Mobile home parks (a.k.a. manufactured housing communities) have become a darling of private equity over the past few years, and rightfully so. The simple, powerful supply and demand imbalance provides a compelling investment thesis.
In mid-2018, Blackstone made its first bet on manufactured housing when it acquired 14 communities for about $172 million. And Blackstone isn’t the first institutional investor to dive into the niche: Apollo Global Management owns a majority stake of Inspire Communities, and the Carlyle Group owns several thousand manufactured housing lots. In 2016, GIC Pte. — the sovereign wealth fund of Singapore — was part of a group that paid $2 billion for YES! Communities.
So, why mobile home parks? As the co-founder and managing principal of a housing investment company that specializes in mobile home park investing, I’ve outlined 10 reasons I believe any investor could benefit from expanding their portfolio to include MHPs:
Strong And Increasing Demand: As middle- and lower-class families continue to be pressured financially, growing demand for inexpensive housing makes mobile home parks an attractive housing option for those who are unable to pay the costs of conventional homes.
Artificially Constrained Supply: Through my time in the field, I’ve found that due to increasingly burdensome zoning regulations, few mobile home parks are being built. These government regulations artificially constrain the supply of mobile home parks. In addition, profit margins for mobile home park developers are often inferior to those in the apartment industry.
More Control Of Rent Prices: The high and largely inelastic demand for affordable housing provides significant pricing power in the marketplace.
Outsized Same-Store Net Operating Income Growth: The fundamentals of mobile home parks remain strong and are expected to grow until at least 2021.
Stable Cash Flow: Acquiring positively cash-flowing mobile home parks with further upside provides buyers with a solid margin of safety. The stable cash flow generated by mobile home parks reduces investor risk.
Access To Exclusive Off-Market Deals: Through a private equity fund, investors can participate in purchasing at a steep discount to the prices one must pay to own mobile home parks through a publicly traded real estate investment trust. These deals are often purchased directly from owners who have not maximized the net operating income of their investment. Acquisitions are negotiated based on the current net operating income, which can often be increased shortly after closing on the property.
Higher Yields: I’ve found that mobile home parks typically trade at higher yields than most other commercial real estate assets. Further, many small operators have not maximized the value of their respective communities, so there might be value-add potential as well. The goal for a new private equity entrant should be to aggregate communities from smaller operators and implement professional business systems to increase both cash flow and equity, thus ultimately resulting in higher yields.
Low Tenant Turnover: Throughout my time investing in this space, I’ve also observed that in most cases, once a mobile home is moved into a park, that home will stay for many years. Often, if a resident wants to move, they resell the home, which gains you a new tenant.
Accelerated Depreciation Time Frame: Mobile home parks are tax-efficient. Much of the purchase price can be allocated to capital improvements (e.g., roads, underground utilities, etc.). These items are depreciated over an accelerated 15-year time frame versus the standard 27.5 years for residential real estate or 39 years for commercial real estate. Recent updates to the tax code further expedite the process through favorable language regarding bonus depreciation.
Recession-Resistant: Mobile home parks outperformed other real estate sectors during the most recent recession. Demand for the product (affordable housing) actually increases as the economy tightens. The unique, favorable economics of mobile home parks produce superior risk-adjusted returns for investors.
What are a few best practices for getting started?
Before you take the plunge, you need to clearly define your goals and your reasons for getting involved with mobile home parks. You should spend time thinking about how investing in the mobile home park business can assist you in achieving your personal goals and the goals you have for your family.
Once you clearly define your goals, you can focus your attention on narrowing the specific criteria you’re seeking in a park. Crystallizing these criteria will help you focus on the properties that will make your goals a reality. The following is a list of questions to ask yourself once you’ve clearly defined your goals:
• What size parks should I focus on?
• What type of financing can I get?
• What type of problems do I want to solve?
• What type of problems do I want to avoid entirely?
• What type of tenant base do I want to manage?
• Am I comfortable with private utilities?
• What is my threshold for certain property risks?
• What is my risk tolerance?
• Should I seek opportunistic, value-add, core-plus or core assets?
As you dive into the space, ensure you’ve done your due diligence on how to appropriately value a mobile home park asset. While the basic underwriting tenets are consistent across commercial real estate asset classes, each niche has its idiosyncracies. In mobile home parks, not all rental income should be treated equally.
For example, I’ve found that banks prefer land-lease income (generated from renting lots) rather than park-owned-home income (generated from renting mobile homes). Why? Mobile homes are considered depreciating assets that lose value over time. As such, banks are unwilling to capitalize park-owned-home income, since that income stream might not be there in perpetuity. All too often, new entrants into the space capitalize park-owned-home income and overpay at acquisition. Don’t make the same mistake.
With large private equity firms now seeing the merits of mobile home park investing, is there still an opportunity for you to consider mobile home park investing? Absolutely. In time, I believe the more sophisticated investors will certainly jump into the space. The question is: Will you?
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