Will Mobile Home Parks Be the Hottest Real Estate Investment of 2020?
Mobile home parks are arguably likely to be one of, if not the, hottest investment classes in 2020. Tons of new and experienced investors are jumping on board to take advantage of this previously misunderstood investment.
Why? Because mobile home parks have proven to be one of the highest yielding and reliable investments—especially when compared to similar-kind investments (i.e., self-storage and multifamily properties).
That said, in previous years (especially pre-2018), the mobile home park space was much less investor-populated. Metrics were far different than those that we are seeing today. To help you navigate today’s mobile home park market—so you can take advantage of this exciting asset class, too—I’d like to share with you:
- How mobile home parks changed my life
- Why mobile home parks are getting so much attention
- What the mobile home parks space looked like prior to 2018
- What has changed post-2018
Let’s dig in.
How Investing in Mobile Home Parks Changed My Life
I excitingly (and humbly) achieved financial freedom through mobile home park investing in a mere 2.5 years. Today, I also have time freedom and location freedom (Financial + Time + Location Freedoms = True Freedom).
I have so much gratitude for this asset class. It’s been a catalyst for me to live a self-designed, free lifestyle as I expand my generational legacy of wealth, consequently helping many others along the way.
I wasn’t always a mobile home park investor, though. In fact, I used to be a blue-collared worker—a steel fabricator/welder to be precise. I grew up “Down Under” (in Australia). At the age of 17, I was at a crossroads. From what I observed at the time, I had two choices:
- Complete high school, proceed to university, then move on and get a J.O.B.
- Get a job as a blue-collared worker.
(Later I found out I had an abundance of choices within my reach that at the time I was not privy to.)
Deciding was easy for me, as the thought of continuing schooling was daunting. I foresaw extreme boredom and dissatisfaction if I chose that route. It’s not that I didn’t like education; in fact, I’m obsessed with growth and education. I just wasn’t a fan of traditional schooling, which I felt held me back from my creativity and full capabilities.
I wasn’t excited about option No. 2, either. However, it seemed the less of two evils, so I chose one of the top-paying blue-collared professions: steel fabrication and welding.
For the next 17 years, I was dissatisfied with the career path I’d chosen. And the more time went on, the more my dissatisfaction increased. Yet, it was (at the time) the best way I knew to make money, so I kept on along that path, working my way up “the ladder.”
Fast forward several years deep into this profession, I was so physically, mentally, and spiritually burnt out, that an alternative career choice was the only thing that could lead to feeling satisfied again (for me and for my wife!).
In the land of opportunities, I explored the top three ways to make money:
- Stock market
- Owning a business
- Real estate
Trust me, as a man who’s traveled to over 60 countries and owned businesses on three continents, I can honestly and confidently say that the United States of America provides such abundant opportunities and low barriers of entry in real estate and business that, as an expat, it’s like a kid landing in a candy shop of never-ending supplies!
It’s easy for me to see why foreigners consistently come to the U.S. and crush it. I’m now a U.S. citizen and proud of it!
After trying my hand at all three money-making opportunities, I found I was spinning plates and having mediocre success. It became very clear that real estate was the best option for many reasons. But there were so many ways to make money in real estate, it was challenging to know where to start.
I knew I had to laser focus on one asset class, and one asset class only, if I was to have the highest possibility of success. So, I looked at as many real estate investment types as possible, including real-life profit and loss statements for each of the main asset classes, and noticed an unfair advantage that mobile home parks had over other asset classes.
Due to the incomparably high cash flow while owning a mobile home park and disproportionally large equity payouts at the end of a mobile home park investment cycle, it became clear very quickly that this type of investing was a wise move.
Additionally, I had a discussion with my mother-in-law, who had firsthand experience as a mobile home park tenant. She proceeded to tell me she owned her mobile home in the park, and regardless of her ownership of that home, still had to pay $1,000 a month in lot rent to the park owner/landlord. (This was a California-based park, hence the high lot rent.)
The national average for affordable housing mobile homes runs around $250-$300 a month). At my mother-in-law’s, I ran outside and counted over 100 homes in that community and quickly did the math:
100 x $1,000 = $100,000 a month in revenue
I was sold and decided to go all-in. I became thoroughly obsessed with mobile home parks, reading every book and taking every class on the topic that I could.
Once committed to and educated on this asset class, I dove in—it took three months to get my first park under contract. At the time, I had a negative net worth, unseasoned credit (as I hadn’t been in the U.S. long enough to build solid credit), and a mere $2,000 in the bank.
So, I used the power of syndication. Syndication is bringing investors and their capital into the deal, while providing those investors an opportunity to be part of a deal they would otherwise not have the time, resources, or experience to be involved in.
I had the current lender rollover the loan from the sellers to us, the buyers; three months later, the deal closed.
Once I saw what I’d created from nothing via mobile home park investing, I was downright addicted to this asset class. I continued to expand my mobile home park portfolio, and as mentioned, attained financial freedom 2.5 years after acquiring my first park.
Excited about this asset class, I wanted to share this hidden knowledge with others, so they too could take advantage.
Before I started seriously pursuing financial freedom, I honestly did not know it was possible—and certainly not so easy. This is why I feel it’s my duty to preach the gospel of financial freedom and how it’s so possible, even for those who think it’s not.
Starting Out as a Mobile Home Park Investor
Prior to 2018, I was one of the only mobile home park (MHP) investors at any given real estate meetup or networking event. When I disclosed my preferred asset class, I received a common response, “MHPs are profitable? I thought they were all dumps?”
But in early 2018, that changed. The cat was officially out of the bag that MHP investing was highly profitable, proven, sustainable, reliable, and repeatable. All of a sudden, there were multiple MHP investors in the room.
The dialogue changed to, “Yeah, I’ve heard MHPs are cash cows,” or, “Me, too. I’m pursuing [or I own] MHPs.”
This massive influx of new MHP investors has changed the playing field—not necessarily for the worse though—resulting in a handful of crucial adjustments that MHP investors need to make to remain profitable.
Before I dig deeper into comparing MHPs pre-2018 versus post-2018, I think it’s important to cover why MHPs are getting so much attention, in general.
I’d like to note, there are generally two classes of mobile home parks:
- NOT affordable housing: Instead these are four- to five-star MHPs that people choose to live in for non-financial reasons. These parks are often gated or even guarded communities that have paved streets with curbed gutters, plus amenities such as pools or community event centers. Lot rents are typically above $500 a month.
- Affordable housing: These are MHPs that people live in mostly due to economic reasons. These parks are three stars or less, with little to no amenities. These make up the majority of MHPs in America, and this is the type of MHP that I’ll be referring to for the rest of this article.
In my opinion, the sweet spot in MHPs is buying two- to three-star parks and turning them into three- to four-star parks. Of course, I’m open to buying four-star. We just don’t see that many attractive deals in that sector.
Why Mobile Home Parks are Getting So Much Attention
1. Supply & Demand
The demand for affordable housing is arguably the highest need in the real estate sector in 2020. In 2018, 38.1 million people lived in poverty in the U.S., which is a poverty rate of 11.8 percent. Low income was calculated as 200 percent of the poverty rate—those numbers too are daunting.
No matter where you get your numbers, these issues are of epidemic proportions—a serious problem we cannot turn a blind eye to. This, matched with the low supply of mobile home park inventory (roughly 45,000 parks), creates an ever-expanding supply and demand in favor of mobile home park owners. Plus, this number decreases year over year due to more MHPs being closed down and replaced by high rises than MHPs being built.
Put simply, if you buy the right park in the right market, your phone should be ringing off the hook with qualified applicants wanting to move into your park. Furthermore, with higher-than-ever interest in mobile home park purchases, MHPs are becoming easier and easier to sell, which helps with your exit strategy.
2. Annual Lot Rent Increases
It’s expected in the mobile home park space that lot rents will increase annually. It’s common to see upticks of 5 to 15 percent for annual lot rent (and mobile home rent for new tenants), and sometimes you’ll need to increase rents up to or exceeding 20 percent to get close to market rents (particularly 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-plus 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.
3. Recession Resistant
Mobile home parks are positioned in an interesting place within the real estate sector. 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. I like to use $300 as a more conservative average, as rents are consistently trending upward.
Depending on the setup of each park, tenants may also need to pay for utilities (gas, electric, water, sewer, etc.). Let’s be ultra conservative and say that with utility expenses included, $300 expands up to $500 a month.
What if we experience some type of financial meltdown or correction in the future? (Or right now?!)
Think about it. In that scenario, when you can no longer afford $500 a month in rent, where are you going to go? Unfortunately, you’d be led to live with family or friends, or perhaps you’d sleep in a car, or god forbid—you’d be homeless. Point being, there not many options if you can’t afford to live in a mobile home park.
Look at this situation from a macro standpoint, and where are the people who own houses or condos or rent property going to go? Well, if they can’t afford where they are now, they move down the housing rung, one or two notches.
MHPs 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.
MHPs already perform well, and in a recession, they typically perform better. This is something to take into heavy consideration given the current and near-future state of the economy. Due to this, I know a whole niche of investors that are geared toward recession-resistant investments only.
Being that we are in the affordable housing sectors and that most tenants live in mobile home parks for financial reasons, 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.
5. Historically Strong Cash Flow
MHPs have gained the nickname over the years of “cash cows” due to the high cash flow that has historically been produced in the mobile home park space. This is what caught my attention from day one.
If you are buying stabilized parks (roughly 70 percent tenant occupancy and above), it’s almost expected to have solid cash flow straight out of the gate. Operators in comparable asset classes (self-storage or multifamily) often offer “preferred returns” to investors, along the lines of say 6 to 8 percent ROI annually.
This is not a guarantee to investors but more of an “I owe you” and declaration that investors will get paid before the operators get paid. If the preferred return (often abbreviated as “pref”) is not met in any given year, then it rolls over and adds to the next year in a cumulative way.
For example, if a specific investment offers an 8 percent pref but for some reason only 2 percent of that pref was met this year, then the remaining 6 percent rolls over and adds on to the next year’s pref. This accumulates year on year, then at a sale event, investors get paid their pref in full before other profits are split between them and the operators.
Similar setups exist in the MHP space, although it’s much easier and more common to not only hit the pref each year but to also exceed it due to the high cash flow.
I’m going to touch on forced appreciation below, which increases both equity and cash flow.
6. Large Potential Equity Payouts at Sale of Asset
MHPs have historically had high purchase caps in the double-digit range. As time has progressed, cap rates have compressed. This means those who purchased at 15 percent caps could later sell at 12 percent caps; those who purchased at 12 percent caps, could later sell at 9 percent caps; and so on.
It’s getting more challenging to meet the same equitable profits as earlier years due to the recent cap rate compression, although 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.
7. Attractive Financing Options
Loan default rates in the mobile home and mobile home park spaces are 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 MHPs.
Fannie even offers 30-year fixed rate options with their Manufactured Housing (Mobile Home Park) Loan Program. In addition, many other commercial lenders have competitive financing options with 4 to 5 percent interest rates, up to 80 percent 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—and sometimes extremely favorable—terms to the park buyer.
There are also bridge loans for otherwise “un-financeable” parks that can help get an ugly deal across the finish line while you make the necessary improvements to make the park more financeable. (This is ideal for really low occupancy parks as you increase occupancy to a more desirable number.)
8. 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 in 2007, Clayton Homes’ revenue was $3.66 billion. Enough said.
Warren Buffet makes highly calculated (and historically wise) investment decisions. It was only natural that many others joined ship shortly after.
9. 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 timeframe 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 (not the park), 21st Mortgage gets to finance a plethora of mobile homes, and the park owner avoids the legalities that were introduced with chattel loans after the 2008 financial meltdown.
Of course, a park owner has to have some skin in the game, so we essentially guarantee or backstop the loan and take over the financial responsibility if a tenant defaults while we find another tenant. This has been a game changer for park owners and is a win-win-win for everyone involved.
Although there were earlier attempts at the same type of structure, 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.
There are similar-type programs available with other lenders, too.
This general business model does not work in all markets, as not all markets can support the financial requirements of tenants to pay the needed monthly payments to make these programs work. But for the majority of markets it works in, this is certainly a major bonus to the park owner.
10. Forced Appreciation
Mobile home park 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 percent operating expenses, and a market cap rate of 8 percent, 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.
(More on this later as we dig into how forced appreciation can be one of the best tactics in your profitable mobile home park investing business plan in today’s market.)
11. Section 8 Vouchers Used Toward Purchase of Mobile Homes
For those of you unfamiliar 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.
12. Proven Track Record
MHPs were once largely viewed through the “trailer park” lens. We’re all familiar with the stigma that came with that—from “Trailer Park Boys” to the stereotype of slums/slumlords to Jerry Springer guests to what was depicted in the show “Cops.”
In addition, MHPs were seemingly a wildcard investment because of the lack of solid historical data. As a flip takes roughly three to seven years, it took a while to create a solid, rinse and repeat strategy of successful mobile home park investing. Yet all the while, mobile home park investors were bringing in high cash flow and large equity payouts, fixing up and improving parks nationwide.
And by 2003, as mentioned, there was enough of a track record for Warren Buffet to join the mobile home industry. Not too long after came the 21st Mortgage CASH program, Fannie and Freddie financing, Section 8 mobile home purchase ability, and numerous large institutional buyers.
Consequently, many investors from other asset classes have jumped the fence to join the MHP investing craze.
In summary, combine all the above, and you are faced with one abundantly attractive asset class. A single mobile home park could change your life financially. Two or more MHPs could make you financially free. And five or more could not only change your life financially, but also change the financial life of your descendants for generations to come.
No wonder mobile home parks are likely to be the hottest asset class in 2020!
Mobile Home Park Investing Prior to 2018
Many years ago, mobile home park investing was like the wild, wild west. MHPs were relatively easy to get your hands on. It was common that there would only be one buyer putting an offer in or negotiating to purchase a specific park.
It was a buyer’s market. You could buy a park for up to and exceeding a 15 percent purchase cap rate. Earnest money deposits were so small, they hardly even counted. Many of the parks were in the need of professional management and required much love and attention to improve curb appeal and NOI.
There were not as many mobile home park financing options, so seller financing was not uncommon. The people selling mobile home parks were moms and pops that generally lacked tight operations and proper bookkeeping, giving professional park buyers the upper hand in purchase and negotiations.
Basically, mobile home parks were abundant, buyers were few, and there were many well-priced MHPs in need of physical and financial improvement—all of which were possible to seasoned, financially advantaged park buyers.
I joined the MHP sector in 2015 when I purchased my first park. At that time, it was still common to find good value-add mobile home parks in the 10 to 12 percent purchase cap rate range. But by late 2017, it was getting hard to find any decent mobile home parks for a 9 percent-plus purchase cap rate. And post-2018, even high-risk, low-quality mobile home parks began to trade for less than an 8 percent purchase cap rate.
These “good” times (prior to 2018) won the mobile home park industry the attention that it has today, with the rinse and repeat benefits of park ownership. Since 2018, the mobile home park playing field has changed. Let’s take a further look at how and why.
Mobile Home Park Investing From 2018 to Now
As previously mentioned, momentum built over time as large institutions jumped on board the MHP investment train. Warren Buffet was a huge contributor as Berkshire Hathaway purchased Clayton Homes back in 2003, then later introduced the CASH program, providing super attractive mobile home financing options for park owners and park tenants. Many similar programs were to follow.
Financing options are abundant and are so much better than before—it’s exciting. Section 8 is on board to help low-income tenants purchase mobile homes, and there’s a ton of historical data showing the epic track record of this asset class.
All the while, cap rates had already compressed in other asset classes. It was clear that when comparing other assets like self-storage or multifamily to similarly-priced mobile home parks, MHPs proved to be far superior in financial gain—especially when matched with the increased stability of MHPs.
It was inevitable that when the cat was out of the bag (for sure by 2018), many new investors would be joining this hot asset class and many experienced investors would jump ship from their previous asset class to be part of the epic mobile home park movement.
It may have become clear by now, mobile home park purchase cap rates have compressed and consequently resulted in higher buy-in prices for mobile home park owners today and less profit spread on the table for future exits. Although this is partially true and in fact MHP purchase prices are higher than they have ever been historically, there is still meat on the bone for investors to join this asset class—as long as they are aware of how to successfully evaluate, purchase, and operate MHPs in the current market.
Despite the recent increase in prices, there are advantages now that did not exist in the past. As mentioned, abundant and attractive financing options help increase the spread between financing interest rates and purchase cap rates. This is a huge advantage, as financing terms were significantly less favorable before this asset class was proven to be sustainably successful.
Section 8 vouchers to purchase mobile homes is a huge game changer, as well. Higher quality of mobile home parks and mobile home park management, higher than ever and consistently increasing lot rents, higher than ever demand for affordable housing, and lower than ever mobile home park inventory all help park owners in today’s market.
If you are a park owner, you’ve likely taken advantage of the cap rate compression in recent years and massively profited from this market shift. I have definitely been taking advantage of this shift and, in one case, been fortunate enough to see over 57 percent annual returns to investors involved in my deals (an accumulation of cash flow and equity for a park we owned for a little over four years).
I’d like to note that large private equity funds and large institutional buyers mostly focus on the four- to five-star parks (not affordable housing), so they are not too much of our competition in the affordable housing mobile home park space. New competition is made up of beginner investors wanting to buy into the mobile home park space and seasoned investors from other asset classes jumping ship to join the profitable MHP space.
So, by now, you’re probably thinking “OK, I get it. This MHP gig seems to be totally worthwhile. But how do I profit with these recent market changes?” And, “If there is more competition than ever in the MHP space, why are you sharing how we can best profit given the current MHP market conditions?”
The answers are simple:
- I see it as my ethical obligation as a mobile home park investing educator to help point out some of the main ways new MHP investors can minimize pitfalls and maximize profits.
- I truly believe we live in a world of abundance, and there are more than enough MHPs for us all to profit from.
- If new MHP investors incorrectly evaluate and overpay for MHPs, this will artificially drive up MHP purchase prices and further compress cap rates, making it harder for MHP deals to pencil out.
Regarding my latter point, I’ve already seen this happen in the space. Newbies have come in uneducated, or using evaluation methods from other asset classes, then overpaid and underperformed only to bring those same parks back on the market after losing their hard-earned cash and expecting buyers to pay unreasonable prices to reduce the pain of their loss.
To completely eliminate that from happening is impossible, yet if you are reading this and wanting to break into the MHP space, I’m glad you will get to know some important ins and outs to profitability—before you take down your first or next park.
I’m assuming by now you understand mobile home park investing on at least a slightly deeper level. Now that you’ve nailed down the basics of this asset class, as times and circumstances change, we too need to move with or—even better—stay ahead of the game. As with all real estate, the key to success is paying attention to the economy, the market, and housing trends and adjusting accordingly.
Originally posted on biggerpockets.com