{"id":123093,"date":"2020-05-20T15:00:31","date_gmt":"2020-05-20T21:00:31","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=123093"},"modified":"2021-05-03T13:10:53","modified_gmt":"2021-05-03T19:10:53","slug":"8-benefits-mobile-home-park-investing","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/8-benefits-mobile-home-park-investing","title":{"rendered":"8 Impressive Benefits of Mobile Home Park Investing"},"content":{"rendered":"

If you could find a single asset class where the world\u2019s top two investors\u2014as well as BiggerPockets’ own Brandon Turner<\/a>\u2014have invested their time, effort, and funds, would it be worth 15 minutes to learn more? You now have that opportunity.<\/p>\n

Recently, I discussed my four brushes with investing in manufactured housing (mobile homes and parks)<\/a>, and I talked about a number of ways to lose money in this asset class. Then, I explained why my firm, along with a growing tribe of friends and investors, is loving this powerful asset class.<\/p>\n

In this post, I will provide a more detailed explanation of why more and more top investors are growing passive income and expanding their wealth through mobile home park investing.<\/p>\n

Related: <\/strong>Will Mobile Home Parks Be the Hottest Real Estate Investment of 2020?<\/a><\/em><\/p>\n

Finding the Right Seller<\/h2>\n

Oh, the joy of frag.men.ta.tion.<\/p>\n

My BiggerPockets friend and fellow investor Kris Bennett<\/a> pointed out that about 93% of multifamily properties above 50 units<\/a> are owned by companies with multiple assets. This doesn\u2019t mean they\u2019re all well-run. But it does mean that, in general, the operators have wrung most of the value out of them.<\/p>\n

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Value-add opportunities in multifamily are few and far between these days. It\u2019s very hard to find a well-located, mom-and-pop-run apartment complex with lots of upgrade opportunities. This means they\u2019re being acquired with very little margin of safety\u2014a risky proposition at this point in the cycle.<\/p>\n

Warren Buffett would probably be selling apartments right now (if he owned them). Multi-billionaire Sam Zell recently unloaded over 23,000 of his apartment units.<\/p>\n

Investors beware!<\/p>\n

Contrast this with mobile home park ownership. <\/em><\/p>\n

It is estimated that there are 44,000 mobile home parks in the U.S. It\u2019s also estimated that about 90% of these mobile home parks are owned by mom-and-pop operators.<\/p>\n

It\u2019s a highly fragmented ownership base, and this is a big deal for you and me as potential investors in this asset class. Typically, a mobile home park owner doesn\u2019t have the knowledge, the desire, or the resources to increase income and maximize value.<\/p>\n

They really don\u2019t need to.<\/em><\/p>\n

After all, many of these owners have owned these parks for a generation\u2014or more. They live there. (Or they live at the beach.) They know the tenants. Their goal is to minimize hassle and keep collecting checks. They are (often) debt-free, and their costs are minimal.<\/p>\n

Many of them are ready to sell and move on.\u00a0This could be your opportunity. <\/em><\/p>\n

If you\u2014alone or through an investment partnership\u2014can acquire a well-located mobile home park like this, at a fair price, you may have the opportunity to transform it into a well-run, profit-churning, value-maximizing ROI machine.<\/p>\n

Related: <\/strong>Real Estate Investing Partnerships: 4 Types of Partners (& 5 Secrets to Success)<\/a><\/em><\/p>\n

Finding the Right Buyer<\/h2>\n

This is a great time in the history of this real estate sector\u2014because there are still deals out there. Mom-and-pop owners abound.<\/p>\n

But it\u2019s not just the sellers. There is another factor on the other side of the equation: Enter the institutional buyer.<\/p>\n

As I write this, there is an unprecedented increase in interest among institutional buyers in this sector. And they want to write large checks, and they want the opportunity to assemble a portfolio.<\/p>\n

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I\u2019m talking about real estate investment trusts (REITs), life insurance companies, private equity firms, and family offices. A friend said he recently attended a manufactured housing conference, and he was surprised to see representatives from these types of firms at an unprecedented level.<\/p>\n

They want to add these assets to their portfolios, so you\u2019d think they would be our competition. But that\u2019s not generally the case.<\/p>\n

You see, institutional buyers aren\u2019t interested in hassles. They don\u2019t want the risks and headaches and uncertainties of upgrading a mom-and-pop to a stabilized asset. So, they are willing to pay a premium for stabilized assets.<\/p>\n

Assets that are upgraded.\u00a0At market rents. At close to full occupancy.<\/p>\n

And this is our opportunity. <\/em><\/p>\n

If we can acquire an under-performing, mom-and-pop-owned mobile home park in a decent area, it can be upgraded and stabilized. Rents can be brought to market. Occupancy can be maximized. Capacity can often be augmented. Utilities can be passed back to tenants<\/a>. Ancillary income can be added.<\/p>\n

After writing the draft for this post, a Wall Street Journal<\/em> article heartily confirmed this \u201ctheory\u201d that institutional investors were chasing stabilized mobile home parks. A February 25 article explained<\/a> how one public company provided its investors with a 4,100% return since the Great Recession!<\/p>\n

As if that’s not enough of a reason to love mobile home parks, here are a few more perks.<\/p>\n

Why You Should Be Investing in Mobile Home Parks<\/h2>\n

Steady during downturns<\/h3>\n

Mobile homes are perhaps the steadiest performer of all the commercial real estate asset classes<\/a>. (I haven\u2019t researched medical buildings, but I imagine they are similar.)<\/p>\n

Check out this graph showing the performance of manufactured housing versus other asset classes. Zero in on the downturn years.<\/p>\n

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Shrinking supply, increasing demand<\/h3>\n

Mobile home parks are the only asset class with a shrinking supply and an increasing demand every year. City planners, developers, \u201cnot in my backyard\u201d folks, and an aging population of owners result in the estimated demise of about 100 parks annually. And very few (ab0ut 10?) are being constructed.<\/p>\n

Yet there is an affordable housing crisis that is not going away<\/a>. The number of low-paying jobs is on the increase<\/a>\u2014especially in light of health care laws passed under the prior administration. Incomes have simply not kept up with the rise in housing prices.<\/p>\n

Did you know that about 10,000 people are turning 65 each and every day<\/a>? Shockingly, studies say that six out of 10 of them have $10,000 or less saved for retirement<\/a>.<\/p>\n

Though they don\u2019t have savings, many of them have equity in their homes. This equity can often be traded in for a mobile home in a decent park, with significant savings in the form of personal property taxes and lot rent\u2014and the freedom that comes along with this change.<\/p>\n

Sticky tenants<\/h3>\n

Mobile home parks have one of the stickiest tenant bases<\/a> of any real estate asset class. No, I\u2019m not talking about guys with Velcro suits (though it could include those people\u2014I\u2019m not one to judge).<\/p>\n

Imagine this scenario. You\u2019re renting an apartment. You prefer renting, and you plan to rent for years to come. You get a notice that your rent is going up by 6%. You\u2019re paying $1,000 per month, so this is a $60 increase. That\u2019s $720 this year, and it will probably go up again next year.<\/p>\n

You may move to avoid that rent hike.<\/p>\n

\"move-mobile-home\"<\/p>\n

Now, imagine you\u2019re living in a mobile home park. You\u2019re paying $400 per month in lot rent. A new operator takes over, beautifies the park, and raises the rent up to the average market level at $424. A 6% increase.<\/p>\n

Are you realistically going to pay a home-mover about $5,000 to move your mobile home a few miles away or across town… to save $24 per month?<\/p>\n

In fact, you could pay double that amount to move a doublewide. This cost includes transportation, decking, skirting, HVAC and utility hookups, and more. And your home and its contents could be damaged.<\/p>\n

It\u2019s highly doubtful. <\/em><\/p>\n

That\u2019s another great aspect of this business. Once you acquire a tenant, you\u2019re likely to keep that tenant.<\/p>\n

If you live in a home, and you have to downsize, you may move to a smaller home. Or an apartment. Or a mobile home.<\/p>\n

But where do you go if you\u2019re in a mobile home and you have to downsize? The next step could be under a bridge.\u00a0<\/strong><\/p>\n

Related: <\/strong>Post-Pandemic Investment Outlook: Top-Performing Property Types for 2020 and Beyond<\/a><\/em><\/p>\n

Low maintenance & capital expenses<\/h3>\n

Mobile home parks also have the lowest cost for maintenance of all the real estate sectors, as well as the lowest and perhaps most predictable capital expense requirements.<\/p>\n

The issues are fairly predictable, and with no toilets and other hassles endured by other real estate types, it is well-suited for operators who want to minimize their hassles and expenses.<\/p>\n

\"\"<\/p>\n

Brandon Turner said that he is tired of dealing with contractors. After years of flipping homes and building a rental property portfolio, he has had his fill of lazy, lying contractors that don\u2019t follow through and who can make his life\u2014and his tenants\u2019 lives\u2014pretty miserable. (Of course, many contractors aren\u2019t this way.)<\/p>\n

Related: <\/strong>4 Reasons You\u2019ll Never Find a Good Contractor (Insight From a Contractor)<\/a><\/em><\/p>\n

Owning a manufactured home community is essentially owning dirt and infrastructure. This means limited requirements for contractors and a typically limited scope of work when one is required.<\/p>\n

As someone who has spent decades dealing with unexpected maintenance, high capital expenses, and unreliable contractors, I love this aspect of mobile home park investing. <\/em><\/p>\n

Joint stakeholders<\/h3>\n

In a professionally structured mobile home park scenario, the park owners own and lease dirt and infrastructure to tenants. The tenants own the homes. They have the motivation to care for them and keep them up.<\/p>\n

Park owners are joint stakeholders with their tenants. This joint responsibility is the ideal real estate investment scenario in my experience.<\/p>\n

Less competition<\/h3>\n

Then there’s the stigma.\u00a0Let\u2019s face it. Mobile homes… aka trailers… have a stigma. Maybe you still believe it. I\u2019ve been there.<\/p>\n

Along with the ever-widening supply and demand imbalance, this has been a great advantage to those of us who have already discovered mobile home park investing. While this is still true, this advantage is slipping through our fingers as more investors at all levels are discovering this previously hidden asset class.<\/p>\n

Financing<\/h3>\n

Up to about 40,000 of the 44,000 U.S. mobile home parks are owned by those who built them or by small-time owners who inherited or acquired them. Some of them date back about half a century.<\/p>\n

These owners recall the difficulties they had getting them financed. They likely got no financing at all.<\/p>\n

So, when these owners are approached to sell their parks, they are often amenable to owner financing. They may even believe that is their only option to sell them. (And this could be true if their occupancy is low or their records are so poor that the bank won\u2019t touch the deal.) This can be structured as an installment sale, which can provide significant tax benefits to the seller.<\/p>\n

The opportunity to get significant owner financing can mean less hassle, less uncertainty, and lower hurdles to clear for the mobile home park operator. Owner financing is also non-recourse, which is a great debt structure for the operator.<\/p>\n

But here\u2019s the truth about mobile home park financing… <\/em><\/p>\n

While these parks were hard to get financing for in decades past, the situation has flipped now. Sam Zell\u2019s big play into manufactured housing has turned many banks\u2019 opinions to favorable status.<\/p>\n

Large banks now love to finance mobile homes. Freddie Mac and Fannie Mae programs offer lower interest rates and better terms than similar programs for other asset classes, like multifamily and self-storage.<\/p>\n

\u201cRisk is relatively low for manufactured housing lenders. Second only to self-storage, the asset class has one of the lowest rates of default.\u201d<\/em> \u2014Hunt Mortgage Group Managing Director Josh Messier<\/p><\/blockquote>\n

One of the best ways to grow wealth is to safely refinance \u201clazy equity\u201d and put it to work in a second investment. This is one of the goals of most high-powered real estate investors. Freddie Mac and Fannie Mae programs allow and even encourage this.<\/p>\n

One of the operators my company invests with has debt structures that allow for two supplemental loans in the first five years of ownership. This means that operators could grow the income and appraised value for, say, three years and pull out a nice chunk of safe equity for investors to get back (tax-free). And they could do it again just before the five-year mark.<\/p>\n

Investors who are able to obtain all of their principal back find themselves playing with house money. <\/em>They have zero left in the game, and their ROI is now infinite since any number divided by zero is infinity.<\/p>\n

By putting that untaxed equity to work in a second investment, they are able to keep earning returns from the first investment and have the opportunity to potentially double their returns by investing the principal again. This can really add up over a decade or two, especially when Uncle Sam doesn\u2019t have his hand in the till.<\/p>\n

And speaking of tax benefits…<\/em><\/p>\n

\"closeup<\/p>\n

Tax benefits<\/h3>\n

The tax benefits of mobile home investing were surprising to me\u2014and may surprise you, too.<\/p>\n

Before I looked into it, I assumed that mobile home park investing probably offered little in the way of tax benefits. We all know that dirt is not depreciable, and owning a piece of land is owning a non-depreciable asset.<\/p>\n

But this is yet another aspect of this investment sector that I was dead wrong about. <\/em><\/p>\n

One of the operators we invest with explained how a mobile home park\u2019s value could be segmented for the basis of depreciation. He explained that the raw land may hold only about 30% of the value in a mobile home park. And about 35% would be tied up in infrastructure (like paved roads, parking, utilities, a pool, clubhouse, and landscaping).<\/p>\n

As my friend explained this, I couldn\u2019t imagine what the last 35% could be. He went on to say that the last 35% could be chalked up to goodwill.<\/p>\n

Really? <\/em><\/p>\n

Yep, goodwill.<\/p>\n

So, the depreciation basis in this example could be:<\/p>\n