Asset Focus: Mobile Home Parks
It seems every internet-famous real estate investor is talking about investing in mobile home parks nowadays. In this edition of our Asset Focus Series, we are diving head first into the subject, looking at the benefits and risks of this niche real estate market.
- How to Invest
This article won’t make you can expert on investing in mobile home parks. But it is a great start if you want to understand the investment case, risks and some of the available investing options. I hope you find it useful.
An Introduction to Mobile Home Park Investing
House prices are rising, and rising, and rising. This has made investing in rental properties very challenging in many areas. As a result, investors are seeking out alternative real estate investments. Investing in mobile home parks (or ‘manufactured housing communities’) is fast becoming the de-riguer strategy for investors looking for relatively low maintenance, high income assets to add to their portfolios.
On the face of it, it’s not hard to see why this interesting asset class is in such high favour right now. Just look to rapidly rising demand for affordable housing in the face of increasingly limited supply. Well-located affordable housing is likely to do very well in terms demand. An demand translates well into good rental income, occupancy levels and potentially capital appreciation.
Add to this the fact that the mobile home park market is disjointed and largely undermaintained. Small sites owned by the same families for generations suffer from many years of deferred maintained. This is music to the ears of real estate investors looking for new opportunities to buy assets cheap and add value.
It certainly also helps that investing in manufactured housing has found its way on to the agendas of the really big guns. Blackstone Group ($649 billion in assets under management) made their first investment in 2018 with the purchase of 14 properties for $172 million. That’s no small bet, even for those guys!
There are others, too. $414 billion Apollo Global Management, and $276 billion Carlyle Group have also invested. So has the sovereign wealth fund of Singapore. With billions of dollars in institutional money flowing into the space, it is little wonder that smaller investors are scrambling for their own piece of the pie.
Benefits of Investing in Mobile Home Parks
So the headlines look pretty good. But is there any real fundamental support for the investment case? After all, there are plenty of investments that pay monthly income that do not involve owing a bunch of low-income housing units. Well, here are eight good reasons why you might consider investing in mobile home parks.
Millennials Want to Own Their Own Homes
We all thought they didn’t. Turns out, they do! Millennials were supposed to be the renter generation. Preferring a more transient life of non-permanency. But in actual fact the American Dream (of home ownership) is alive and well. A study of 6,400 Millennials by Apartment List found that 89% want to own their own home. But 67% will not be able to afford it for at least 20 years!
A combination of student debt, and a lack of savings for a deposit were the main barriers to home ownership for younger buyers. This bodes well for mobile home parks which offer a relatively low cost (and dare I say it, Hipster) way for Millennials to get their foot on the property ladder.
Retirees Want Affordable Homes in Good Locations
Leaving the young’uns aside for a moment, the main demographic served by mobile home parks is retirees. Well-located and well-maintained senior living communities are always is super high demand. If you’ve done things right, by the time you retire you have a healthy 401(k), no debt, and you own your house free and clear. But the cost of living rising fast, your money has to stretch further than ever before.
As a result, more and more retirees are selling up their most valuable asset (their house), and trading in for a much cheaper unit within a manufactured housing community. And it makes perfect sense. The cost to buy and maintain manufactured housing is lower, freeing up cash to spend or invest for income. You’re not going to be stuck with huge repair bills like a new roof. And best of all you’re surrounded by people in your own age bracket with similar interests and activities.
New Communities Are Not Being Built
Ask any real estate developer; good quality locations do not come cheap. This is especially true for mobile home parks. Residents want commutable access to metropolitan areas. Or, in the case of retirement communities, they want peaceful and picturesque. These sites are expensive to purchase, and government zoning regulations are becoming ever more prohibitive.
On top of all that, when you dig down into the financials it is apparent that it is far less profitable to build a manufactured housing community than it is to build, say, an block of apartments. This combination of burdensome red tape and thin profit margins means new parks are just not being built.
The Affordable Housing Crisis
Aside from the supply issues specific to mobile homes parks, there is also a lack of affordable housing in general. In the US, there is a shortfall of around 7 million units for low income renters. According to the National Low Income Housing Coalition, extremely low income renters face a chronic housing shortage in every US State.
For every 100 renters, there are just 37 affordable and accessible homes. And in some States that number is as low as 20! Furthermore, 75% of super low income families pay more than half their income on rent. And only 25% of the families who need rental assistance actually receive it.
For many, mobile home parks – especially in the form of fashionable new sustainable housing – is the answer. First off they are cheaper to build at $45-$60, compared to about $150-$200 for single family homes. Millennials can purchase a manufactured home for circa $82,000. that’s way cheaper than the average stick built home at $287,148.
So, we can see millions of Millennials and retirees all clambering for affordable housing. Yet at the same time the supply of good quality, well-located units is extremely limited. With demand increasing and supply inherently limited, the value of existing sites with good infrastructure and transport links is likely to continue to increase.
Stable Cash Flow
Much like multifamily apartments, mobile home parks generate income from multiple tenants. This acts to somewhat stabilize cashflow over the long term. Unlike single family homes for example, where 100% of your rental income is largely dependant on one tenant or family, occasional vacancies in individual units or lots do not necessarily have a significant impact on overall cashflow of a mobile home park.
Tenants in mobile home parks tend to stay for a very long time. This acts to reduce turnover and marketing costs for owners in comparison to multifamily or single family homes. The combination of multiple income streams and long term tenants makes investing in mobile home parks an interesting cashflow investment.
Availability of Cheap Value-Add Assets
As I have already mentioned, the mobile home park market is fairly disjointed. There are lots of properties that have been family-owned for many years, many of which have fallen into disrepair. Certainly there is an abundance of assets that require investment in new infrastructure and improvements.
This is a huge value-add opportunity for investors. The ability to buy an asset at a discounted price, and then force up the value with improvements, is a great strategy to amplify yield and generate solid capital gains. With large institutional investors mostly focussed on larger properties with many hundreds of homes, individual investors and small groups are able to shop for the smaller sites.
Higher Yields Than Rental Properties
Whilst capital appreciation is the cherry on top, real estate is viewed by most investors as an income play. Specifically, real estate generates monthly income. After all, that’s we buy REITs and mortgage notes, right? So properties that pay a higher than average yield are going to look attractive right off the bat.
Low rents in a community usually mean the owners have not maximized the value of their property. Think deferred maintenance! And just like our value-add investment strategy increases value, it also allows us to increase rents, too. Investors aim to create economies of scale by consolidating smaller properties, making physical infrastructure improvements, and implementing professional systems. All of these things lead to higher yields!
Now, I’m not here to impart tax advice. Indeed, the tax code seems to change more often than some folk change their underwear. But as of the time of writing there are some tax advantages to investing in mobile home parks. For many investors this is a an absolute must when it comes to portfolio planning.
For example, a large portion of the purchase price can be allocated to capital improvements and can be depreciated over 15-years. This compares very favourably to the standard 27 and a half years for residential real estate. Or worse, 39 years for commercial properties.
So, there are 8 pretty good reasons to consider investing in mobile home parks. There’s no doubt that this interesting alternative real estate play looks pretty appealing. And especially so for investors that are struggling to buy other types of real estate at the right price. But the question remains; how do you go about it? Well, let’s find out.
How to Invest in Mobile Home Parks
There are plenty of ways for you to invest in mobile home parks. From simply buying one outright, through REITs, crowdfunding and private equity. There are investing options for all budgets and risk tolerances. Let’s take a more detailed look at some of the most accessible routes for smaller private investors.
Buying Your Own Mobile Home Park
The most obvious course of action for most investors will be to actually purchase a small park. I’ve seen a few real estate investors I know take this route, with varying levels of success. Every manufactured housing community I’ve seen has has it’s own unique challenges. If you are going to attempt to buy, improve and manage a mobile home park by yourself, there is a heck of a lot to learn.
You will want to ask yourself some important questions before you part with your cash. For example, what is your total budget? How much time and effort do you want to put in? Do you know the likely approximate cost of common improvements? And are you sure you know how to appropriately value mobile home parks in the first place?
Once you have an idea of what you are prepared to spend (in terms of money, time and effort), what things are likely to cost, and what risks you are (and are not) prepared to take, you can start shopping. If you manage to find a property worth looking at, then things start to get more interesting.
One thing to think about is how you’ll finance your purchase. The standard income-based valuation model used for other types of commercial real estate is not always appropriate for mobile homes parks. That’s because parks make money from both lot leases and park-owned-home rents. Some lenders view these types of income differently, so you might come up against problems getting financing for some properties.
You might also consider what type of tenants you want to deal with. Are you OK dealing mostly with low income renters? or would you be more comfortable managing a community housing mostly retirees? There certainly is a lot to think about if you want to be a mobile home park landlord. Of course, there are always more passive investing options.
Investing in Manufactured Housing REITs
If you want a more passive mobile home park investment option, you might want to buy shares in a REIT that specializes in manufactured housing. There are currently 3 publicly traded REITs that own and operate mobile home parks.
Sun Communities, Inc. – SUI – Sun Communities owns or has an interest in 569 properties. Originally formed in 1975, the company went public as a REIT in 1993. They have won the Manufactured Housing Institute’s Community Operator of the Year award twice! Sun Communities shares have shot up by about 35% over the course of the last year. They currently distribute a dividend with a yield of 1.67%.
Equity LifeStyle Properties, Inc. – ELS – This mobile home park focused REIT owns or has an interest in 435 properties containing 166,188 sites in 33 states and British Columbia. Shares in the company are traded on the New York Stock Exchange, and have risen by about 32% over the past year. According to its website, the company is focused on providing its residents with an attractive and affordable lifestyle.
UMH Properties, Inc. – UMH – Currently trading on the NYSE at $23.31 (21st August, 2021), shares in UMH have risen in value by more than 50% over the last year. The company owns and operates 127 mobile home parks with around 24,000 developed sites (lots). Interestingly, they also owns around 1,800 acres of land for the development of new communities.
Shares in Mobile Home Manufacturers
If you want to invest in the industry, rather than the assets, you could buy shares in manufactured housing manufacturers. Here are a couple of larger manufacturers of mobile homes that are publicly listed on the stock exchange.
Legacy Housing Corporation – LEGH – Trading in the NASDAQ, Legacy is one of the top (4th, actually) manufacturers of mobile homes in the United States. the company was established in 2005, and shares have shown almost 100% value growth since the 52-week low of $12.50.
Skyline Champion Corporation – SKY – Shares in this manufactured home builder have almost doubled in value over the last 12 months. the company is one of the largest home builder sin the US, and als0o has a direct to retail arm with 21 locations in the South.
Private Equity Investments in Mobile Home Parks
If, like me, you’d rather own physical assets than shares in a corporation, there may be a halfway house in the form of private equity investments in the mobile home park space. One such provider is Sunrise Capital Investors, a private investment firm offering investments in their diversified portfolio of manufactured home communities.
According to their website, You can invest with Sunrise with just $100,000. Much less than the amount you would need to buy your own property. And, you get the benefit of their experience and management team to boot. The company’s funds pay out a quarterly dividend, which is very useful for investor looking to flesh out their monthly income.
There are other private equity players offering fund investments in mobile home parks such as Midwest Park Capital. They offer accredited investors investments in mobile home parks from $450,000. Another option is Elevation Fund, offering investments self storage units and mobile home parks. Although it looks like these guys are being sued, either by investors or competitors, so maybe tread carefully with that one!
Crowdfunding Mobile Home Parks
Crowdfunding has become the go-to for investors seeking small-scale managed exposure to niche real estate assets. You can pretty much crowdfund any type of real estate. There are investing options for commercial real estate such as multifamily apartment blocks, industrial, retail, and of course, mobile home parks.
You’d have to fish around the many real estate crowdfunding websites to find a current offer to invest in a mobile home park. Realty Mogul have previously listed one such offer from MHP Funds that was apparently fully subscribed. You can find a list of real estate crowdfunding websites in my recent article on commercial real estate investing.
Return on Investment
So there you have quite a few options for investing in mobile home parks. But what kind of return on investment can you expect? Well of course, investment returns are an entirely subjective affair. There are so many variables to consider such as location and investment strategy it is impossible to give even a ballpark average figure.
As with all investments, the more risk you are prepared to take, the better the returns you can expect – theoretically at least. Investing in a manufactured housing REIT is likely a relatively safe option, but yields are not great. Buying, developing and managing your own property is obviously quite risky, but you’re in total control, and your returns are not diluted.
Whatever investment route you decide to take, make sure you do your due diligence and understand the risks. Mobile home parks are different to other types of real estate, with their own set of unique challenges. Lucky for you we’re going to talk about the risks of investing in mobile home parks next!
Risks of Investing in Mobile Home Parks
Obviously, higher than average yields, and opportunities to add value seem very attractive, but what are the downsides to investing in mobile home parks? Well, there are a few.
Maintenance and Repairs
With a business model based on leasing lots to families who own their own manufactured home to place on the site, there is a risk that tenants may fail to keep up maintenance on their homes. This can have a negative impact on the rest of the community, bringing down rentability, lease values and overall property value. While you can build in minimum maintenance standards into your lease contracts, getting tenants to comply can be challenging.
To be clear, although I have used the terms interchangeably throughout this article, a mobile home and a manufactured home are two different things. A mobile home is a trailer – a house on wheels if you will. Manufactured homes on the other hand are more like regular houses. They are built in a factory and then shipped to the park. You have to understand that mobile homes specifically are depreciating assets. They go down in value, not up.
There are certain zoning regs that limit the number of homesites on a park. You need to make sure that the park you are buying has not exceeded that legal limit. If it has, you will just end up taking them out and be left with a park with less homesites than you paid for. This could kill your return on investment entirely.
As I have mentioned, mobile home parks are notorious for issues of deferred maintenance. In particular, site infrastructure such as road, sewers, plumbing and electric may not have been updated for decades. Not only is this aging infrastructure expensive to put right, it can be dangerous and/or illegal. Make sure you get a proper site survey from someone who know this type of property well.
Many smaller family-owned mobile home parks service extremely low income tenants. This can lead to issues with timely rent collection, and sometimes behaviour on site. While clearly not true across the board, you must be sure of the level of risk and work you are taking on if you buy this type of property.
Conclusion and Resources
So there you have it. My introduction to investing in mobile home parks. I hope you found this article useful. Informed investors make better decisions. If you want to learn more about this and other investments that pay monthly income, you can further your research using the following resources:
- Garnaco – The Ultimate List of Investments That Pay Monthly Income
- Prospect Now
- Bigger Pockets