To understand mobile home park investing, you have to first move away from the term "mobile home" and think instead in terms of "affordable housing". ...
To understand mobile home park investing,
you have to first move away from the term "mobile home" and think instead in terms of "affordable housing". The very name "mobile home" is inaccurate, as the homes are anything but mobile once they have been delivered from the factory. It costs around $4,000 to move a mobile home - if they can be moved at all. So ignore for a moment all the mental stigmas that the term "mobile home" brings to mind and look past that to what it represents. The key to understanding this asset class is to look at the raw power of affordable housing and how it relates to today's consumer.
The household income for 20% of all Americans is under $20,000. That's 60,000,000 people. Based on the government's suggested ratio of housing costs to total income - about 33% -- these families can afford around $500 per month. But the average apartment rent in 2010 was over $1,000 per month. So where can you live for $500 per month? There are only two options: 1) low rent apartments and 2) mobile homes sited in mobile home parks.
So who wants to live in a mobile home? Just about everyone, as it turns out. Low rent apartments have many characteristics that tenants find appalling including 1) high crime 2) constant noise on all sides and above and below you 3) no outside play space 4) inability to have a pet and 5) no sense of "community". Mobile homes, however, offer the chance to have privacy, a small yard, a pet, and an actual neighborhood feel like a real subdivision. A mobile home in a mobile home park is infinitely more desirable than its multi-family alternative. Perhaps that's why 8% of all Americans already live in a mobile home.
The least expensive form of detached housing
So how did mobile homes get so cheap? In the 1970's HUD began to regulate the mobile home manufacturing industry, and allowed many construction methods to reduce the cost of the product. Still, the disparity between mobile home and traditional stick-built housing has a lot to do with the soaring value of "stick-built", single-family homes. As you can see in the following chart, while mobile home prices rose over time, the prices of stick-built homes skyrocketed. As a result, a new mobile home costs less than one-third of its stick-built relative, or about $30 per square foot. Warren Buffet - who is known for his attraction to value and low costs - is the largest owner of mobile home manufacturing and financing in the U.S. But that's only half the story.
There is an extremely large and fluid secondary market on mobile homes, in which homes often sell for as low as $1,000. These homes are made available by private owners as well as mobile home park owners and lenders through repossessions. Consumers can access these homes through traditional newspaper classifieds, signs on mobile home park frontage, and word of mouth. When you factor in this secondary market, the price per square foot drops to as low as $1 per foot. Mobile homes are, without question, the least expensive form of detached housing.
Understanding mobile home parks
The other part of the equation in this affordable housing model is the mobile home park. Mobile home park rents remain extremely affordable, with the average rent in the U.S. around $200 to $300 per month. With a new home, the sum of mortgage and lot rent is around $700 to $1,000 per month. However, with used homes, this sum can be as low as $300 to $500 per month. Affordable lot rents are as important a part of the model as home prices.
Mobile home park owners make good money at rents this low. The average expense ratio for mobile home parks is 30% to 40% of the gross revenue. On top of that, mobile home park owners are essentially renting land, so that they do not have to save for expensive capital improvements. Mobile home parks sell for cap rates of 7% to 10%, so the average park owner is very satisfied with his current performance and has no pressure to dramatically increase rents. And when rents are raised, it is in very affordable increments of $10 to $20 per month.
One of the bedrocks of the mobile home park as an investment vehicle is the inability for most customers to ever leave. At a cost of around $4,000 to move a mobile home from point A to point B, few tenants can afford to move out even if they are unhappy with the product or the price. This "locked-in" tenant base is what allows park owners to enjoy phenomenally stable revenue figures even in major recessions.
What can make this business model go bad.
The greatest threat to mobile home park investing is when you lose track of the concept of affordability. Most people would agree that no customer, when offered a stick-built home or a mobile home, will opt for the mobile home. Mobile homes are desirable when compared to apartments, but not when compared to brick homes in a subdivision. However, many investors sometimes forget this precept with terrible consequences.
In some parts of America, lot rents have been raised to levels in excess of $500 per month, so that the sum of lot rent and mortgage can be well over $1,000 per month. In this cost range, mobile home owners have many other housing options that are more attractive, such as stick-built homes and luxury condominiums. As a result, they walk off and abandon their new mobile home. This destroys the consistent revenue model of the park, and may even jeopardize its ability to hold firm on its rent level.
Continuing to provide affordable housing should be the primary aim of mobile home park owners, not to cross into the danger zone of having to compete with more attractive housing stock.
Conclusion
The mobile home park is an excellent investment tool when geared towards "affordable housing". It delivers the lowest cost form of detached housing in the U.S. It enjoys extremely stable tenant bases, due to the $4,000 hurdle to move a home. And its market is growing, as the U.S. economy sinks.
Look for increased awareness of this investment niche as high-profile industry investors, such as Warren Buffet and Sam Zell, continue to build awareness for this sleepy, little-known investment option.
