A growing handful of intelligent and educated investors are scouting for mobile home park investment opportunities. So what’s the new magnetism of mobile home parks? And how are their stark contrasts to other types of commercial real estate sectors providing individual investors an edge?
A Diamond in the Rough
The aesthetics and stigma associated with mobile home parks has turned out to be one of the secret investing weapons of intelligent investors that focus on the numbers. Mobile home parks may not carry the prestige and cool of announcing investing in the latest trendy Manhattan office building. But the returns may certainly be something to boast about when dinning out with friends.
If you are investing for financial gain and security, and not as a crutch for your ego, mobile home parks can be especially appealing. And after the dust settle many may find all of those old preconceptions about this asset class have been taken out to the curb.
The CCIM Institute forecasts 15% more global investment in North America in 2015, topping $471 billion annually. The Association of Foreign Investors in Real Estate ranks the US as the top destination for capital appreciation, and expects a 60% rise in US real estate investment by foreign nationals over the next 5 years. That’s on top of the current surge in domestic investment in real estate. Much of this capital is chasing commercial real estate. In turn this competition, and expectation of rising rates is set to cramp cap rates in office, retail, and multifamily sectors. Super-sized foreign pension and sovereign funds may be happy with very modest, low single digit yields and cap rates. But most individual investors can’t afford to settle for that. And this is where mobile home parks really shine.
Mobile home park investments have been ignored and undervalued; and that is one of their big advantages today. But more than that; these investments offer great potential for adding value and boosting cash flow, and making high ROI value-add improvements. All of which can catapult returns very easily. This is what makes them the crown jewels of the current landscape.
6 Fundamentals Driving Mobile Home Park Profitability
- They’re Not So Mobile
It can cost well over $5,000 to move an existing ‘mobile’ home to another park, and re-connect it to utilities. Virtually none of these residents ever has that level of surplus cash in their lifetimes. So more than 90% of these units never leave the original park they were delivered too. That means customers are subject to whatever rent raises landlords require.
- The Growing US Affordable Housing Crisis
A fresh round of foreclosures in 2015, along with Zillow data showing the minimum hourly wage to rent a mediocre apartment in some US cities now exceed $49 to $200 an hour means a vast population that can’t afford to live anywhere but in mobile home parks. An increasing number of US cities like Tampa, FL are even making homelessness illegal, forcing people to find housing at any cost. Tight mortgage lending, and fresh restrictions on the largest banks in America mean that while most want to buy homes, they simply can’t afford to. And that isn’t going to change dramatically anytime soon.
- Value for Residents
Even among those that could afford to live in an apartment building, or obtain government subsidies for housing face many other issues. Aside from the claustrophobia, and rules, giant out of areas hedge fund landlords are frequently making it more difficult to qualify to rent an apartment than to qualify for a mortgage. Mobile home park tenants get to skip much of this and enjoy more outdoor space, no shared walls with neighbors, and community.
- Demand and Low Vacancy Rates
All the above adds up to great demand for mobile home rentals. And that in turn translates to low vacancy rates. Even in Vermont official data puts statewide vacancy for mobile home lots at just 4.4% for 2014. According to The Wall Street Journal in April 2015, this tremendous low cost housing demand is boosting mobile home park operators’ returns, which can be 10 times more than that of prime office and retail buildings.
- Limited Supply
Zoning laws and restrictions have virtually banned the development of additional new mobile home parks in many parts of the country. Especially in those areas which are seeing land value go up the most. In more remote areas utility resources can be limited, or development cost prohibitive. When there is scarcity, that results in to robust capital appreciation, and potential for hot exits in the future.
The perceptions and traditional mom and pop operators that have run most existing communities have left these parks undervalued, and underperforming. But ripe for a sizable leap. There many ways to optimize operations that mom and pop operators haven’t seen or bothered to implement for decades. And now aging owners are ready to cash out. That’s a great thing for individual investors seeking passive income cash flow, and wealth building for the next few decades. And despite the fact that mobile home park investments are catching on, and can even occasionally be seen being promoted on platforms along prestigious brands like the Hard Rock in Palm Springs, the operating fundamentals offer far better margins. One data set shows financial filings that put manufactured housing like this at over double the operating profit margin of multifamily housing and well below the average, student housing, and even self-storage.
US mobile home parks are ripe for investment. They are ready to be polished, and to shine in investors’ portfolios. For those that can get over their misconceptions, and who would rather have the best returns at the table, than a shiny non-performing liability, mobile home parks could be the gem that delivers.
What will you invest in?