Why are investors so interested in mobile home parks today?
Those that understand the math and advantages of mobile home parks as an asset class can’t help but be drawn to investing in them. Investors that are looking for more from their portfolios may be surprised that they haven’t been tuned into these investments before.
What you need to know…
Between attractive rental spreads, value add opportunities, enhanced tax benefits, and evolving fundamentals, mobile home parks some of the best, and most predictable returns out there. For the 12 months ending in March 2015 the gross returns of three major mobile home park operators hit 44% according to the Wall Street Journal.
Potential Add Value
Forbes’ recent report on investing in real estate for income and retirement highlights the advantage of control over asset value that real estate offers. Try as hard as you like and you aren’t going to increase the value of CDs or stocks you own.
Imagine buying Disney stock and trying to add value to that. Even if you buy an annual pass to every park, get an ESPN subscription, and buy all the merchandise as gifts for your family for the next year, and even spend you weekends volunteering to don a character costume; you aren’t going to nudge your stock’s value up one cent.
In contrast; real estate owners have numerous ways to force up the value of their own properties. This works in all phases of the property cycle. This can include raising the rent, making over the property, adding additional services, and even simply holding and seasoning property performance until it is considered ‘stabilized’.
Lower Maintenance Costs & Ease of Ownership
One of the most common excuses investors lean on to justify not having direct real estate investments in their portfolios is maintenance and property management. We’ve all heard the tales of the high maintenance tenants that want help unclogging the toilet, changing a lightbulb, or unlocking the door when they forget their key; at 2am. Mobile home park investing eliminates that dynamic.
In a mobile home park residents generally own their units. You collect lot rent. So if they lock themselves out, break something, or want new appliances; that’s all up to them, and out of their pocket. You are as the park owner have to keep up the landscaping, and any community features you choose to include. But that’s a night and day difference from managing single family homes or low income apartment buildings.
Lower Cost per Unit & Creating Economies of Scale
One of the main attractions to multifamily investment properties by sophisticated investors and funds in the past has been the ‘low cost per door’. This simply doesn’t get any lower when you are buying mobile home lots in bulk.
The second advantage here is the economy of scale. This includes property management, but this also specifically relates to ROI on improvements. Improvements made can elevate the total property value, and income potential across all units in a park. Compare this with spread out single family homes and the ROI is clear. You could hire a professional manager, install new laundry services, and a swimming pool to serve a whole mobile home park for not much more than for one single family home. Yet, you are simultaneously increase the rental potential on what may be a dozen or a hundred or more units.
Affordable Housing Needs
20% of US households earn less than $20,000 a year. Yet, even many of those that earn much more are struggling to afford anything more than a mobile home. While many are unhappy about the proposition of a $15 an hour minimum wage, the truth is that a $30 an hour minimum wage isn’t nearly enough to afford a reasonable starter home in many parts of America.
Need Growing on a Daily Basis
The need for affordable housing is growing on a daily basis. Even millennials and generation X aside; Pew Research reveals that 10,000 Baby Boomers are retiring daily. Vanguard reports the median 401k savings at age 65 as of 2015 is just over $70,000. Even for those that have owned homes for 30 years and paid them off (which remains rare) that isn’t enough money to go very far when you factor in property insurance, taxes, and maintenance. Never mind food and healthcare. As we enter an era of higher inflation this savings – expenses gap will only grow.
Priced Out of Other Housing
Since 2009, over 50% of new mobile home park residents have been former single family home residents. With house prices rising fast, and interest rates set to go on a hike spree for the years to come more and more individuals and families are going to find they are priced out of other housing options as each quarter goes by.
Real estate is often heralded as a great investment due to limited land and housing stock. Well, there are even fewer mobile home parks. You can actually build more land with man-made islands, and in most areas you can construct or redevelop luxury condos and single family homes. What you can’t do is build new mobile home parks. Local government and developers don’t want to approve them. In fact, many owners of standalone mobile homes find they can’t replace them once their useful life runs out. Building codes prohibit it. That leaves existing mobile home parks. As these parks have been changing hands from those that have held them for decades to new long term buy and hold owners supply is decreasing. There is more demand than there is availability. That means rising value.
Returns Not Tied to Wall St.
Wall Street and mobile home park returns are not tied together. This provides better diversification to counterbalance any downfall in stock market performance. In fact; downturns on Wall Street often spur greater demand for mobile home housing and investments. This is crucial for those desiring predicable income streams, and cash they can count on to support their lifestyle before and after retirement.
Can Buy without Banks
Seller financing is common in mobile home park investing. This has multiple benefits. One; it means investors do not need to tie up their personal credit reports with loans. It also means being able to purchase and increase acquisition activity even when banks are contracting and tightening underwriting. That works on the exit side as well.
True Tangible Diversification
Stock, bond, fund, and even REIT investors can find true, non-paper diversification in mobile home park real estate. A well rounded portfolio is great; but non-paper assets are critical. Mobile home parks even offer a secondary layer of diversification by having multiple units and tenants. This ensures consistency in cash flow and yield month after month.
The land mobile home parks control isn’t going to be lost. It is a much lower risk than office buildings, multifamily apartments, and even single family homes which owe most of their value and performance to the structures above ground. Additionally, this provides greater control. This is even better than a condo or co-op where you really have no control over the value of the complex, or a single family community. It’s better than a fund, stock, or REIT in which you don’t actually have any tangible collateral. A company can shed its real estate, a fund manager can change up the stock mix, or something else which leaves the investor nothing. The opposite is true with mobile home parks.
Now is the Time to Invest in Mobile Home Parks
Invest Like Buffett
Everyone wants to know how to invest like billionaire Warren Buffett. You can invest in Berkshire Hathaway stock, but it is very convoluted, does not offer diversification from other stocks and funds in your portfolio, and Buffett himself has warned its size threatens low yields ahead. What Buffett does continue to call his best lifetime investments (aside from getting married) is his direct real estate investments. Buffett’s organization is now owner of Clayton Homes, the largest mobile home manufacturer and financier of mobile homes; worth an estimated $2B. Direct mobile home park investing cuts out all the middlemen to enable investors to enjoy more security, higher yields, and net returns.
Unique Window of Opportunity for Acquiring Mobile Home Parks
We’re currently experiencing a unique window of opportunity for mobile home park acquisitions. Due to their strong cash flow and easy management owners rarely want to let their mobile home park investments go. However, after being held for decades, some aging original owners are looking to unload underperforming mobile home parks and retire. They often offer seller financing on these properties to retain passive income streams to retire on, though are willing to pass on the opportunity to improve and manage them to a fresh buyer. Once these opportunities are absorbed we may not see many available again for another few decades.
Other Real Estate is Overpriced
Other real estate asset classes are currently rapidly becoming overpriced. Some are buying into the panic of buying homes as house flippers and developers force up prices fast. Savvier investors are taking a bigger picture, more business like view. They see homes being flipped for $50,000 in profit in days without much being done to add value. They know it is only a matter of time before someone gets stuck holding the hot potato that no one else wants, and the debt that comes with it. Zillow is already predicting a softening and single digit declines in many US cities in 2016. History suggests that when the market goes down, it will invariably fall harder and longer than anticipated. This will only add more demand for mobile homes, and mobile home parks as investors sit out and wait for the bottom of the single family home and commercial property market. Remember single family prices dove by as much as 70% or more in the last downturn. Yet, even though bank lending can become scarce, stock portfolios can be impacted, jobs can be hurt; this also only supports the demand for mobile homes.
Technology is Creating More Efficiency
Technology is changing the dynamics of mobile home park investing too. It not only now allows investors to find, buy and manage MHPs from anywhere in the world, it also means increased net profitability through superior management. This checks the vital boxes investors seek in lifestyle and investment convenience.
Current acquisition opportunities won’t be this appetizing or available forever. But those that are acting now can find it a major financial game changer.