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August 4, 2020
My mother always told me to stay away from trailer parks. Did yours?
My mom even called the residents “trailer trash.” I’m not proud of that, and thankfully I never adopted that term.
My dear parents passed away many years ago. And after decades of hard work at a well-paying job, my dad passed away and left us enough to cover his funeral expenses. Barely.
No IRA. Nothing invested in the company 401k. No real estate or stocks.
I’m grateful for my childhood, but my parents taught me nothing about investing. This was a huge handicap to me, especially when I made a few million dollars at 33.
I started calling myself a fulltime investor for a while, but I didn’t know the first thing about investing. I did know about speculating, however. And this cost me dearly.
Investing: When your principal is mostly safe, and you have a chance to make a profit.
Speculating: When your principal is not at all safe, and you have a chance to make a profit.
I had the chance to invest in mobile home parks, which I quickly ignored. My ignorance…and the stigma…made it a quick pass.
Instead, I invested my IRA funds in exciting stuff I knew nothing about. Like:
If I’d have only known about the principals of investing…and particularly about the power of investing in mobile home parks…I would have saved myself a lot of grief. And I’d be a whole lot wealthier now.
What do Warren Buffett, Charlie Munger, and Sam Zell know…That many of us missed?
I should have caught onto this years ago. I heard that these giants were heavily investing in manufactured housing around the turn of the century. But I thought I had a better plan. But like I said in the title: I was wrong.
A Dozen Advantages of Mobile Home Parks
1. The big picture. Due to some of the factors below, manufactured housing (mobile home parks) has been quite recession-resistant and in fact had no discernible downturn in the great financial crisis and so far during this pandemic. Check out this graphic:
2. Supply and demand. Manufactured housing is the only asset class with a shrinking supply and increasing demand. There are virtually no new parks being built, and the affordable housing crisis is real. About 10,000 Americans turn 65 daily. About six in ten have less than $10,000 saved for retirement. But many have home equity they’re willing to trade in for a mobile home park lifestyle.
3. The joy of frag/men/ta/tion. The stock market is extremely efficient. It’s nearly impossible to get “a great deal.” The real estate market is inefficient in general, but this is particularly true for an asset class like manufactured housing, where about 90% of the 44,000 U.S. parks are owned by mom-and-pop sellers.
4. Mom-and-pop sellers. The mobile home park world is dominated by these folks, and many of them are getting up in years. They typically don’t have the knowledge, the desire, or the resources to increase the income of their parks and maximize their value. They leave significant meat on the bones and a professional operator can pay them a fair price, treat the tenants ethically, and drive significant income and value for their investors.
5. Surprising value-adds. As a multifamily investor in the past decade, I found that most of the value-add opportunities had been gobbled up by the professional operators selling their properties. Though I couldn’t see value-add potential in mobile home parks from a distance, now I know there are many. These include:
6. Sticky tenants. This doesn’t mean renters in Velcro suits (but that’s ok, too…I’m not one to judge!). Mobile homes really aren’t that mobile. In fact, it’s said that over 90% never leave their first location. And some stats suggest that tenants stay an average of 13 years. It costs about $5,000 or more to move and reset a mobile home, and a typical tenant won’t do that to save $50 in lot rent across town.
7. Joint stakeholders. In a professionally structured mobile home park scenario, the park owners own and lease dirt and infrastructure to tenants. The tenants own the homes. Tenants have the motivation to care for them and keep them up. Park owners are joint stakeholders with their tenants. This joint responsibility is the ideal real estate investment scenario in my experience.
8. Favorable financing. Agencies like Fannie Mae and Freddie Mac love manufactured housing communities. Aggressive refinancing programs provide great returns for investors as well. And thanks to investors like Buffett and Zell, there are great financing opportunities for mobile home tenant-buyers, too.
9. Amazing tax treatment. While IRA investors aren’t always in need of tax deferrals, some are bitten by UBIT (Unrelated Business Income Tax) due to profits made from leveraged properties. Mobile home parks have surprising tax benefits that allow significant depreciation and high corresponding tax write-offs for investors.
10. Low maintenance and capital expenses. Capital expenditures and maintenance expenses are generally predictable and the lowest of the major commercial real estate types.
11. Higher value per square foot. Mobile home park tenants not only enjoy low costs, privacy, and a yard, but they also get a significantly better value for their money. The goal in the graph below is to have the highest star (square footage) compared to the lowest bar (rent).
12. That stigma. Oh, and don’t forget that stigma I believed for years. Maybe you have, too. Those investors who can see through this issue and look at the facts will be ahead of the curve and enjoy less competition than those competing to invest in apartments and other “sexier” asset types. This advantage is already eroding as many investors have seen the light, but it’s still a benefit to those who act soon.
A Case Study
My investment firm and I recently joined our operating partner to acquire a 300+ lot mobile home park in Louisville, Kentucky. The previous owner was out of state and had hadn’t visited the park in about five years. This park had about 50 vacant lots, the water and sewer were funded by the owner, and rents were about 25% below the market.
This park was acquired for just over $7 million in February. Our operating partner got an offer for $9.5 million just six days later. (This was another buyer who had been outbid and knew the inherent value of the park.) Our partner turned the offer down without countering. Why?
Because we project it will be worth $12 million to $14 million in about 24 months by executing on the operating plan. This includes raising rents to market levels over a few years, passing back utilities to tenants (like the competition in the area does), and filling many of the vacant lots.
And the operator will be raising the standard of living for park residents in meaningful ways. Many tenants see this as more valuable than the rent increases to market levels.
With about 50% debt, the $3.6 million in equity will be valued at over $8 million if the $12 million valuation can be achieved. And over $10 million at the $14 million valuation.
This demonstrates the power of mobile home investing. And the power of finding and evaluating a truly great opportunity. And investing with a best-in-class operator. If you’re a passive investor, it’s worth your effort to find a great syndicator to invest with.
How can you get involved?
Most investors won’t buy and run a mobile home park. But thanks to relaxed SEC regulations and the popularity of syndications and crowdfunding, most investors can enjoy the significant income, growth, and tax shields provided by this overlooked asset class.
There are a handful of operators who have been doing this since before the great financial crisis. They have honed their skills and their teams to provide their investors with extraordinary returns. Some provide diversification by operating other asset types like RV parks or self-storage.
Don’t miss out on this overlooked but powerful asset class anymore.
Benjamin Kahle, Operations Manager
*This site contains educational content provided by third parties. NuView Trust does not endorse, recommend or approve any of the companies or individuals or investment vehicles or strategies that may be discussed. NuView Trust encourages clients to seek legal or tax advice as necessary and to perform their own due diligence before engaging in any investment vehicle or strategy.