The purpose of this post is not to ask a specific question or write about a specific situation/event, but rather to start a general discussion around the three alternative investments named above.
Commerical MF: Diversification, truly passive income for investors, forced appreciation, and economies of scale, to name just a few of many, are very appealing attributes of value-add commercial MF properties. Equity multiples of 2.0x-3.0x (yes, double to triple your money!) over the hold period aren't uncommon. 10% CoC is reasonably achievable. This list goes on. There's a reason why many of the richest people in the world have their hands in commercial MF in one form or another. Check out my blog for deeper thought on the matter:
Mobile Home Parks: If the fact that Warren buffet is one of the single largest holders of mobile home parks in the U.S. doesn't speak volumes, here are some other things to consider: new development on mobile home parks are extremely limited nationwide; costs are typically extremely low relative to other investment options (no dwelling expenses); cost/effort for dwelling owners to leave the lot are high. There's a negative stigma surrounding mobile home parks, but it is my opinion that, while sometimes true, this stigma is generally ill-founded.
Self Storage: Lower development costs often make the break-even point for self storage lower than other alternative investment options. Operational expenses are often lower as well. With the percentage of Americans renting today being relatively high, the demand for self storage is strong. Typical tenant problems are less common than residential properties. That being said, competition is still fierce and an accurate market analysis is still key.
Comment your thoughts on each niche; whether they come in the form of opinion, personal experience, questions for other posters, strengths/weaknesses of one over another, whatever! Just looking to get other BP member insight on these 3 alternative investment options and open up a fun and informative dialogue.
I looked forward to reading everyone's responses!!
Hi @Michael Bishop ,
A quick clarification, Warren Buffet is not the single largest holder of mobile home parks in the country. In fact, I do not believe he or Berkshire Hathaway own any MHPs (he may have a few). However, Berkshire Hathaway does own Clayton Homes, which is the largest mobile home manufacturer in the country. They also own 21st Century Mortgage, the largest lender on mobile homes in the US.
The largest "single" owner of mobile home parks is Sam Zell, who runs Equity LifeStyle Properties Inc, a MHP REIT.
All that said, I do think MHPs are a great investment right now. Low maintenance, high returns, and you are buying large tracts of land. They have my vote!
Best of luck!
@Matt Souza I said "one of" because I thought most people would know who Warren Buffet over Sam Zell. But you're right, I should have been more clear there, thanks for the clarification!
The large tracts of land bit is a good point as well, they'll never make more real estate! Appreciate your insight.
I can only speak about self storage, but after 23 years in the industry, as a supplier to the industry as well as an owner, I can say that it is a great business. It is less expense to build and operate as other forms of real estate based businesses and you don't have the normal 'problems' that you have with MF and rents properties. The increase in value that you can create is great. Personally I like the model where you grow the equity, do a non-recourse refi with a cash-out, which isn't taxable and then use the money to invest in another project while still owning the original asset which will keep covering the payment. A lot of people have moved over from MF to SS for many reasons. Low overhead, low maintenance, very few, if any, employees, good returns.....great business.
Hi @Terry Campbell , good thoughts. With MF there are numerous ways to increase value by driving up NOI; renovating interiors for increase rents, adding additional facilities that make money (i.e. clothes care center), increasing operating efficiency and thus lowering expenses, implementing a RUBS to decrease utilities expenses, just to name a few. What are some of the most common ways you've found to increase value in self storage?
Also, you've named the positives - any negatives, compared to alternatives, that you can think of with self storage?
I doubt this would work in Arkansas where I live, because electricity is very cheap. But I was thinking you could use the top of the storage buildings for solar panels. I’ve looked into them in Arkansas and the cost of installation and equipment would take 15-17 years to recoup. However Arkansas is one of only a few states (I think) that requires the electric company to purchase your excess electricity at the same rate they sell it back to you at. Some states buy from you for say $.50 and sell it back to you for $1.
@Pat Alford interesting thought, that had never crossed my mind. I'm sure there are some tax benefits to be had there as well! This is something that I'd imagine would vary drastically state by state on procedure, costs, tax breaks, electric company/owner relationship, etc.
@michael bishop, some of the ways to drive up NOI in self storage is through inceasing rents, selling ancillaries such as tenant insurance, packing and moving supplies, using technology to become unmanned, and plain old revenue management....for example, if you come in Monday morning and find that you have one 10x10 available, that unit may cost 10% more than it normally does because of supply and demand. Sometimes people fixate on being fully occupied and if you are, you aren't charging enough! You never want to be 100% occupied because that's like being a convenience store with no bread or milk. You can, in some states, add solar to the roof. Massachusetts is one of the best states to do thIs because of tax incentives and subsidies and that rates that you can sell the electricity. If you have space, you rent out office space for meeting, have mailbox services, rent land to cell towers, etc.. if you have right of ways or easements that you can't build on, you can place portable units or have parking for boats/RV/vehicles. Lots of creative ways to drive up the NOI. Also, you can add truck rental for extra income.
Some of the disadvantages are that you could possibly get stuck with a unit full of tires, or some other undesirable items that you have to get rid of. Competition that moves in and builds in your market when there isn't enough market to support you both. Having to do an auction is a pain. Storage wars makes it seems glamorous and that yo can make big bucks, but, that sort of thing rarely happens in real life. In fact, before that show came out, most auctions didn't result in the debt for the forclosed unit being covered. At one point, there was a lot of meth labs being operated in self storage units but that has sort of went away for the most part. Illegal activity can happen like it does in MF, but if you have cameras set up, it can help to discourage it.
Lots more positive than negative!
Mobile home parks in most areas are going out.
Counties and cities typically do not like them in urban core to suburban. They are more accepted in rural areas. Parks tend to have drugs, criminals,transients. Not all are like that but it can become a breeding ground for them. On top of that they are an eyesore to a community unless very upscale and new development.
Counties and cities want to get rid of them because property taxes are low per acre. They can put commercial, multifamily, or new houses on the same land and generate higher levels of jobs and property tax base to the muni's. One strategies governments employ is to keep passing higher sewer and tap fees, if not connected pass a law making it a requirement, and also pass other laws to add on for landlord owners. Government wants to make it as tough as possible legally to own them so owner gets tired and wants to sell for redevelopment.
I would only want to own one in the path of progress to sell out to a developer or develop myself for a much higher use in the future. If it is just a park in the middle of nowhere or only residential with no growth in site I would not want to own it.
Generally there are 2 types of investors. Those that invest in whatever is the current flavor at the bottom of a cycle and ride the wave up to 1031 into something else OR investors they enjoy a particular asset class and want to stick with that no matter the cycle. They have a long term plan to create value in any cycle with a certain asset class the strategy just changes to meet the market cycle conditions.
I personally enjoy retail. I have sold larger apartment buildings with clients and do not enjoy that space hearing residential tenants constant BS and excuses. Multifamily you can VERY EASILY lose money. People are all getting excited about it and having blinders on. You make money when you buy no matter the asset class.
@Terry Campbell so self storage has lot of similarities with MF in terms of management and increasing NOI, but also varies in some drastic ways. I like the flexibility that self storage has in terms of driving up NOI through creative means; using additional space as office space, mailboxes, portable units, parking, etc. Have you tried any of these personally and are there any common hoops that you have to jump through?
@Joel Owens you mentioned high crime rates in mobile home parks; how do you feel about implementing around the clock security to make parks a safer place and the effect it may have on attractiveness and NOI? You also mention that you enjoy retail more, I purposely left that out because I thought that the three I mentioned would be more common among BP members. Do you sell/lease retail space, invest, or both? Care to offer some thoughts on retail; what kind of clients do you typically work with, what are some pros and cons, why you prefer retail over alternatives, etc.
I also agree that MF, not unlike other forms of REI, is easy to lose money in, and that's why it's SO (so so so) important to work with the right Sponsor. One that is extremely conservative in their underwriting, purchases below market and is very thorough with their sensitivity analysis. Anything less is doing their investors an extreme injustice.
one method that I failed to mention was a kiosk so that you can rent units after hours. we used one at the last facility that I was a partner in and it did help to rent more units. today, you can still use the kiosk or even software that allows you to use your smart phone as a kiosk. we didn't use any other methods expect parking and we didn't have a lot of extra room for it, but it was extra income. there are different rules and laws when you are involving something with a title, such as a car, RV, etc.
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