Why are sophisticated investors and finance experts moving up to mobile home park investing, and away from single family homes?
Most people might not think of a mobile home as a housing upgrade. But savvy finance professionals and experienced investors are being highlighted by major financial publications for making the move from Silicon Valley and Wall St. to mobile home parks. In early 2015 some of the world’s largest investments firms shocked the real estate industry when they began shedding the massive portfolios of single family homes they bought up during the downturn, and began talking more about land and income. Specifically, Blackstone division Invitation Homes has made a 180 degree turn from acquiring over $9B worth of houses, to its CEO stating the company plans to sell off at least 5% of the portfolio per year. There is no question that Blackstone is still bullish on US real estate, as it has shown with the launch of its new B2RFinance unit which seeks to fuel investors with capital. The massive bulk flip of homes is certain to be a goldmine, in addition to the recent securitization of rental income portfolios. But what’s next?
Why mobile home park investing?
Investors are Growing Up
Most real estate investors’ first acquisition is a single family home. Some start out with a condo or even a mobile home to live in. In fact, around 12 million Americans live in mobile homes, or a little under 10% of the population. Buying a home is a great move. It creates a strong foundation and is a great way for individuals to cut their teeth on real estate as an asset class, and on the process of acquiring properties. Even Warren Buffett, who is one of the world’s most notable mobile home investors, still calls his own (“stick-built”) home one of his best investments ever. Yet our own homes are not calculated as a part of net worth, and are not pure investments. After all; we all need somewhere to live.
Sourcing Investment Property Deals
While there are still substantial amounts of distressed real estate in America, publicly marketed inventory is low. In June 2015 national housing inventory sat at just 5 months according to the National Association of Realtors. According to Housing Wire and data from Redfin, the inventory picture is worse that it appears too. While well priced new listings may be going under contract within hours, Redfin classified 70% of homes on the market in 2015 as ‘stale’. That means unwanted properties collecting dust on the shelf that no one is drawn to buy. The attractive deals are drawing multiple offers, and that means prices are bid up quickly, while the potential for profit drops. Put simply; it’s getting challenging to find profitable single family homes deals, especially in any type of reliable volume.
Overlooked, Underestimated, Undervalued, Mobile Home Park Investing
Even though single and multifamily property sectors are highly competitive they will continue to be so. It’s what the average investor and fund manager understands. It’s their comfortable go-to asset. This is especially true given the current overall investment environment in which there are fears of a stock bubble; gold is soft, and oil and gas have proven unpredictable. Perhaps aside from those willing to gamble on contemporary art, real estate seems the only attractive asset on the table. And certainly the safest. Yet, in comparison to single family, multifamily, and office and retail investing, one type of investing goes largely under the radar – mobile home park investing. This is true even though mobile home investments have been the backbone and saving grace of Berkshire Hathaway and Warren Buffett through both good and bad times. So what we have is a strong, undervalued investment opportunity, without all the competition. It’s exactly the combination of factors that savvy investors crave.
Advanced investors and commercial real estate professionals use price-per-door (aka per unit price) when looking for value. This is why multifamily apartments, rather than single family homes, are normally sought out by funds. But the value spread is even wider than that between homes and apartments. The St. Louis Federal Reserve Bank put the median sales price of existing US homes at $236,400 as of June 1st 2015. But according to Cost Helper, the average price of a single-wide manufactured home is just $37,100. And it doesn’t require a genius to figure out that the rental spreads or cash on cash yields on a manufactured home are a lot higher. While some investors may take on individual mobile homes, mobile home park investing offers the diversification benefits of multifamily, yet with lower acquisition costs.
Economy of Scale
Serious investors need scale. Single family home investing is really hard to scale effectively. Some may argue that even giant firms like Blackstone and Cerberus simply weren’t prepared for the renovation and property management burden that single family homes proved to be. Pools of distressed single family homes can still sometimes be purchased in bulk. But that often means taking the good with the bad, and little control of how spread out each property is. A ‘50% discount’ is pretty meaningless if half of the pool is worthless, or is going to cost double the average unit purchase price to teardown. Then there is the management. Even if units are rent ready, and rented, it is going to cost a lot more to manage 100 units spread out over an entire city. What about across the country? Then there are the transactional headaches and costs. How much more time and money would it take to complete 100 transactions versus just 1? This is where acquiring a mobile home park can really build in even more profit upfront, as well as delivering superior ongoing cash flow spreads. With the lower cost of mobile homes investors can find that they are able to acquire a whole park for less than the price of many single family homes. This brings additional safety, diversification, flexibility, and more consistent cash flow.
Seller financing is very common in the mobile home sector. Acquiring investments with seller financing can reduce acquisition and borrowing costs, and increasing speed.
Building a Team
Building a team to invest in mobile home parks is virtually the same as for single family homes. You may want some specialists that are really masters of this asset class, but it makes for a very easy transition for those that have been investing in single family homes. Your title partners, mortgage connections, Realtors, handymen, contractors, and property managers may still be able to help. And there are even managed and turnkey style mobile home investment options now coming online.
For those looking to upgrade their efficiency in investing in real estate, improve security, and fatten their net profit, mobile home parks can definitely be the step up investors have been looking for. There is nothing wrong with buying a single family home or two first. It’s a great time to buy a house, or move up. But serious income and value investors will find the price, economy of scale, financing, management of mobile homes, and ease of entry hard to ignore.