Mobile Home Investments
Terrydale Capital
Dec 7, 2021 11 Min read
In the past, mobile home investment has always been neglected by traditional investors. This can be attributed to the inherent lack of information in Mobile Home Park investments. As economic times toughen, homeowners that fall under the low-income range are finding the option of mobile homes within communities quite attractive. This trend is captured in a report by NorthMarq that points to an increase in activity in said investment opportunity by about 20% since 2018. This has seen the otherwise out of favor, and somewhat stigmatized asset class gain some steam.
Mobile Home Park investments offer interested parties probably the most attractive risk-adjusted cash turnover available in the current real estate market. These Mobile Home Parks (MHPs) essentially have two unique investment characteristics that set them apart from traditional apartment investments. For starters, MHPs are residential subdivisions. For an investor, this means that you basically own the land, streets, utility connections, and common areas. You then get to lease the land to the homeowner who seeks out a community for their mobile home. The second unique characteristic is that MHPs have relatively high tenant switching costs. Specifically, it will cost a homeowner a total of between $5,000 and $10,000 to up and reinstall their homes within a different community.
From an investment viewpoint, these two characteristics make MHPs a viable investment option. It means that you have a lower tenant turnover, which would have otherwise been more significant than 60% had you considered getting into the traditional apartment sphere. What's more, you have reduced operating expenses and a pricing power which translates to the ability to raise rent without much fuss. Finally, as an investor, you have relatively minimal ongoing capital expenditure. Further, for an investor, you want to get into the asset class now that transaction volumes are up. A report by JLL's capital markets group shows that in 2020, transaction volumes were at around $4.2 billion, which is a significant rise from the $1.2 billion in 2013.
Pros of Getting into the Mobile Home Madness
On the surface, MHPs are not your typical real estate asset class. However, if you look a little deeper, you find an asset with remarkable qualities that would make a perfect addition to your investment portfolio. These include:
Strong Cash Flow
At the tenet of this business is the unique characteristic of having homeowners pay you a monthly rate while still maintaining ownership of their homes. These homeowners have a vested interest in having their homes stay on your land and not attempt to move.
As an investor, that'll be how you get steady cash flow. Since your property is currently the most affordable housing option available, homeowners will consistently pay to lease land from you.
Recession Resistance
History has proven that when there's a recession, the average homeowner in the United States is unable to make their mortgage payments. So while the rest of the industries suffer through the recession, MHPs seem to flourish. These facilities will be the most affordable options and will therefore attract heightened interest. This wave of interest and the strong cash flow that is assured helps the asset class thrive even during uncertainties.
Uncorrelated Performance
The performance of an asset class in relation to the economy, in general, does affect investor sentiment. As it pertains to the performance of MHP, it does not correlate with the stock market or even the broader real estate market. This translates to a unique position in that when the rest of the economy is in chaos, MHPs can still continue offering predictability even with constrained cash flow.
The advantage here is that you continue to earn money whether the economy is booming or near down-right collapse.
Verity of Lending Options
Big money seems to be swamping into the MHPs space. It could be theorized that this is because it has been reported that it was the top-performing real–estate asset class in 2020.
Banks have jumped right at the opportunity to become key financiers within the niche market. A major lender providing funds is Life Insurance who has shown a growing appetite for providing loans for commercial real estate. Their offerings are pretty attractive as they will invest in about three-quarters of the asset. It would be prudent to mention that this lender is relatively more conservative than other lenders within the same space.
Another key bank facility is the CMBS loans for mobile home park operators. The latter can get loans to expand their current properties, add to their portfolio with new acquisitions, renovations to increase demand of their properties, and a refinance to their current loans at a fixed interest rate.
Interested investors can also access public resources for their MHPs through government-sponsored entities such as Fannie, Freddie, and SBA. These entities are committed to lowering the barriers to ownership of low-cost and good-quality site-built homes and, as such, have loan and loan guarantee programs that will benefit an aspiring investor.
Finally, there are Amortized loan plans available to investors where they are sure of having the loan pay itself entirely by the end of the agreed-upon term limit.
Collectively, the financing options currently available advertise either 5-10 year fixed terms, up to 30 years Amortization, or rates as low as 3.5%. What's more, there are institutions offering leverage of up to 75%, while some also offer full-term interest-only options.
Possible Cons
While there are various advantages to adding this asset to your portfolio, you should consider that these properties will often be located outside the metropolitan statistical area (MSA). This is a challenge because now you have to consider the social and economic factors. This is particularly true because with this model, in contrast with investing in the traditional apartment asset, you are entirely in charge of the street and utility connection. This is a consideration especially, as you want the initial investment capital lower than it would have had you acquired an apartment.
As you get into this investment, you want to have the end in mind. As a savvy investor, you ought to be aware that this asset class only has a specific set of buyers. While the perks are to die for, it would be best to consider how difficult it might be to get rid of the asset once you want to exit.
Concisely, MHPs offer outsized cash flow returns relative to the inherent investment risk. This is attractive to both potential investors and financial institutions considering extending financial facilities to said investors. Trends within the sector point to a recession-proof investment opportunity. What's more, investors and their financiers can expect an NOI growth that is above the rest of the property types available to them.
Critical analysis of this investment opportunity shows that it has great promise for both seasoned and new real estate investors and financiers. Get a quote today and mention code "MADNESS" to get a free appraisal cost waiver with Terrydale Capital Financing.
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