We are currently in one of the longest economic recoveries on record and many believe that a market correction is looming. Now is a critical time to ensure that your investment strategy is focused on recession resistant assets and Mobile Home Park’s (MHP’s) are at the top of our list.
Mobile home parks often come with many negative stigmas and the belief that they are undesirable places to live. What many people don’t know is that some of the most successful people in the world have been investing in MHP's for decades, and for good reason.
Billionaire Sam Zell’s Equity LifeStyle Properties, is the largest owner of mobile home lots in the U.S. and made $869 million in 2016 alone. He was recently quoted saying: “I don't know of any stock or any company that I'm involved with that has a better prospect than Equity LifeStyle."
Sam is not alone. Clayton Homes, the U.S.’s largest manufacturer of mobile homes has been building homes since 1956 and has sold millions of homes. Warren Buffet’s Berkshire Hathaway, acquired Clayton Homes for $1.7 billion in 2003.
Let’s take a closer look at some of the unique characteristics that attract both Sam Zell and Warren Buffet to this often misconceived asset class:
1) High Demand: There is currently an affordable housing crisis in the U.S. resulting in the demand for mobile homes to continue to grow. It is estimated that 20 million people live in mobile homes in the U.S and more than half of workers earn less than $30,000 per year. In addition, about 4 out of 10 American workers make less than $20,000 per year.
The U.S. Census Bureau’s 2016 Poverty Guidelines stated that a family of 4 earning $24,300 or less is living in poverty. Based on 2014 figures the nation’s poverty rate was near 15% with more than 45 million people living in poverty.
Residents of mobile homes often do not have affordable housing options and when compared to apartments, mobile homes often provide a significantly lower cost of living. In 2016 the national median rent for a 1-bedroom apartment across 50 cities nationwide was $1,234 per month and depending on location, living in an apartment is often 30-60% more expensive than living in a mobile home.
It is also important to note the inverse correlation of mobile homes and economic strength. During times of recession when the economy is down, the demand for affordable housing and mobile homes increases.
2) Supply is Restricted and Declining: It is extremely difficult to build new mobile home parks in desirable areas. Most cities’ zoning restrictions do not allow for new parks to be built as the majority of MHP's were built in the 60’s and 70’s. In addition MHP's are often targeted by developers looking to tear down and convert parks into more costly housing options such as multifamily apartments. The national supply of Mobile Home Parks is estimated to be decreasing annually and when coupled with increasing demand, this creates an extremely favorable investment structure for the long term.
3) Accelerated Depreciation Tax Benefit: Compared to other real estate investments, MHP's provide accelerated depreciation. The majority of a park's value is comprised of land improvements (roads and utility lines), which can be depreciated at an accelerated schedule and are often 50%+ of the purchase price for tax purposes. Depreciation schedules for mobile home parks typically average 15 years compared to apartments of 27.5 years and commercial properties of 39 years. Keep in mind that when the park is sold capital gains and depreciation recapture tax would be owed but most likely at a lower rate than many investors marginal tax bracket. This results in maximized after tax net proceeds.
4) Cap Rates Higher Than Multifamily:
Commercial real estate typically trades based on the capitalization rate or projected rate of return that the asset is estimated to yield. MHP's often trade at a capitalization rate from 2-4% higher than comparable multifamily assets. MHP's provide significantly stronger cash flow and income than currently available in multifamily apartments. For those investors that invest for cash flow returns, MHP's are likely to be an attractive option.
5) Operating Efficiencies Resulting in High Margins: Mobile home parks are residential subdivisions where the investor is the owner of the land and infrastructure (roads, utility connections etc.) and the owner typically leases the land to the mobile home owners.
Mobile homes are not really “mobile”: The cost of moving a mobile home and placing it in a new park is highly restrictive (often $5,000-$10,000) which results in long term residents.
Lower tenant turnover: with very few comparable low cost housing options and high cost barriers to move, the turnover of tenants is estimated to be between 10-15% annually vs 50%+ for apartments.
Lower operating expenses: When managed correctly with the majority of homes owned by the residents, mobile home parks often have lower operating expenses in the neighborhood of a 30% operating margin vs. roughly 50% for apartments.
Rental rate increases: Residents of mobile home parks desire the same amenities and features as any other neighborhoods. Attractive parks that are maintained well, offer a safe environment, and that are located in desirable areas lead to a greater ability to to raise rents without realizing significant vacancy.
At Aerial Investment Management we are bullish on MHP's and are currently analyzing several investment opportunities. Reach out to us today to learn about how you can begin investing in mobile home parks and add this superior asset class to your portfolio.