Recession Resistant Asset Class – Mobile Home Parks
January 3, 2019
A portfolio of mobile home parks purchased at the right price have proven to be a remarkably recession resistant investment. If you are concerned about a possible near-term recession and are looking to position your IRA defensively, you should consider investing a portion of your capital into mobile home parks.
Here are a few reasons why mobile home parks have delivered profits year in and year out, whereas their cousins (apartment buildings) were far more erratic over the last few recessions.
- No competition from new supply – Strict zoning laws make mobile home parks nearly impossible to build today. Compare that to apartments buildings, where 350,000 new units were built last year. That’s a never-ending supply of new competition for existing apartments. Whereas there is a declining supply of mobile home parks (as some parks are redeveloped into other uses).
- Demand for affordable housing is insatiable – 51% of U.S. wage earners make less than $32,000 / year. The median retirement savings is less than $5,000, yet there are 10,000 Baby Boomers retiring every day. There will always be demand for inexpensive housing in this country.
- Loyal customers – there is little incentive for tenants to leave a mobile home park for a competitive property. The tenant typically owns their own home (the park rents them the land) and it costs +/- $6,000 to move a mobile home.
- Few institutional players to compete against – the mobile home park industry is a highly fragmented, inefficient market with the largest players owning less than 3% total properties.
- Higher in-place cap rates relative to risk – This reduced level of competition translates to higher in-place cap rates and (thanks to minimal ongoing capital requirements) superior cash flow returns relative to other real estate asset classes of comparable risk. Finance theory suggests that assets with lower risk should have lower returns. This is not true with mobile home parks.
- High operating margins / higher profits – The vast majority of mobile home park tenants own their respective home (park owners rent them the land, which is easy to maintain). This leads to lower operating expenses than apartment buildings.
- Have dramatically lower turnover – Only about 2% of the homes leave our parks per year, versus the average apartment tenant yearly turnover, which was 53% in 2015.
While we don’t believe in economic forecasts, consider where we are in the current investment cycle: 10-year recover; one of the longest in history, crazy high earnings multiples on most assets, unprecedented run of low interest rates.
Good times can certainly continue, but the odds are against it. A sustained stock market rally from today’s valuations seems doubtful. Trees don’t grow to the sky.
Whether its mobile home parks or another recession-resistant investment, it probably makes sense to invest defensively at this point in the cycle.
Written by Brad Johnson
Brad Johnson is a Managing Partner of Evergreen Capital. Evergreen helps investors build – and protect – generational wealth through truly passive niche real estate investments (ex: mobile home parks). Evergreen’s current fund, is uniquely suited for IRA investors as it is highly diversified, issues a 1099-DIV statement each year (instead of a K1) and its investors are not subject to UBIT / UDFI taxes. www.evergreencap.com
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