- Supply & Demand
The demand for affordable housing is arguably the highest need in the real estate sector in 2020. In 2018, 38.1 million people lived in poverty in the U.S., which is a poverty rate of 11.8 percent. Low income was calculated as 200 percent of the poverty rate—those numbers too are daunting.
No matter where you get your numbers, these issues are of epidemic proportions—a serious problem we cannot turn a blind eye to. This, matched with the low supply of mobile home park inventory (roughly 45,000 parks), creates an ever-expanding supply and demand in favor of mobile home park owners. Plus, this number decreases year over year due to more MHPs being closed down and replaced by high rises than MHPs being built.
Put simply, if you buy the right park in the right market, your phone should be ringing off the hook with qualified applicants wanting to move into your park. Furthermore, with higher-than-ever interest in mobile home park purchases, MHPs are becoming easier and easier to sell, which helps with your exit strategy.
- Annual Lot Rent Increases
It’s expected in the mobile home park space that lot rents will increase annually. It’s common to see upticks of 5 to 15 percent for annual lot rent (and mobile home rent for new tenants), and sometimes you’ll need to increase rents up to or exceeding 20 percent to get close to market rents (particularly if the sellers did not raise rents to match the market).
If cap rates and occupancy stayed the same, just by merely raising rents each year for three-plus years, park owners can create handsome profits at refinance or sale with little effort. If cap rates further compress, and if your occupancy increases along with the increased rents, then you have leveraged the formula for massive potential mobile home park profits.
- Recession Resistant
Mobile home parks are positioned in an interesting place within the real estate sector. Mobile homes are typically the most affordable type of housing. The national average lot rents run around $250-$300 per lot per month, with trash pickup included. I like to use $300 as a more conservative average, as rents are consistently trending upward.
Depending on the setup of each park, tenants may also need to pay for utilities (gas, electric, water, sewer, etc.). Let’s be ultra conservative and say that with utility expenses included, $300 expands up to $500 a month.
What if we experience some type of financial meltdown or correction in the future? (Or right now?!)
Think about it. In that scenario, when you can no longer afford $500 a month in rent, where are you going to go? Unfortunately, you’d be led to live with family or friends, or perhaps you’d sleep in a car, or god forbid—you’d be homeless. Point being, there not many options if you can’t afford to live in a mobile home park.
Look at this situation from a macro standpoint, and where are the people who own houses or condos or rent property going to go? Well, if they can’t afford where they are now, they move down the housing rung, one or two notches.
MHPs are essentially the bottom housing rung, so that means the compression of everyone moving down from above results in even more increased demand for mobile homes with a simultaneously dwindling supply.
MHPs already perform well, and in a recession, they typically perform better. This is something to take into heavy consideration given the current and near-future state of the economy. Due to this, I know a whole niche of investors that are geared toward recession-resistant investments only.
Being that we are in the affordable housing sectors and that most tenants live in mobile home parks for financial reasons, the cost to move a mobile home is typically higher than the financial capabilities of the homeowner. Therefore, once a mobile home is placed in a mobile home park, it typically stays there.
If a homeowner needs to move, they more often than not sell their home to another approved tenant, leave their mobile home at the park, and buy a new one at their next location.
- Historically Strong Cash Flow
MHPs have gained the nickname over the years of “cash cows” due to the high cash flow that has historically been produced in the mobile home park space. This is what caught my attention from day one.
If you are buying stabilized parks (roughly 70 percent tenant occupancy and above), it’s almost expected to have solid cash flow straight out of the gate. Operators in comparable asset classes (self-storage or multifamily) often offer “preferred returns” to investors, along the lines of say 6 to 8 percent ROI annually.
This is not a guarantee to investors but more of an “I owe you” and declaration that investors will get paid before the operators get paid. If the preferred return (often abbreviated as “pref”) is not met in any given year, then it rolls over and adds to the next year in a cumulative way.
For example, if a specific investment offers an 8 percent pref but for some reason only 2 percent of that pref was met this year, then the remaining 6 percent rolls over and adds on to the next year’s pref. This accumulates year on year, then at a sale event, investors get paid their pref in full before other profits are split between them and the operators.
Similar setups exist in the MHP space, although it’s much easier and more common to not only hit the pref each year but to also exceed it due to the high cash flow.
I’m going to touch on forced appreciation below, which increases both equity and cash flow.
Original Author: Bryce Robertson