Major economic disruptions, like those caused by the pandemic and prior recessions, leave investors looking for ways to buttress shaky portfolios. Over the last few years, mobile home parks (MHPs) have emerged as a surprisingly stable and profitable asset class, catching the attention of high-profile investors like Warren Buffett.
The COVID-19 dust won’t fully settle on the commercial real estate (CRE) market for years, but it doesn’t take a crystal ball to know that the effects will be significant. We’ve already seen some sectors, like retail and office space, take huge hits that could last for years.
Mobile home park investing provides a steady income stream and buoyant property values during economic downturns. Investors that overlook MHPs miss out on an asset class that will buffer their liquidity and income when other commercial real estate asset classes falter.
Rental housing provides more stable rent-collection rates than other CRE asset classes during a recession. Mobile home parks beat out other rental housing investments, like apartments, because they also offer low turnover rates.
Every sector of CRE saw rent-collection rates drop at the outset of the pandemic. As the world’s markets froze and people sheltered in place, many companies couldn’t afford to continue their lease commitments.
Apartments faired better than most, maintaining a >90% rent collection rate (compared to retail, where rent collections were slashed by nearly 50%).
But apartment renters tend to change homes often—over 47% of multifamily units turned over in 2019.
The nature of mobile homes makes such transience less likely. Occupants typically own the physical structure and just rent the space it’s located on. And despite their name, mobile homes aren’t all that mobile. In fact, it costs $5K to $8K to relocate that home, so renters are more likely to stay put. Compare that to the cost of changing apartments—usually the price of a moving truck or pizza and beer for your friends.
As a result, mobile home park owners report very low turnover rates. In their 2020 annual report, Sun Communities, one of the largest investors in manufactured housing communities, listed their total turnover rate at 7.7%—less than one-fifth that of the average apartment building.
Even better, about half of Sun’s renters sold their home rather than moving it, meaning Sun Communities had a replacement renter without interruption.
COVID-19 accelerated a trend of both people and businesses moving away from densely populated city centers. That simultaneously reduced the need for office space downtown and increased the demand for housing in secondary markets, right where mobile home parks proliferate.
After more than a year of allowing their employees to work from their homes, many companies—like Twitter and Facebook—are considering a long-term remote work strategy.
As companies give up some or all of their big-city office space, vacancy rates are climbing, and rental rates are dropping. Manhattan recently hit a record-setting 15.1% vacancy rate for commercial space, while the income from renting out an office in San Francisco dropped by 15%.
The pandemic also had an effect on the urban population. People became less comfortable with living in a crowded city. Since the remote work trend was already rising, moving out of their high-rise apartments was entirely possible. A study from Mymove.com proves this out, showing that the largest cities are losing residents at a quick clip, while smaller towns are growing. All this suggests that making bets on secondary geographic markets is a smart move.
Now, look at the five cities with the most mobile home parks.
The average population in those towns is 250,000 people. Meaning, MHPs mostly exist in the small to mid-sized communities that people are headed towards.
Layoffs and high unemployment during a recession exacerbate an already growing affordable housing crisis. Mobile home parks provide a low-cost housing solution which makes them a resilient investment in bad times—not to mention a solution to a huge social challenge.
Well before the first cases of COVID-19 emerged, affordable housing was an economic pandemic. Overall, 46% of households that rent were “housing cost burdened,” meaning they spent more than 30% of their income on housing.
For households with income less than $30K, that number jumps to 81%.
And when COVID-19 hit, the income-to-housing cost disparity deepened. By June 2020, 30 million workers had been laid off, but house prices still increased another 5.7% by September.
Mobile home parks offer a piece of a solution.
The average monthly rent for mobile homes was $549 in Q1 of 2020—almost flat from 2019 (a total $2/month increase). The average studio apartment rented for $1,691 per month, a +5.4% YoY increase.
For the investor, upward price pressure on alternatives means more demand for affordable mobile home park spaces. That’s true all the time, but even more so during a recession, when people are looking for less-expensive options. Plus, you’re providing a roof for many who couldn’t afford it otherwise.
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Mobile home parks have a trifecta of low entry cost, low maintenance cost, and a limited supply that isn’t increasing. Meaning, MHPs are accessible investments when liquidity is low (recessions), and increase in value without new competition during periods of growth.
Both liquidity and loan availability take a hit when financial markets drop. Bankers tightened their belts when the delinquency rates of commercial mortgage-backed securities increased during COVID-19. That means less free funds for new investments.
Mobile home parks are relatively inexpensive to buy, so they don’t crush liquidity. Sun Communities recently inked a deal for several parks, paying just $79 for each developed home site.
When you consider that the average cost to build a new apartment starts at around $75K, it’s easy to see why MHPs are easier to access when capital is less available.
Once you own them, the cost to keep MHPs is also low. Unlike an apartment or office, the renter owns the structure and is responsible for the maintenance of it. Even with low rents, the profit from MHP rentals remains more stable—there are no surprise house repairs eating away at your bottom line.
Mobile home parks don’t just provide stable monthly income. A restriction on supply keeps them increasing in overall value as well.
Unlike apartment buildings, which spring up like weeds when demand increases, zoning regulations effectively eliminate new mobile home park creation. Static supply plus increased demand equals an appreciating asset.
It’s the epitome of Mark Twain’s quote, “Buy land, they’re not making it anymore.”
The net/net is an asset class with a low financial barrier to entry that offers stable profits in every financial market and will continue to increase in value over time.
The first step in stabilizing your CRE portfolio with a mobile home park investment is finding the best possible deal.
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