Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.
Mobile home parks (MHP’s) are shaping up to be one of the hottest investment classes of 2020. Investors are jumping on board to take advantage of this previously misunderstood investment class.
So, why have investors fallen in love with MHP’s?
Supply & Demand
The demand for affordable housing is strong and growing stronger. In 2018, 11.8% of people in the US lived in poverty. This, matched with the low supply of MHP inventory, creates an ever-expanding supply and demand in favor of MHP owners. Plus, this number decreases every year because more MHP’s are being closed down and replaced by high rises than MHP’s being built.
If you buy the right park in the right market…your phone should be ringing off the hook with qualified applicants wanting to move in. Furthermore, with higher-than-ever interest in mobile home park purchases, MHP’s are becoming easier and easier to sell, which helps with your exit strategy.
Annual Lot Rent Increases
It’s expected that MHP lot rents will increase annually. It’s common to see upticks of 5% to 15%. Sometimes you’ll need to increase rents even more if the sellers did not raise rents to match the market.
If cap rates and occupancy stayed the same…just by merely raising rents each year for three years…park owners can create handsome profits at refinance or sale with little effort. If cap rates further compress…and if your occupancy increases along with the increased rents…then you have leveraged the formula for massive potential mobile home park profits.
Mobile homes are typically the most affordable type of housing. The national average lot rents run around $250-$300 per lot per month, with trash pickup included. Depending on the setup of each park, tenants may also need to pay for utilities (gas, electric, water, sewer, etc.). Let’s be conservative and say that with utility expenses included, $300 expands up to $500 a month.
MHP’s are essentially the bottom housing rung, so that means the compression of everyone moving down from above results in even more increased demand for mobile homes with a simultaneously dwindling supply.
MHP’s already perform well…and in a recession they typically perform better.
Most tenants live in mobile home parks for financial reasons…so the cost to move a mobile home is typically higher than the financial capabilities of the homeowner. Therefore, once a mobile home is placed in a mobile home park, it typically stays there.
If a homeowner needs to move…they more often than not sell their home to another approved tenant…leave their mobile home at the park…and buy a new one at their next location.
Historically Strong Cash Flow
MHP’s are often called “cash cows” due to the high cash flow that has historically been produced. If you’re buying stabilized parks (roughly 70%+ tenant occupancy), it’s almost expected to have solid cash flow straight out of the gate. This makes MHP’s ripe for syndication deals.
Large Potential Equity Payouts at Sale of Asset
MHP’s have historically had high purchase cap rates…in the double-digit range. As time has passed, cap rates have compressed. This means those who purchased at 15% caps could later sell at 12% caps; and so on.
With the right mobile home park investing business plan, and by leveraging forced appreciation, there are still plenty of profits to be had in the mobile home park sector.
Attractive Financing Options
Loan default rates in the mobile home park space is historically lower than most other asset classes. Fannie and Freddie knew this and jumped on board to provide exceptional financing programs for three-star-plus MHP’s.
Fannie even offers 30-year fixed rate options with their Manufactured Housing Loan Program. In addition, many other commercial lenders have competitive financing options with 4% to 5% interest rates, up to 80% LTVs, and 30-year amortization with five, seven, 10, and 15-year balloons.
The parks that larger commercial lenders won’t touch (i.e., $2 million purchase price and less) can be financed by smaller local banks. Short of any of the above financing options, many park sellers are open to carrying some or all of the financing for reasonable terms to the park buyer.
Warren Buffet’s Acquisition of Clayton Homes
Clayton Homes is the largest builder of manufactured housing and modular homes in the U.S. In 2002, Clayton earned a revenue of $1.2 billion, and in 2003 Warren Buffet’s Berkshire Hathaway Inc. purchased Clayton Homes for $1.7 billion.
Four years later, Clayton Homes’ revenue was $3.66 billion. Warren Buffet makes highly calculated (and historically wise) investment decisions. It was only natural that many others joined shortly after.
21st Mortgage CASH Program
A consequent effect of Berkshire Hathaway buying Clayton Homes was the introduction of Clayton Homes teaming up with 21st Mortgage to introduce the “CASH” program. This program provided an avenue for park owners to get their hands on new Clayton mobile homes and to have them transported to the park owner’s community (although transportation costs are the responsibility of the park owner).
Upon arrival, the park owner has a certain time frame where he can market the home for sale…and then send park-screened applicants to 21st Mortgage for financing. Essentially, this means tenants get their home financed, and the park owner barely fronts anything out of pocket while getting a $40,000-plus new mobile home in their community and a new paying tenant. Meanwhile, home repairs and maintenance are the responsibility of the homeowner.
The CASH program was introduced in a perfect time of need and has been a huge success since. As time has progressed, 21st Mortgage now will do the same structure with most of the major mobile home manufacturers, which makes this setup possible for many park owners nationwide.
MHP owners have the advantage of filling vacant mobile home park spaces with new or used homes, then filling those homes with qualified tenants. Additionally, in some cases, new lots can be added to existing parks to further increase occupancy.
At a lot rent of $300 a month, 30% operating expenses, and a market cap rate of 8%, this means each new lot that is filled with a home and qualified paying tenant adds $31,500 of overall value to the park.
$300 (lot rent) x 12 (months) x .7 (operating income) / .08 (cap rate) = $31,500 (new filled lot value)
Match this with the low cost to park owners with the CASH program, and multiply this by as many lots as you can fill in your park, and you’ve created a low-risk/high-reward way to increase your park’s value.
Section 8 Vouchers Used Toward Purchase of Mobile Homes
With Section 8, essentially the government pays a landlord rent on behalf of low-income tenants. This has been used to pay rent in the apartment and mobile home park space in the past, although now Section 8 can pay toward the purchase of a mobile home. This is a win-win for the park owner and for Section 8 tenants.
In summary, combine all the above and you have an attractive asset class. It’s no wonder mobile home parks are likely to be one of the hottest asset classes in 2020!
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com