage payment. Assuming they are valued at $15,000, then their personal property tax is around $150 per year ($13 per month). Their in- surance is around $50 per month. Their repair and maintenance budget is around $50 per month, as well. Their utilities are a wash, as the apartment tenant has to pay their own utilities, too. So, in- cluding tax, insurance and repair, the difference between the lot rent and related costs and the av- erage apartment is still around $700 to $900 per month. Does that seem reasonable to you? If you answered "yes", then you apparently have no han- dle on economic pricing theory. Could many owners have any less confidence in their product? We have found that the average American, when faced with the choice of an apartment and a manufactured home in a manufactured home community, normally chooses the manufactured home. Why? Because a manufactured home does not have neighbors knocking on your walls and ceiling. It comes with your own yard. The ability to park by your front door. The ability to own the home and customize it as you see fit. Apartments offer you none of these amenities. That's why we get hundreds of calls per week from customers des- perately trying to find a manufactured home to buy or rent. There is nothing immoral about running your business correctly We all have different goals in life. But in America, the basic tenet of business is to make money. That's why we are called a capitalist country (but don't tell Bernie Sanders). That's not just my idea. It's the idea of Wall Street, Main Street, and the bank that financed your property. If you want to run your community as a charitable enterprise, then that's your business – but you're in the minority. Don't try to pretend like making money is wrong, or immoral. That "immorality" is what makes your water turn on in the morning, your car start, and that Big Mac ready when you pull up in line. Russia used to also think making money was "immoral", but they changed their tune pretty quickly in the 1980s, after they had endured nearly a century of starv- ing. And one final item to think about Many of the communities that we buy that come with ridiculously low rents – where the owner has refused to raise it for decades – also seem to have failing infrastructure that requires hundreds of thousands of dollars in capital repairs to be brought back to life. Do you think that cus- tomers want to live in squalor at a low rent, or a nice place at a much higher rent? Of course, they prefer the better quality of life that a higher rent provides. Don't kid yourself that you are doing them a favor by running a marginal business that provides no cash flow for capital repairs. Conclusion Until community owners across the nation can be proud of their product, and demand a fair rent that is more in-line with apartments, and provides for needed capital repairs over time, we are going nowhere as an industry. Personally, I refuse to ac- cept this fate. I'm going to continue to write those "immoral" articles because I know that smart own- ers are still out there reading them, and under- stand that we need to take this industry to the next level. It's right for both the tenants and the own- ers to run a property with a healthy bottom line. Always has been. That's why more communist and socialist countries are turning to capitalism; it simply works better for everyone. But if you want to run your community like the Salvation Army, that's your choice. Frank Rolfe has been a manufactured home community owner for almost two decades, and currently ranks as part of the 6th largest community owner in the United States, with more than 17,000 lots in 22 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top-selling ones in the industry. To learn more about Frank's views on the manufactured home community industry visit www.MobileHomeUniversity.com. T J