Mobile Home Parks – What Drives Higher Returns?
Evergreen believes that Manufactured Housing Communities (aka Mobile Home Parks) offer investors the highest returns in real estate for the amount of risk taken.
Mobile Home Parks (MHPs) have two unique investment characteristics that differentiate them from apartment investments:
1. Mobile home parks 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
Expanding on each of these factors:
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 seek immediate cash flow returns, mobile home parks are 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 compeitor – 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 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.
Apartments have a 10 times as many items to maintain on an ongoing basis. 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 parks generated excess cash flow.
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’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.
We believe mobile home park investing offers outsized cash flow returns (relative to inherent investment risk). If you are interested in learning more about Park Street Partners and its investment strategies please email us or register with us to receive access to our investment opportunities.
- Source: Sun Communities, Inc. Form 10-Q for March, 31, 2018.
- Source: U.S. Census Bureau. (2010).
- If the property every sold, the investor would be subject to 25% recapture taxes on the cash flow sheltered via depreciation.