In my continuing efforts to identify some of the most lucrative, alternative real estate investment asset classes, mobile home parks continue to catch my eye. I love multi-family value-add apartment investing as my core strategy for investing, but mobile home parks continue to prove themselves as a valuable, unique diversification of anyone’s portfolio. My interest roots from long term demographic trends favoring more renters need for affordable housing. I continue to see an increase in the desire for affordable housing while the supply continues to decrease. We’ll go over the pros and cons of this fascinating asset class and dissect whether or not it could be a plausible option for syndication.
Pro #1) Demand for Affordable Housing Increasing – For many Americans, the rise of housing costs and overall living costs keeps affordability of buying a home out of reach. More and more people are retiring (10,000 baby boomers retire every day) with little savings and live primarily on social security to make ends meet. Low wage earners simply cannot afford the rising cost of home ownership so their only options are low rent apartment housing (D class) or MHPs. MHPs are an affordable option for many people who need a place to live. In some MHPs potential tenants can even owner finance their home from the owner, pay a small premium, and eventually, own the home outright, giving them pride of ownership and typically allowing them to make better decisions with their care of the property. There is definitely a growing demand for affordable housing and with where the economy is going, there’s no end in sight.
Pro #2) Lack of Supply / Lack of 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 & almost impossible. The lower supply increases the value of existing parks. This benefits current owners, as there is virtually no competition from new MHP development. It’s also costly to build new parks because the owner must then bring in new mobile home owners and moving them is costly. 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. Which makes for a much longer timeline before any profit is seen from the investment.
Pro #3) Lack of Mobility – The income strategy of MHPs comes from renting the lot 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. (Not as mobile as you would think) The only reasonable option 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 home is counterproductive to the benefit of the owner
Pro #4) Cash Flow – MHPs produce a lot of cash. 10% cash-on-cash returns are easily achievable. Additionally, cap rates for the asset class 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 rate due to lack of mobility and high cost of other housing options & very little maintenance costs are needed since the units are not owned by the MHP owner. A good park that stays full because the owner takes care of its residents and property will produce immense cashflow if bought right. 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.
Pro #5) “Mom & Pop” ownership – Almost 80% of the 50,000 MHPs in the nation are not owned by large companies but by “Mom & Pop” who have owned these parks for years. Many, of which, are ready to retire. The opportunity for a new MHP owner is to look for parks in good locations that are underperforming and can be forcibly appreciated by improving the overall appearance and economic performance of the park.
Pro #6) Big money has committed to the space – The largest park owner in the U.S. is Sam Zell, the Chicago based real estate mogul 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 there’s big guys like Sam Zell & Warren Buffet committing to these assets, then I want a piece of it!
Can I passively invest in a MHP syndication?
Syndication is not only plausible, but preferred when investing into this asset class. Here, as a passive investor, you can invest with experts that know this space well, acquire and manage these properties well, and know how to force appreciation for maximum ROI & performance of the property. When investing in a MHP syndication, you can invest in many different geographical locations and can truly diversify your portfolio to be practically recession proof!
What are the Cons to Mobile Home Park Investing?
Con #1) MHPs are a different sort of animal from traditional multifamily investments. One of the constraints in the MHP sector is the small investor trying to invest individually without an established team or systems in place. Even with the explosion of the Internet as a tool for research and acquisition opportunities, the manufactured housing community remains highly fragmented and inherently localized by nature.
Con #2) Personally I've looked at several dozen mobile home parks, but finding good data or even an accurate accounting of the parks' income and expenses has proved incredibly challenging. According to Lanoie, "Opportunities persist for established companies like Four Peaks Capital Partners because they are equipped to identify areas of inefficiency." Established investors, like Lanoie, who have experience and staff, (Lanoie's company has over 100 employees) possesses the ability to search for and review opportunities not easily attainable to small investors. In other words, these multifamily syndicators are experts in their space, and it’s people like them that you would want to passively invest with. Additionally, investors like Lanoie align with local operators to gain knowledge in the marketplace, identify special situations and inefficiencies, and find hidden gems located in their target market.
Con #3) Tenant base in MHPs isn’t the greatest. Sometimes you get some seriously sketchy individuals visit, or even rent, your property and it can scare away some of the good tenants. Most of that can be disrupted by quality screening on the front end, but sometimes you buy into a property with pre-existing bad tenants. Occasionally tenants won’t pay, or they’ll be late every month. Bad debt isn’t uncommon with such a low class of tenants. Some tenants don’t even have bank accounts and it can be extremely difficult to receive lot rent from them with good records, if their only payment option is cash.