Mobile Home Park Investing

Mobile Home Park Investing – Cash Flow Drivers

Mobile home park investing offer investors the highest returns in real estate for the amount of risk taken.

Mobile Home Parks have two unique investment characteristics that differentiate them from apartment investments:

1. Mobile home park investments are residential subdivisions – investor owns the land and property infrastructure (streets, utility connections and common areas) and typically only leases the land to homeowners.

2. High tenant switching costs – it costs $5,000-$10,000 for a homeowner to move and reinstall their home into another community.

These two factors translate to:

  • Higher returns than apartment buildings
  • Recession Resistant Returns
  • Reduced Operating Costs
  • Demand / Supply Imbalance
  • Minimal Capital Expenses
  • Low Tenant Turnover
  • Tax benefits

Let’s go a bit deeper on some of this factors. Here are the most attractive characteristics of mobile home park investing:

Higher Return Than Apartment Buildings

Mobile home park investments tend to trade at a capitalization rates (net income divided by purchase price) anywhere from 1-3 percentage points higher than comparable quality multifamily assets.  The combination of the higher going-in cap rates with comparable financing terms provide significantly stronger cash-on-cash yields than currently available in multifamily.  For those investors that prioritize cash flow returns, mobile home park investing is likely to be an attractive option.

Recession Resistant Investments

Manufactured housing is arguably the most recession-resistant asset class in commercial real estate. Mobile home park investments have consistently outperformed other property types with higher returns AND lower volatility. That shouldn’t happen. You should get higher risk in exchange for higher possible returns. Mobile home parks are a statistical outlier in this regard.

The below graph shows the net operating income (NOI) growth since 2000 for various property types including manufactured housing (as well as Sun Communities – a manufactured housing REIT.

Notice the performance during the Great Recession of 2007-2009, when every asset type except manufactured housing experienced income declines. SUN Communities has had positive operating income growth for 18 consecutive years (though two recessions). SUN’s major competitor – Equity Lifestyle Residential (owned by Sam Zell) has experienced positive income growth for every quarter for the last 20 years!

This is a good business.

Demand / Supply Imbalance

Demand for quality affordable housing often outstrips supply of mobile home park investment properties.  Affordable housing is in high demand from young families, middle-aged people in transition, and seniors on a fixed income.  Approximately 26% of American households earn $25,000 per year or less (1), which allows for roughly $500 per month in total housing costs.

The average apartment rent is over $1,000 per month and is smaller than a typical mobile home. Our mobile home park investments offer tenants a superior combination of quality and price than comparably-priced site-built homes or apartments in that area and provide families with a sense of community.

While demand for quality, affordable housing increases, the supply of mobile home parks is diminishing.  It is estimated that approximately 1% of mobile home parks are redeveloped every year into higher and “better” uses.  Furthermore, we do not expect any new mobile home park developments adding to supply as use restrictions and local economic environments have made it difficult to acquire appropriate zoning for new parks, thereby eliminating new competition for current mobile home park investments.

Reduced Operating Expenses

30-40% operating margin vs. ~50-60% for apartments. Mobile home park tenants own the home. Mobile home park investors own the land. There are no on-going home expenses for tenant owned homes. Land is much easier to maintain then the home. Land does not need much ongoing maintenance. The goals is to keep the grounds looking clean. 

An apartment building has 10 times as many items to maintain on an ongoing basis than a mobile home park investment. Appliances, windows, HVAC, building facade, building systems, gyms, pools, clubhouses, carpets, toilets, etc. Add these costs to the never-ending expenses relating to 40%+ tenant turnover and you can see why mobile home park investing generates excess cash flow relative to other real estate assets.

The value of roads, clubhouses and other common area improvements can be maintained with periodic capital expenditures averaging $125/site annually.

Low Tenant Turnover

Mobile home park tenants are “sticky”. Turnover is incredibly low as the tenants typically own their home and switching costs are high (expensive to move home and moving is a hassle and often damages homes). Sun communities states 6.6% of tenants resell their home and move out each year while a paltry 2.1% of their tenants leave the park each year (taking their home with them). Our personal experience suggests that 2% is even a bit high.

Compare that to annual apartment tenant turnover of 45-60% per year.

Tremendous Tax Benefits – Accelerated Depreciation

From an accounting perspective, the majority of a mobile home park investment’s value is comprised of land improvements (roads and utility lines), which can be depreciated at an accelerated schedule.  Mobile home park’s blended depreciation schedules typically average 17-19 years compared to apartments of 27.5 years and commercial properties of 39 years.  This unique tax feature often translates to tax free operating cash flows to the mobile home park investment owner. (3) This tax deference is further amplified by reinvesting dividends to compound returns.

Mobile home park investing is incredibly tax efficient. It’s not uncommon for a mobile home park investment to deliver double digit yearly cash flow returns largely tax free (until the property is sold).

Conclusion

We believe mobile home park investing offers high cash flow returns and are compelling, recession-resistant investments.

  1. Source: Sun Communities, Inc. Form 10-Q for March, 31, 2018.
  2. Source: U.S. Census Bureau. (2010).
  3. If the property every sold, the investor would be subject to 25% recapture taxes on the cash flow sheltered via depreciation.

Why Manufactured Home Communities Outperform – Evergreen Featured

Brad Johnson of Evergreen, based in Ladera Ranch, CA says manufactured home communities are “unbelievably reliable businesses.” To highlight that point, he notes that Equity LifeStyle Communities has notched NOI growth in every quarter since 1998.

“This would be impressive in any 20-year period, but considering this timeframe happened to include a nuclear-bomb housing crisis, it’s downright amazing,” says Johnson, whose two businesses own, operate and invest in manufactured home communities.

Over the long haul, a buy-and-hold investor in manufactured housing stands to earn the top risk-adjusted returns (8.1 percent) among all commercial real estate types, according to a May 2018 report from Green Street Advisors.

Johnson says the manufactured home sector is being buoyed by the wave of retiring baby boomers, many of whom aren’t financially prepared for life after work; a tight supply of manufactured home communities; and stagnant wage growth coupled with a spike in housing costs.

Full article from National Real Estate Investor

Benefits of Passive Real Estate Investing

7. Invest today, not next year.

Real estate crowdfunding offers investors “plug & play” investment opportunities. Review a deal, conduct some initial due diligence on the property and the sponsor, sign legal paperwork online and transfer funds…boom, you’re done.

Real estate investing via the crowd sure beats having to scour the market for months or years looking to find a suitable real estate investment. You can get capital working for you in a couple hours through a RE crowdfunding platform.

6. No maintenance required.

No 1:00am “emergency calls” regarding broken toilets or misbehaving tenants. Let the pros deal with those day to day management issues while you collect the distribution checks.

5. Stiff the Tax Man.

Passive equity investing in real estate provides unbelievable tax benefits relative to other asset classes.  Unlike interest payments or dividends that can be taxed at your highest bracket, your share of depreciation and mortgage interest expenses work to offset your passive income.

4. Invest with professionals.

The learning curve in real estate is painful and expensive. So if you don’t have time to properly research and conduct due diligence, don’t buy a real estate investment on your own. The pros have spent a lifetime learning their various markets and asset class speciality. Leverage that expertise.

3. Instant Diversification.

Passive real estate investing will let you spread around your capital immediately. You might cap your upside vs. investing in one “home run deal”, but you’ll certainly put a high floor on your downside by allocating  your capital over a number of properties. Compare this to investing in real estate directly. You’ll likely need to put an uncomfortable amount of your investment portfolio towards the downpayment of one deal. If that deal goes south, can your portfolio survive a complete loss of that equity?

Whether you are a seasoned real estate investor or a rookie looking to invest a couple thousand bucks, real estate crowdfunding enables you to quickly construct a diversified portfolio that meets your specific goals.

2. Tremendous Access to deal flow.

The key to buying quality real estate investments is deal flow. In most access classes, you need to pass on a lot of frogs before pulling the trigger on the right deal. Do you have the discipline to pass on 99 out of 100 properties, even if it takes you years to find that 1 deal? Probably not.

Furthermore, before real estate crowdfunding, it was extremely difficult to gain consistently access to deal-flow through with experienced sponsors. “Country club” deals through good ol’ boy networks were the most common entry point to passive real estate investing. You may or may not have gotten a call when their next deal became available.

Of course, you can still network, search and gain access to great real estate deals from quality sponsors, but you’ll need a lot money (minimum investments are usually $100K-$250k+) and a lot of time and effort to amass a decent portfolio of sponsors (or deals) to choose from. Alternatively, if you have accounts with a couple of the larger RE crowdfunding platforms, you’ll have 30+ vetted real estate deals to choose from today.

1. Make money 24/7.

When you invest in stabilized properties with existing tenants, you are making money every second of the day. Being a landlord is a little bit like being a utility provider. Provided your real estate is leased, the “rent meter” just keeps on spinning.

Passive Real Estate Investing

Understanding Real Estate Investment Categories

Want to make intelligent real estate crowdfuning investments? At a minimum, you’ll need to understand the relationship between risk and return as it relates to deal type. Otherwise you might assume that all things are equal (they’re not) and just pick the deals with the highest projected returns. This strategy would not end well. It’s the equivalent of exclusingly picking racehorses with the highest odds. You’ll hit it big on one or twice, but eventually you’re going to be the sad guy at the track with a pocket full of worthless tickets and a boring story about how you almost made it rich.

Don’t be that guy. Learn the risk / return relationship in real estate, starting with deal type.

There are four main investment types into which commercial real estate investments are catergorized: Core, Core-Plus, Value-Add and Opportunistic. The category a RE crowdfunding deal falls into depends on where that asset fits on the spectrum of risk vs. return. Here is a quick overview.

CORE ASSETS

Core assets are (typically) considered the lowest risk investments. These properties are higher quality, in top-tier locations in large markets with stable (perhaps credit tenants). Consquently, investors in Core assets can usually count on stable cash flows with a significant proportion of an investment’s return stemming from income vs appreciation.

An example of a Core deal is a beautiful, towering skyscraper located on Market Street in downtown San Francisco. The tenants are name brand tech companies, large consulting fims, and established law firms. In all but the worst economic times, investors expect such tenants to adhere to their contractual lease terms.

CORE PLUS

Next up are Core-Plus properties, which offer investors additional return potential (and additional risk) relative to Core deals. Core Plus properties are high quality, but need some additional capital, perhaps for a remodel or redevelopment to achieve maximum returns.

An example of a Core-Plus deal might be that same San Francisco office building on Market Street, but perhaps the lobby is tired, looking more like , CA, where adding amenities such as a gym could allow the complex to command even higher rents. That need for rehabilitation creates a little more risk and might require more financing than the traditional Core assets, but at the same time, it’s like to increase the potential return.

VALUE-ADD

Properties that require sizable capital improvements or repositioning involve significantly more risk than the prior two deal types. Of course, invesors are usually “compensated” for this additional risk with larger potential returns.

These properties tend to need some combination or redevelopment, rehabilitation, or remarketing, which can boost cash flow and and overall value. An example might be a large 25 year old, apartment building complex in Dallas Texas where the apartments all need kitchen upgrades and hardwood flooring.

OPPORTUNISTIC

High risk, high return deals. Opportunistic real estate crowdfuding deals might include developments, redevelopments, or vacant properties, all of which need large capital budgets to impove and lease. Think of an empty wharehouse in an up-and-coming submarket of Seattle that can be converted into tech space (open floorplan, exposed brick, etc.) and leased to promising startups at top market. Taking a building from negative income to fully leased can result in huge profits. Of course, the sponsor could also time the market wrong, fail to get the property fully entitled, under-estimate the capital budget, or fail miserably in just about any number of ways.

So, while constructing a diversified real estate crowdfunding portfolio is a topic on it’s own, it certainly helps to undestand the basic risk / return characteristics of the deals you’re investing in.