written by Chad Freeman:
These are some of the advantages mobile home parks have over other real estate and apartments:
- Affordable housing will always be in demand. Only mobile home parks provide the kind of housing that is truly affordable, that is not subsidized by the government, no section 8.
Mobile home park operating expenses are typically 35-40% of gross income. Typical apartment expenses are between 50-60%.
Mobile home parks rent land to home owners and have a much lower turnover than apartments. A park owner is not responsible for maintaining homes in the park if they do not own them. Most home owners take better care of their properties than renters do.
Typically, mobile homes do not leave parks because the costs of dismantling, moving, and setting up the home are too high. Usually, if a home is sold, it remains in the park and is not moved.
Due to the high cost of moving a mobile home (approx. $6,000 for a single wide) rent increases do not compel residents to move out of mobile home parks. The opposite is true for apartment moves, which are very fast and inexpensive.
Usually, a mobile home park’s depreciable costs include roads, water lines, sewage lines, power poles, and other like items. The depreciation period for these improvements is 15 years because they all constitute land improvements. Apartments have a substantial value associated with their structures, and as a result, they are normally depreciated over a period of 27.5 years.
Mobile homes offer residents home ownership at a very affordable price, as opposed to apartment complexes. Residents have a yard, they are not sharing walls, ceilings, or floors with their neighbors, and they can park right in front of their homes.
Timing is excellent for the mobile home park industry. Coronavirus and U.S. economic decline has made affordable housing incredibly hot.
Each day, 10,000 baby boomers retire, causing a demand for affordable housing to increase. Typical retirement income for baby boomers is just enough to get by. About $1,200/month per person with little or no support from pensions. Moreover, half of all new jobs created in America since the Great Recession pay $10/hour or less. Our country has become a nation of low-income earners and a nation that does not have a lot of income in retirement. Consequently, the demand for affordable housing will remain strong for the foreseeable future.
Due to the low number of people who have figured out how to buy and operate mobile home parks effectively, CAP rates remain high and provide an attractive return on investment.
Banks love mobile home parks. Our industry has one of the lowest default rates of any asset class. Agency debt for mobile home parks is now being sold for nearly 40 basis points less than commercial apartments.
Income-producing real estate acts as a hedge against inflation. Price increases are passed on to consumers, increasing our net operating income. As a result, our property value increases. Furthermore, as revenue increases mortgage payments remain fixed. With a fixed interest rate mortgage, you can combat inflation by taking advantage of several benefits. By borrowing money at a fixed rate, you benefit from the present value of dollars. As inflation drives down the value of the currency, you get to pay it back in dollars that are worth less than they were when you borrowed them. By taking on fixed-rate mortgage debt, we align ourselves with the government. As the government loads up on debt, the Fed has an increased incentive to keep interest rates low and let inflation increase.
Mobile home parks are undervalued, limited in supply, have large barriers to entry and very little competition.
Warren Buffet looks for businesses with a “virtual moat”. Mr. Buffet agrees that this holds true for mobile home parks. Among his businesses, he owns Clayton Homes, the nation’s largest mobile home manufacturer, as well as 21st Century Mortgage, the largest manufactured home lender. 21st has originated more than $1.3billion in loans for new and previously owned manufactured homes. The company owns and services more than 180,000 mortgages with a value of more than $9 billion.
There are several reasons why we have a virtual moat:
There are large barriers to entry due to the difficulty of developing new parks. Due to cost, regulation, and government restrictions, it is not feasible to establish new mobile home parks in most states. Local and state governments don’t like mobile home parks for a number of reasons, including: negative perception, existing parks that have been allowed to degrade, and a lower property tax base that costs the government more tax money than they receive from mobile home parks.
Mobile home parks face little competition. Since we are not subsidized, we are the only true form of affordable housing. Our competitors are mostly apartments, which are triple the price and don’t offer home ownership. As of 2019, the average price of a 2 bedroom apartment in the US is $1,148. Mobile home parks have an average lot rent of just $280 per month.
The supply of mobile home parks is decreasing. Mobile home parks are being purchased by developers for other purposes like condos, single-family homes, townhouses, etc. Around 100 parks are razed and converted each year. Because of mobile home lot rents being so low, repurposing and increasing revenue is often a wise decision. A large number of “mom and pop” operators never adjusted lot rents sufficiently, even to keep up with inflation. Inflation adjusted lot rents from the 1960s put average rent over $500/month, yet today’s average is only $280/month. Considering this, we have an excellent opportunity to increase rents to a fair market value, which will then make the property more valuable.
Conclusion: Mobile Home Parks offer a multitude of benefits that other types of housing cannot. Our business is a simple and effective one, providing a home ownership opportunity to low income families.