Why should mobile home parks trade at higher caps than multifamily?

37 Replies

Hi folks - first post here on Biggerpockets. Glad to be here!

I and my family have been in the multifamily industry for many years, owning and operating apartment complexes ranging in size from approximately 30 - 130 units, in California and Oklahoma.

We are considering dipping our toes in the mobile home park business to diversify the portfolio and add some yield (anybody half awake has noticed that multifamily caps are at historic lows) - we'll be at the bootcamp in Seattle this week.

But one question has been gnawing away at me - there is no free lunch in this world. While I am a believer in the tenets of behavioral finance and of going against the herd to find deep value, I still struggle with the idea that there is a whole asset class out there that is mis-priced and a goldmine waiting to be claimed.

In addition it does not make sense that parks are claimed to be both very stable compared to multifamily, easier to run than multifamily, AND trade at yields well above multifamily.

We live in a world where information is instantaneous, and investors are flush with dollars coming out their ears driving yields down on every type of asset class - why should mobile home parks be any different?

So I have a hypothesis - that the high mobile home park cap rates are an illusion - that in the long run (ie holding periods of 20-40 years) these cash cows are giving you a return OF your capital, not a return ON your capital - i.e. a gradual liquidation.

The reasoning is simple - if your customer base is stable because they are so poor they cannot afford to rent an apartment, how in the world can they afford to maintain the mobile home they own in a habitable condition over a very long period of time? You can't have it both ways.

And if you are dead broke and can't maintain your home - eventually you may simply stop paying lot rent and abandon your now-trashed "home" - leaving it for the park owner to fix up and attempt to sell to the next person who also cannot afford to maintain it.

With multifamily the caps are lower but as the owner as long as I maintain my property and make the necessary cap-x investments when needed (roofs, fencing, interior upgrades, siding, etc.) the property's life is indefinite.

In any case - somebody please tell me where I'm wrong. I would very much love to be able to gobble up a portfolio of 10 cap parks, put a regional manager in place, and be sitting in cash cow city while I wait for the multifamily industry to crash and burn from its current low cap rates until acquisitions are attractive again in that sector.

Your last paragraph is what I'm seeing alot of bigger guys are doing.  Buying larger parks and regionally managing.  They like mostly lot rent parks on city utilities which is driving down caprates just like in MF.

You need to go to a MHP boot camp to understand the math and maintenance of a park including park owned homes which are just like MF doors.  Same principal.  Short of fire have an indefinate life.

Take the boot camp at mobilehomeuniversity.com 

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@Chris Reeves

  I am not an expert on these by any means.. but I have owned 3 parks.

one was a SOLID B class and it was a dream to manage ( was in Vancouver WA). on the management side it was akin to an A class SFR or Multi. I bought from the original owners who built it 30 years ago.. and they basically hand picked each resident.. So I count myself lucky on that one... We sold to a SF based company that owns about 30 of these in Oregon and WA.. they run them of course like a corporate entity.

I loaned on a RV/MHP in central Oregon and had to foreclose on it... this one was a HUGE bummer.. low end tenants.. on Private sewer and Water.. All sorts of issues.. the main issue was abandoned homes that were too old to tow ( our state regs) so had to be crunched and hauled to the dump.. so lots of money when these old trailers get to the end of useful life.

YOu will find that lenders do NOT want you to Own any of the MH's.. and maintenance of park owned can be really tough because they are not like apartments were you can just run to a supplier and buy universal supplies etc.. to maintaining them is tough.

Third one I just bought is a mini Ghetto and I will be hauling 30% of the homes to the dump. and replacing with new.. this has city sewer water .. I will be individually metering these ( water) as current tenants when they get pissed just let the water run.. this was also owned my the family that started it.. the lady is elderly and totally burnt out.. by the time I come into the picture its a run down Piece of garbage.. but its got income... 1 house 3 apartments 14 spaces brining in about 5k a month. I paid 80k for the whole thing.. they just wanted out.  But I will put a lot of time effort and money to get it turned around with the hopes of selling for about 400k... so maybe a double your money in a year type of deal which is what I shoot for.

I have one in Escrow in Charleston SC its 24 units.. but I am scrapping the whole park and building new construction.. IN SC you only need give 30 day notice and the MH have to leave or you tow them away..  there are a ton of these little parks in the Deep south ,, and in Texas and other areas... but they have their own very unique management challenges.

Solid A and B class are cash cows but they trade like multi very low cap rates.  the B class in Vancouver was 44 spaces at 400 a month I sold it for 1.9 mil and that company paid cash no financing.

I think you have the idea, cans rust, bricks don't. :) 

They have cap compressed just like other things as investors search for yield. The asset classes are cycling at different times.

If the properties do not pencil for great cash flow and quality it's time to develop and grow your cash.

Ways to increase yield in parks is to offset utility onto tenants. MH parks are more intensive. The long term value is in the dirt and not the structures sitting on the land. Those depreciate and have almost zero value.

Many counties and cities across the country do not want MH parks. Think about it for a second.

There is a dump of 20 mobile houses to low income tenants many being transient and trouble makers. They use up police resources and your local council person gets constant complaints about them. The property taxes are very low to the county and city. A developer come along wanting to put 500k houses on land and it will give a windfall in property taxes to the local muni's and get less complaints. For urban and suburban areas it's a no brainer to get rid of them. I would buy a park if ever for the dirt value and eventual exit.

Rural areas the parks tend to be more accepted as a way of living. Some unusual places like Cali have more expensive and upscale parks but that is not the norm across the country. 

@Joel Owens

  EXACTLY the one I am doing in Charleston the Major has told us not to worry !!! they want those run down mini ghetto's gone.. we will replace these with 350 to 450k new construction. right now they have a miss mash of single wide POS trailers with the tenant base you described.   LOL.. it is what it is.

But there are others that want to make these their cash cows and are willing to put up with that kind of tenant.. Just like we see on BP all the people that want to buy 5k houses in Detroit.. same diff.. !!

Yep.... One way I have seen counties and cities pound long time MH park owners is to keep raising connection fees each time a trailer is changed out, charge huge fees every time they need to go out and inspect something, make grandfather clauses with the park so they cannot sell to a new operator etc.

Basically the county and city think of multiple ways to make it harder and more expensive legally to push park owners to retire and sell off to developers.

It's kind of the under the radar hard kick in the As% approach used by your local government.... : )

There is a junkie park now in my county where commercial is sprouting up all around it. The owner is a family friend in her late 70's. County keeps going up on fees every year. Personally I think she needs to sell out and buy something triple net where she can relax. She mentions it is her livelihood and all she has ever known ( 40 years ). Constantly has to evict tenants.

She would never sell unless she got what she wanted out of the trailers. I think the dirt is valuable and the trailers are scrap value.  

I agree with many of the above posters. Mobile home parks have the best cash on cash returns of real estate investment, but they are typically management intensive. Rural parks are best, because this is a preferred method of housing for very responsible families who pay their bills on time, but simply cannot save enough for a down payment.  Also, many rural people perform cash jobs off the IRS radar, but also insufficient demonstrable income to support a mortgage loan.  You might also want to think about senior housing mobile home parks. I had an Aunt who lived in one in California until her death. It was very nice with homes well maintained by residents. Almost all of them had sold their large homes, wanted to own their own housing but did not need something with a useful life of 40 years.  It was an economical choice, freeing cash for travel and other interests.

@Denise Evans

  Senior parks in CA will generally be A class and trade for the same cap rates as multi is today

@Chris Reeves

  Bottom line 10 plus caps in the MHP space generally =  low income  to tweaker villages to down right mini ghetto's  :)  you can find some gems but there is a reason the cap rates are were they are at.. its the same as buy a C to D class multi in the major mid west market.. Super high touch

I operate under the belief it is a misplaced asset class. The stigma that some have mentioned above is I believe what keeps the opportunity alive.  I don't think it will last forever (and I could be wrong) .  MHPs don't have the CapX that multi family will which is really tremendous from an investment perspective i feel. Cash flow is much better and stability of revenue far exceeds apartments.  When you own your own home, it costs 5 k to move.  When you live in an apartment, you skip out overnight in a uhaul truck. 

True the regulation increases on some levels but its a double edged sword.  That makes it much harder for any new parks to be built and therefore makes your park that much more valuable.  The business term would be "competitive advantage" 

So the rest of BP knows, there are a lot of well run parks out there, with respectable people living there, who aren't all dumps and the police called 24/7 in GREAT areas that go for 10 caps.  But as long as you have your blinders on, those deals will pass you but there is TREMENDOUS opportunity in MHPs and they are far superior to apartments in all ways. 

@Jack Baczek

  your right there is always low hanging fruit.... when I bought my park in Vancouver it was a plum.. rents were 225 a month on average in 24 months I had them to 400... and made a tidy profit selling it...

and just like multi  parks are in the same class A B C D etc.. some might be D for age and quality of the MH but it may have been run and managed like the one I bought in Vanouver it would have been an A park if the homes were pit set and newer.. but it had a mix of singles that that dropped it to B and maybe really C on age.. but on management side it WAS A all the way !!

And @Jay Hinrichs mentioned the other really important thing. When you buy right, on 10 caps you are typically also looking for the value add play with under market rents, sorry see now that @Joel Owens touched on it above with utility bill backs push the parks value even higher.  I know apartments are tougher but Id guess there are not a whole lot of places that are 40% below market rent. 

Its hard to get excited about the returns on triple nets especially with interest rates so low but once you start talking about 20-30% plus ROI on parks, it makes the story more compelling.

Thanks for the feedback and great discussion guys - getting ready to head to the airport now - gonna spend the next several days listening to Frank Rolfe in Seattle at his bootcamp.

@Chris Reeves

  Enjoy weather is spectacular this weekend hopefully you can also get out and about

Originally posted by @Chris Reeves :

Thanks for the feedback and great discussion guys - getting ready to head to the airport now - gonna spend the next several days listening to Frank Rolfe in Seattle at his bootcamp.

 Have fun Chris. It will be great perspective.  Im looking forward to you coming back and agreeing with me :)   Let us know what your thoughts are AFTER the weekend to your own question! 

Originally posted by @Chris Reeves :

Thanks for the feedback and great discussion guys - getting ready to head to the airport now - gonna spend the next several days listening to Frank Rolfe in Seattle at his bootcamp.

 Have fun Chris. It will be great perspective.  Im looking forward to you coming back and agreeing with me :)   Let us know what your thoughts are AFTER the weekend to your own question! 

So Chris, what are your thoughts after the bootcamp? 

It was so intense and packed with information!!!!

@Tiffany D. Are you kidding? It was out of this world!!!! It is worth much more. 

In 3 intense days you learn everything that's possible to learn about this business, all you need is your own experience. You get TON of information in writing, the Home Study Course and their document data base provides you with everything that you might ever need in this business. Everything is really well organized and structured. 

It was mind blowing! 

Originally posted by @Rina Amir :

So Chris, what are your thoughts after the bootcamp? 

It was so intense and packed with information!!!!

 Hi Rina, nice talking with you again. Yes it was a lot of information, and it was good quality information about the nuts and bolts of running parks - no question. The course was worth its money and I'm glad I went.

Rolfe is smart enough not to come off as a huckster.

The more important question, to me personally - is trying to understand Frank Rolfe's real motivations for running this university, what his real and private opinion of the state of the market and future of the industry is, and what his larger game plan is.

There is the old saying that says that if you are playing a game, and you don't know who the sucker is - you are the sucker.

The man is clearly very intelligent, and very clearly has an agenda of some kind - some larger plan. It is no accident that NPR was allowed in the room with microphones for three days and that Al Jazeera was there as well with cameras.

Rolfe HAD to know that many students would react negatively to the presence of press - and that is why he didn't tell us. And yet he allowed them anyway. The question is - why? What's in it for him?

What is he REALLY selling?

You see Rina, Rolfe spent three days painting a picture of:

1 - The perfect business (high gross margins, high barriers to future competition (quasi local monopolies), increasing demand).

2 - Claimed that this perfect business counterintuitively sells for a big discount to its true value - and painted a plausible dual reason for it:

a - the stigma premium - mobile homes are yucky and embarassing, therefore demand for them is lower than would be expected

b - the current set of owners of this asset class (mom and pop) are so stupid and lazy that they have priced the rents of the asset class lower than they should be compared to apartments.

3 - He then masterfully executed the classic sales technique of creating a sense of urgency - saying that the current fragmentation and irrational discount-to-value of this asset class (mobile home parks) will soon expire because "mom and pop" are dying off, and will be selling out to professional investors with huge pools of capital.

4 - He claimed that when this de-fragmentation occurs (the next 10 years) the discount-to-value will disappear and that the real value of the rents of mobile homes will finally be extracted through inevitable professional management.

Item number 4, Rolfe must know, makes any experienced investor salivate - it's like cat nip. Because it implies that not only are *current* returns FANTASTIC they will be MIND BLOWING 10 years from now if you buy-in RIGHT NOW because two things will happen (according to Rolfe):

a - earnings will shoot up due to increased rents

b - cap rates on those earnings will plummet due to a new professional investor class owning the asset.

Combine a and b and you have the recipe for giant returns on capital if you only buy in RIGHT NOW, as good old Uncle Frank is advising you to for the low, low price of $2,000.

I'm not done with that post - it's just that it's very long and I'll put the rest in my next post after a writing break.

So, Rina - we must ask ourselves - does Uncle Frank need or want our $2,000? Or even our $75,000 combined dollars for the weekend?

I think not - that is pocket change to him.

There are three plausible motivations to Frank Rolfe that I can see:

1 - He wants to help people succeed in business and he likes to teach.

2 - He holds a large, concentrated portfolio of undervalued real estate and he has taken it upon himself to single-handedly raise the value of his real estate by publicizing its virtues to the world so he can unload his portfolio at higher prices.

3 - He needs a bunch of newbies in a conference room to go bird dog deals for him.

4 - He is creating a pipeline of new leads to buy into his private investment funds.

So - what of the four motivations is most likely to be the real one?

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