Are Mobile Home Parks the most Over Valued Asset Class?

24 Replies

I have been looking to buy a Home Park for probably the last 10 years. I have seen over that time a huge increase in values and shrinking cap rates. It has lead me to think it could be the most oversaturated and overvalued asset class out there. What value exists in a MHP? What improvements lead you to think that a MHP's value is anywhere near a 5% cap rate? What I see, a Meter Base, sewer pipe, and water supply line.

For all the owners of parks out there, don't you just own some exclusive zoning and a bunch of completely depreciated out mobile homes? 

Someone elighten me... I ain't seeing it... the value in owning them seems to be that there is value in owning them and no one can see that you don't really own much for a couple million bucks.

Hey @Kai Van Leuven

You bring up some great points and it is definitely true that the MHP space is greatly misunderstood by the majority of non-MHP investors. It's quite a unique asset class and takes some time and studying to wrap one's head around. Hopefully, I can help a bit with this!

So first, I see a bit of a contradiction here. You've noticed that MHP is an incredibly hot (potentially the hottest) asset class right now, yet you feel there is no value in them? So do you really believe that tens of thousands of investors in, and looking to get in, the park space have just lost their marbles? You say you've been looking at this asset class for ten years yet do not see the value? If that is the case, I may actually not be able to help here but will definitely try!

To simply answer your question, yes there is value in them if you buy right. What you see on Loopnet and MHP Store is not a valid representation of the space. Your average MHP investor is not buying these parks (just look at the DOM for most of them). Yes, cap rates are definitely being compressed, just as they have been in apartments and self storage over the past decade. However, rates have also gone down too so while some parks are being sold at a 1% spread, there are still plenty being sold at a 3%+ spread. Just like self storage and apartments, there are big players coming into the game and driving down cap rates. However, they are still mostly focusing on the larger, stabilized assets. This is actually a good thing for the average investor since it means that if you can buy a rougher park and turn it around, you will have a buyer with big pockets. Turning around parks that were bought direct to seller or from a broker's pocket listings is where the majority of smaller MHP investors are making their money (and a ton of it) right now. Just think of it as a huge BRRRR.

Another common misconception is that you're owning a bunch of depreciating assets (the homes). While this may be true in some cases, most park owners just want to own the land - expenses are lower and you don't have to be a landlord. That being said, there are markets where owning the homes is a great model. This has nothing to do with the value of the homes but rather with the cash flow. Whether you own the homes or not, cash flow is a big part of what makes parks so valuable. While increasing land values and cap rate compression does cause many parks to "appreciate," it's really the stable cash flow that makes these great long-term investments.

If you still aren't convinced, guys like Paul Moore and Bryce Robertson have wrote some fantastic articles on the subject here on BP. While they feel a bit fluffy, the facts are there and explained in a clear, concise manner. Highly recommend giving some of those a read. 

Also, happy to discuss further. Please, throw any counterarguments you have my way on this thread. You can also shoot me a message anytime if you have questions or want to chat MHP!

@Muoki Musau

Lol, I am 99.9% joking about being the “King”.

On Chasing Markets: I just feel like folks will try and say go to a different area for returns. To me there are people in those areas who are investors, know what they are doing, and have been successful. You are looking to compete with those guys/gals. No thanks. You know your area, even though you may not know the real-Estate side,yet. Just my .02c.

@Brenden Mitchum

10s of millions of people bought beanie babies. Some as “investments”, doesn’t mean it justifies the purchase.

I am looking at the underlying assets involved in the Mobile Home Park business and they don’t, in my limited brain, justify the purchase price.

Case and point, before it hit the market I went and looked at a 74 unit complex. It was rough, I estimated it would have taken 400k to get it where it needed to be. I put in an offer for 1.6 and drove the 4 hours to see it. For 2m bucks there is no way. I have seen nicer slums in the third world. The cashflow was ok, but still nothing to write home about.

For 2m you could buy/start an amazing business (non Real Estate related) that would trump the cashflow of that park by 10x.

@Brenden Mitchum I literally just made my account and it was pretty much for this reason. I’m so interested in getting into a smaller park (10-15 lots), I had to find out more after hearing them talk about it on the podcast! I’m very new to the Bigger pockets community but I’m pretty excited to learn more.

@Kai Van Leuven

So, I'll start by pointing out that both of your counterarguments are anecdotes and the first is also a non sequitur. 

Have you spoken directly with any MHP investors? I have and they absolutely love the class and are making good money. In fact, this is a bit of an anecdote too but I do not know anyone who went from MHP to another asset class, only vice versa.

Also, "74 unit complex?" Are we talking apartments or MHP here? Not sure someone who admits to having a limited knowledge of MHP would be the best at estimating turnaround costs either. That being said, it does sound like you found yourself a classic, overpriced park. Overpriced assets exist in every class. Again, this is why the real deals lie in going direct to seller. Where did you find this park? Also, was this in a major metro and what did it end up selling for? 

Agree though - $2M for this park that you're describing sounds like a joke. But, don't marry the whole asset class to this one experience!

@Brenden Mitchum

Went pending in hours... I got to it right before it went on to mobile home Park store.

https://www.mobilehomeparkstore.com/mobile-home-parks/1343788-castle-rock-mobile-home-park-for-sale-in-forks-wa

If it was such an overpriced asset why are people all over it? There was literally one decent home out of 74 spots... c’mon man...

@Kai Van Leuven

They were all over that one because the location is incredible. Definitely potential for a sweet, 5-star, destination park. I am sure that was the buyer's idea. 

But still might have been a terrible deal for the buyer and they just wanted that park in that location. Who knows. There are so many uneducated investors in the space now buying terrible deals. This, mixed with institutional money and big-time brokers getting involved, has lead to a lot of overpriced assets. Again, if it goes to MHPStore (or is going) chances are it's overpriced.

Were the homes all park-owned? 

@Kai Van Leuven

Kai, with cap rates in the MHP space as compressed as you describe remember that at a 5 cap every dollar you drive through NOI is worth 20x. Are you sure these guys aren't buying parks like this not for the immediate cash flow but for the value add?? That would be my suspicion

@Kai Van Leuven

Best line so far: “while they feel a bit fluffy”

Just be careful, those that don’t drink the kool-aid tend to find an exit these days. Probably a few hundred thousand insta-stories... or whatever they’re called this week, reels now(?) posted about this thread already.

Originally posted by @Kai Van Leuven :

I have been looking to buy a Home Park for probably the last 10 years. I have seen over that time a huge increase in values and shrinking cap rates. It has lead me to think it could be the most oversaturated and overvalued asset class out there. What value exists in a MHP? What improvements lead you to think that a MHP's value is anywhere near a 5% cap rate? What I see, a Meter Base, sewer pipe, and water supply line. 

For all the owners of parks out there, don't you just own some exclusive zoning and a bunch of completely depreciated out mobile homes? 

Someone elighten me... I ain't seeing it... the value in owning them seems to be that there is value in owning them and no one can see that you don't really own much for a couple million bucks.

 I can't speak about the whole country but in my neck of the world - which historically has had plenty of mobile homes - the appeal is:

1. Limited/exclusive stock - getting a new MH park permitted in any of the counties around here now is like alchemy. There are literally almost no allies for anyone wanting to start a park; the surrounding neighbors hate it, the county police hate it, the utilities hate it. So what's already existing is somewhat rare.

2. Almost as guaranteed rent as it comes (if you rent the spots) - moving a MH is expensive and a royal PITA. The houses are worth nothing financially but are often the only "asset" the owner has, and since almost everyone prefers a roof to the overpass, they have tremendous value to the owners. MH owners will let their electric be shut off before they don't pay their lot rent and face eviction, and this is direct from several people I know who own parks.

3. Minimal park expenses - except for the really nice stuff, most of the parks here require the lot renters to cut their own grass and all "public" areas are either gravel or asphalt. It rarely snows here or even get cold enough to have to salt the roads. The smart park owners have individual water utilities for the lots, but even the dumb ones don't spend very much fixing the occasional broken water line.

4. Location - because the counties and cities around here won't approve new parks, most of the existing parks are in really good locations because they were put in 40 years ago before the city got that far. Now they're islands of blight in the middle of high land values, so when the owner gets sick of dealing with the tenants they sell the land for prime value to a developer who bulldozes everything. 

So that's my take on why they are what they are. At least in my area. 

@Brenden Mitchum Oh dear, where do I begin... Forks is in the middle of nowhere. It is not near a beach, not that close to the coast, and is a pretty dreary town. Probably 50% of the downtown is uninhabited. I would stick to investing in places you know... 5 star resort... I think not.

As far as estimating costs, my numbers are usually pretty spot on. My last purchase on 10+ multifamily is sitting at right around 20% CAP, in a pretty big market, that is growing. I am not saying that to brag but you come off pretty condescending assuming I don't know how to estimate costs.

I buy in areas I feel like there is value. Some, maybe you, invest at the "watercooler". What is everyone else talking about, what is hot, that is where I will be. I am not into that game.

@JD Martin This is really my point. You are buying the zoning, and some depreciated out improvements. 

Really what gets me is that an appraiser really dictates value. If the business was separated from the land, mobile home parks would be valued at much less.

@Kai Van Leuven people have mentioned lots of great reasons that mobile home parks are appealing. 

Speaking strictly from my own market, here is what I don't like. In my city mobile home parks exist in the worst parts of town. Highest crime and elementary schools have the lowest test scores. Lots of registered sex offenders and drug use. The newer parks are ok, but the ones built 40+ years ago are really bad. The mobile homes themselves from that age really start to deteriorate. You may have heard the term that a house is old but has "good bones". Mobile homes have no bones, haha. That means you have this old park where everything is falling apart. In theory you could move a new mobile home in, but that means spending huge amounts of money. Who wants to put a brand new mobile home in a crappy location?

My thought is what happens in 20 years to these assets when every home is falling apart and the quality of tenant has just gotten worse? 

Of course, this is not true of every market. If you had a mobile home park in Beverly Hills, it would be completely different than my city. 

Also remember some people investing in these assets do not plan to hold them forever. They are buying the asset, stabilizing and increasing rents and selling out for a profit.

There is also the reality that Brandon Turner has made this asset class more popular by endorsing and investing in mobile home parks. Of course his company understands the asset class. They know how to buy, where to buy and how to make money. 

I am not at all an expert on mobile home parks, so take my commentary in context of looking in from the outside.

@Kai Van Leuven Yes, it's definitely pretty saturated at this point. Especially when large corporations are buying them up which is one of the reasons why a lot of investors are buying and selling them. You may just want to continue to sit on the sidelines and watch it until the market changes. 

Many investors I know who owned parks have actually got out of the business and sold their parks. A lot of them said the business was too management intensive and went into other real estate asset classes in commercial real estate. Others who sold went back into residential and got out of owning mobile home parks all together. 

As in anything, it's probably not the best time to buy when everyone's getting in on it. Usually, it's the opposite and time to sell. If you know what I mean...

Hope that helps! 

"Someone elighten me... I ain't seeing it... the value in owning them seems to be that there is value in owning them and no one can see that you don't really own much for a couple million bucks."

Basic CRE, you make money 2 ways:

1) Appreciation of asset and you're right MHPs have had a run-up

2) CF and its growth. When you buy CRE a major part of price is the lease pmts. Look at how much a STNL like a SBUX is worth if they've got 20 years vs they're moving out.

Think the reason buyers like them:

1) If no park-owned units, then no maintenance.  You pay prop taxes on dirt and landscaping is about it

2) They're about the cheapest rent and are vanishing which increases demand

3) As noted, very low turnover so steady income

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