In my continuing efforts to identify some of the most alluring alternative real estate investment asset classes, mobile home parks continue to be near the top. I like multi-family value add apartment investing as a core holding and self- storage and mobile home parks to provide some unique diversification around the edges. The interest stems from long term demographic trends favoring more renters, need for affordable housing, our desires to keep things which all buffer these asset classes to some extent from economic downturns. We’ll focus here on MHPs (often called Manufactured Home Parks). I’ve outlined below the 7 reasons I like this asset class:
1) Demand for Affordable Housing Increasing – For many, the rise of housing costs and overall living costs keeps affordability of buying a home at bay for many. More and more folks are retiring (10,000 baby boomers retire every day) with little savings and live primarily on social security to make ends. Low wage earners also cannot afford the rising cost of home ownership so their only options are low rent apartment housing or MHPs. MHPs are an affordable option for many folks who need a place to live. America as a group is getting poorer as the middle class is getting squeezed. There is a growing demand for affordable housing and this trend has long legs.
2) Limited Supply / Competition – There are only about 10 new MHPs built in the entire U.S. in a typical year against a total stock of 50,000 parks. Cities and townships across America frown on MHP developments so getting permits and zoning approved to build new parks is difficult. Hence, less supply increases the value of existing parks. This benefits current owners also as there is virtually no competition from new MHP development. It’s also costly to build new parks because the owner must then attract mobile home owners and moving them is costly. As a result, most MH owners stay put forcing the MHP owner to not only buy the land and put in the infrastructure, but gradually buy and place new mobile homes on the lot. That creates a longer road to profitability.
3) Lack of Mobility – The essential income generation makeup of MHPs come from renting the space to an owner of a mobile home. However, the cost to move the mobile home for the owner can be $3,000 to $5,000 which is cost prohibitive. For most manufactured homes, the trip from the factory to the mobile home park is the last move it will ever make. The only choice really for the owner of the manufactured home is to continue to rent the lot or sell to the park owner. Reasonable lot rent increases are more tolerable as moving the unit is cost prohibitive.
4) Cash Flow / Total Returns - MHPs throw off a lot of cash for investors and 10% cash on cash returns are achievable. Add refinancing to pull out more investor cash at regular intervals on improved park valuations and total ROI can amp up to high teens to 20% annual returns over the hold period. Cap rates for the sector are typically higher than both apartments and self-storage. Costs are much cheaper since the owner of the MHP does not typically own the manufactured homes and just rents out the lots. Lot rents can increase at a reasonable clip due to lack of mobility issue and high cost of other housing options. Very little maintenance costs since the units are not owned by the MHP owner. Rising property value also does good things for the owner of the manufactured home so it’s not a winner take all proposition which encourages lot renters to stay.
5) Fragmented ownership – Almost 80% of the 50,000 MHPs in the nation are not owned by large companies but by everyday folks who have owned these parks for years. Many are ready to retire. The opportunity for a new MHP owner is to look for parks in good locations that are underperforming and with professional management add value by improving the overall appearance and economic performance of the park.
6) Big money has committed to the space – The largest park owner in the U.S. is Sam Zell, the Chicago based real estate magnate and Warren Buffet, who owns Clayton Homes, the largest manufacturer of mobile homes. Zell is chairman of Equity Life Style Properties and is the mobile home industry’s largest landlord with over 144,000 lots and 32 states. Clayton Homes manufacturers and provides financing for new manufactured homes.
If you like this sector, one of the best ways to play it is through syndication. Here, as a passive investor, one can invest with experts that know this space well, acquire and manage these properties to improve performance. I like pooled investments even better, where instead of just buying one property, you are investing in several MHPs across different geographies.