The Best Kept Secret in Real Estate

the best kept secret in real estate

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There’s a reason every investor wants a piece of a real estate.

Immediate cash flow, the tax benefits are off the chain, you gain equity using other people’s money, there’s massive earning potential, you can make money through appreciation — the list goes on and on.

Yet, there’s one big secret that you’re missing.

It’s one of the ways we’ve made thousands of dollars. In fact, it’s one of the easiest ways to get into real estate, yet so few people are talking about it.

Curious what it is? Stay tuned.

The biggest problem with real estate is the expensive barrier to entry

Long before I was even remotely interested in real estate investing, I would drive through town, and couldn’t help but notice the massive apartment complexes all along the side of the road.

They’re everywhere, right?

Had you asked me during that time what “real estate” was, I would’ve referred you to one of these apartment complexes. They looked a little something like this:

the best kept secret in real estate

Fast forward a few years later, and my expectations have changed quite a bit. After having a little first-hand experience, I’ve come to realize that real estate looks a lot more like this:

how we bought 4 rental units in 3 months

It’s a lot less shiny, a lot less appealing, and much more affordable than the million-dollar condominiums everyone thinks about.

Now, of course that’s the goal, right? Everyone wants to own massive apartment complexes with 40+ units, owned free and clear, each renting for $800+. But nobody starts out that way. At least not most people. Unless you’re independently wealthy or have some 3rd party help, you’re not going to start out that way.

The thing that puts off so many investors is the steep price of getting into real estate.

Generally speaking, to purchase an investment property, you need to put down 20-25% in cash as a down payment. Even on a “cheap” property of $60,000-$70,000, that’s still $18,000. Considering the average savings rate in the United States, I’d venture to say that many people don’t just have $20,000 in cash floating around in a bank account.

I’m not trying to discourage you. Quite the opposite, actually. It’s just that unless you’re placing a concerted effort in setting money aside for real estate and saving with goals in mind, it’s really difficult to up and purchase your first property.

In more expensive parts of the country, where 4-unit multi-family properties are selling for upwards of $1M (and higher), it’s difficult to find someone with $200,000 in liquid assets laying around to purchase something like that.

Naturally, this steep barrier of entry seems daunting to people. Which is why so many turn to the stock market, or other forms of investing, where you can get started with as little as $50 to $100.

Today, I’m going to share with you one of the best kept secrets in real estate.

Mobile Homes

the best kept secret in real estate

You heard me. That’s right.

Mobile homes.

That seemingly dumpy trailer is one of the easiest ways to get into real estate (but notice that I didn’t say best — more on this below), just starting out.

If there’s one thing I want you to take away from this entire post, it’s this: Mobile homes are little boxes of cash.

The first rental property that my wife and I ever purchased was a cozy single family home.

Parked in the backyard of said property was an old, run-down dumpy mobile home from 1978.

At first, we just thought it was an eyesore. But once those rent checks started trickling in, we realized that this wasn’t an eyesore — It was a goldmine.

The 3 bedrooom, 1 bathroom house in the front yard was renting for $850/month. The mobile home in the backyard was renting for $767/month. The house literally cost 20x that of the trailer, yet it rented for nearly the same amount.

Why mobile homes?

They’re inexpensive

Mobile homes can typically be purchased for a fraction of the cost of a regular single family home. In my area, it’s not uncommon to be able to purchase a 25-30 year old trailer for $10,000 or less.

The great thing about this is not only can you get into your first rental property for less than a typical down payment, but the property is now owned by you free and clear. There are no banks involved, no mortgages whatsoever — it’s all yours. All the money that you collect from tenants goes into your pocket, and not into the bank’s hands.

They generally rent for only slightly less than an apartment or single-family home

Even though you were able to pick up the trailer for a significant discount, compared to a single-family home, typically they’ll rent for about the same.

As I mentioned earlier, our 3 bedroom/1 bathroom home rents for $850 per month. The 2 bedroom/1 bathroom mobile home, located literally 60 feet away from the house, rents for $767 per month, despite costing less than 1/20th that of the main home.

The return on investment (ROI) is significantly higher

Let’s run some sample numbers, shall we?

Suppose we’re going to purchase a $100,000 home as a rental property. Because we won’t be living in this or doing any creative financing, we’re going to assume the bank requires a 20% down payment — $20,000.

After purchasing the property, we quickly get it rented out and have a tenant in there right away. By the time we subtract out the mortgage payment, insurance, property taxes, maintenance, vacancy, and property management fees, let’s assume we have $200/net profit left over per month.

$200/month * 12 months = $2,400 net annual profit. $2,400 divided by our initial $20,000 down payment = 12% return on investment.

That’s a pretty good return, actually. Anytime you’re beating the stock market average of 7-10%, you can congratulate yourself.

Now, let’s run the numbers on the mobile home.

For the sake of being extra conservative, I’m going to assert a purchase price of $8,000 (but I believe you should be able to pick up a mobile home for much less than that.) And for easy comparison, I’m also going to assume after all expenses, you bring home $200/month net on the mobile home as well.

$200/month * 12 months = $2,400 net annual profit. $2,400 divided by our initial $8,000 purchase price = 30% return on investment.

Isn’t that crazy to think about? You’re nearly 3x more profitable than the single-family home in the example. And even more importantly than that, the numbers that I used as examples were super conservative. Because the mobile home is paid off, you may be able to squeeze $250 or $300/month net out of the property. Or you may be able to purchase the mobile home for $5,000-$6,000 instead of $8,000.

This could mean returns of 60-70%.

You can sell the property for the same, if not more, than what you originally paid

3, 5, or 10 years down the road, when you’re ready to sell the property and move onto bigger and better things, you likely can sell the home for the same, if not more, than what you paid for it in the first place.

Because mobile homes aren’t affixed to a permanent foundation, they don’t technically qualify as real property. Because of this, they actually depreciate in value (similar to a car), not appreciate like most real estate.

One of the biggest way to turn around someone’s financial situation is by teaching them about the nasty depreciation levels of automobiles. Within 4 years of purchasing a brand new car, it will have depreciated by 40%. Within 7 years, it’ll will have depreciated by 70% of its original value. Now, say you purchase an 8 year old vehicle. If you drive it for 2 years, and then re-sell it, there’s a good chance that you’ll be able to sell it for close to the same amount that you purchased it for, because most of the depreciation has already occurred.

The same rules apply to mobile homes. Because we’re going to be purchasing 20-25 year-old mobile homes, all of the depreciation has already hit them.

This bodes well for us as real estate investors. Say we purchase a mobile home for $6,000. You can rake in the cash flow for 7-10 years, and then likely sell the home for $5,000-6,000. It’s a beautiful thing, really.

And again, for the sake of being uber-conservative (which I always try to be in the investing estimates), let’s say at the end of its life, this trailer is in bad shape. Say we have to literally give it away to someone for free, or scrap it entirely. You will have made your initial investment back, and then some, multiple times over.

How much should you pay for a mobile home investment property?

I’ve come up with a system, which I’ve deemed the “Net 12”, that’s worked great for us. It gives an exact number for the maximum amount of money you should pay for any given mobile home.

To calculate this number, first take the gross monthly rent, and multiply by 12 months. So say we’re making $900/month gross. Multiply that by 12, to come up with $10,800.

From there, subtract all of your expenses for the entire year. This includes lot rent, property taxes, insurance, yard maintenance, vacancy, repairs, property management, etc.

Say after all these expenses, we’re left with $5,000 for the year. Take that number, divide it by 12, and we come out to $450/month. Then, take this number and multiply it by 8 months.

Multiplying our net profit by 8 months ensures that if something happens, and we only make money 8 months out of the entire year (which again, I feel is very conservative), that we’ll still be covered and come out on top. In this case, $450 x 8 months = $3,600.

This is the maximum amount of money I’ll offer on any given trailer.

If for some reason, this home is a home-run deal and you can’t afford to lose it, the absolute highest I’ll offer is the net monthly profit times 12. In this case, $5,500. This gives us our range of $3,600 to $5,500 that we should pay for this home.

Where to find mobile homes for sale?

The best places to search are both the Facebook Marketplace and Craiglist.

facebook marketplace

These are the only two places I ever search, because there are dozens of them. New ones are constantly added each and every day.

The problem is that almost always, people overvalue the mobile home, thinking it’s worth more than it is. It seems to be that $30,000 is a common starting asking price for a home. I’m not sure why that is, but people seem to think they can ask that.

In my experience, they’ll typically get 1/4th to 1/5th of that asking price.

I feel bad in saying that you should lowball people, but at the end of the day, this is a business. You make money when you purchase the home, and not when you sell it. By making sure you get a good deal when you buy, you’ll know that you’ll be profitable over the lifetime of this rental.

Downsides of mobile home investment properties

With anything investment-wise, there will be some pros and cons. I’ve already gone over many of the pros, so let’s touch on some of the cons.

Your mobile home will never appreciate

As I mentioned before, because these homes are affixed to a permanent foundation, they can’t be qualified as real property. Therefore, they won’t appreciate in value.

Over the last three years, we’ve seen insane real estate appreciation in the United States. Sadly, this doesn’t apply to mobile homes. The only exception to this is if a mobile home is sitting on a foundation. But if that’s the case, many of the things I’ve mentioned don’t apply, as you won’t be able to purchase that home for $5,000-$8,000.

That being said, I never go into any real estate investment with the expectation of making money from appreciation. If/when I sell the property, and the property has appreciated in value, that’s great. But it’s just that — it’s icing on the cake. You never want to calculate appreciation into your profitability formula, because it’s anyone’s guess as to what that will or won’t be in the future.

You won’t have a mortgage, but you’ll likely have to pay lot rent

I’ve made the assumption throughout this article that if you’re following these steps, you will be purchasing the mobile homes outright, free and clear, using cash. It’s very difficult to secure financing on mobile homes, and so you’ll likely need to use cash anyway.

Even though you won’t be paying a mortgage on this property, you’ll still likely be paying lot or space rent.

You have to place this home somewhere, most likely in a mobile home park, and they’re going to charge each month to do so. Typically, in my area of the country, I’ve found that lot rent runs anywhere from $250-$350/month. You’ll need to make sure to take that into account when you’re checking to see if a deal is profitable or not.

The one upside to lot rent, is that many utilities come included with that, such as water, sewer, and garbage. Electricity and/or natural gas are usually additional. You can use this as a selling point to prospective tenants that the only utility they’ll have to cover is power.

Many of the traditional real estate tax benefits don’t apply

Again, because mobile homes not affixed to a permanent foundation aren’t considered “real property”, they don’t benefit from many of the lucrative tax benefits that are oh-so juicy in real estate.

Depreciation? Nope. Forget trying to depreciate this over 27.5 years.

Mortgage interest write-off? Nope. Because we don’t have a loan on the home, there’s no interest to write off.

1031 Exchanges? Not a chance.

Unfortunately, in the taxes department, we can’t have our cake and eat it too.

A few last tips and tricks

Wrapping things up, I just wanted to touch on a couple more points that I haven’t yet mentioned.

Mobile homes can have liens on them, just like a car

A mobile home has a title and VIN number attached to it, just like a car. At least in my state, you must register your mobile home and renew the tags, just like you would a vehicle, at the DMV.

When you go to purchase a mobile home from someone, you’ll give them cash, and they’ll give you the title in exchange.

Before doing so, you’ll want to make sure that the home is free of any title liens.

I know a guy who once found a great mobile home to use as an investment property. He negotiated the price, got a steal of a deal, and made the transaction official. He took the title of the trailer down to the DMV to get it registered. The DMV did a VIN lookup on the property and discovered that there were over $2,000 in outstanding liens on the home. Before he could transfer it, he was forced to pay off that $2,000 out of pocket.

That made what was supposed to be an incredible deal… not so incredible.

Make sure to do your due diligence before purchasing these properties to ensure there aren’t any outstanding balances owed.

Look for homes that don’t have to be moved

When searching for mobile homes to purchase, ensure that they don’t have to be moved off of their existing lot.

Moving a mobile home can easily cost thousands of dollars. I’ve looked into this before and have had quotes as low as $3,000 for a single-wide, all the way up to $7,000 for a double-wide. With numbers like that, it would be hard to make a profit.

Look for homes that you can leave where they’re at, and simply take over ownership.

This then leads into my next point

Check with park managers to see if they allow rentals

I have a good investor friend who purchased a mobile home to use as an investment property.

Once the deal was done, he found out that the Mobile Home Park Manager didn’t allow rental properties. My friend was then left with a trailer that he couldn’t do anything with.

Because he overpaid for the property, he had a really hard time unloading it, and eventually sold it for a loss. Not to mention the money he lost each month having it sit vacant.

Make sure you check with the park owner prior to taking over ownership.

Flashing cash is a great negotiation tool

Seeing green is a remarkable negotiation tool.

Someone how may have been completely closed off to a particular offer, can suddenly be very open as soon as they see money in hand.

This has been a really successful negotiation tactic for me when buying something. I’ll reach out to a seller with a specific number in mind. Often times, they’ll initially say, “No”, because they really want to get $30,000 for their property.

If it’s something that I really want to pursue, I’ll show up on the doorstep, knock on the door, pull out money, and physically begin counting benjamins in front of them. As soon as they see dollar bills in front of their eyes, many people are much more open to negotiating a price.

When we’re talking about $6,000-$10,000 in $100 bills, many people have never seen so much cash directly in front of them before.

This can open doors that may have been tightly locked before.

Conclusion

Mobile homes offer a great way to get started in real estate investing. While there are some drawbacks, especially compared to traditional real estate investments, there are also a lot of benefits as well.

Real Estate is often difficult to tap into, simply because it requires so much capital up front, generally thousands of dollars. But by using mobile homes as a stepping stool, you’ll be able make a decent cash flow, and in a few years, sell the property to roll into something larger.

 

2 comments

  1. Melvin

    I really appreciate your tip to try and find a realtor who can give you some imaginative and creative solutions to your problems. My wife and I have been thinking of getting a new house, and we are worried that we won’t be able to find a house. I will be sure to tell my wife that we should try and find a realtor who can have a creative solution to our problems!

    1. Bryce | Sane Cents

      Glad we could help, Melvin! Realtors can either be an incredible help, or a massive detriment to your search. Find someone who is connected, and it’ll make a world of difference.

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