I believe Mobile Home Parks are the best investment in commercial real estate.
That’s a big statement, isn’t it? Let me explain.
Let me preface this by saying I am an apartment broker. I sell apartments in one of the arguably hottest markets in the US – Portland, Oregon. I also believe that apartments are and will continue to be a tremendous investment. With thousands of baby boomers retiring every day for the next 15 years and a lot of millennials wanting to live in apartments to be in more urban areas, apartments remain in high demand.
However, with this high demand comes high prices. It’s a simple case of supply and demand.
For example, in Portland, we have a housing shortage. Because there is a limited supply of housing available, coupled with the fact that investors are clamoring to buy apartments, this presents higher than ever prices.
So, what does this mean?
It means that your rates of return start to diminish. For example, let’s say you buy a 1-Million-dollar apartment building on a 5% cap rate. If you bought this with all cash, you would expect to get a 5% return. The cap rate is the return you would expect on an investment without using debt.
MORE CASH FLOW
This leads us to the first and foremost reason why I love mobile home parks – they produce more cash flow.
But how so? In a lot of areas of the US, mobile home parks can often be purchased in the 9 to 12% cap rate range. This means that you are potentially doubling the return on your investment or cash flow that a similarly priced apartment building would give you.
Let’s look at a quick example:
Say you are considering buying a $1 Million apartment building vs a $1 Million mobile home park. The apartments building has an actual cap rate of 5% and the mobile home park’s cap is 10%. Let’s assume there is no debt involved and you buy this with all cash.
Here’s how it looks:
$1M Dollar apartment building on a 5% cap rate would yield a 5% return or $50,000 annually.
$1M Dollar mobile home park on a 10% cap rate would yield a 10% return or $100,000 annually.
And what does that mean? In this example, there is no debt, so all that cash goes to your pocket. Pretty sweet right?
It’s an easy choice for me as to which amount I’d rather make. Now cap rate is much more sophisticated than that. A cap rate is a determination of risk and market fundamentals, thus usually implying the higher the cap rate and potential yield, the more risk. Cap rate is also one of, if not the most overused metrics in commercial real estate. BUT, we’ll save all of that for another post.
However, if you are buying right, there is no more risk buying a mobile home park than an apartment building. The key is knowing how to buy them.
The second reason I believe mobile home parks are the best investment is that it is one of the very few asset classes that remains highly fragmented.
It means that by and large, there is a significant portion of all mobile home parks that are owned by mom and pop owners. Apartments, on the other hand are much more consolidated across the board. Look at the top 100 list of apartment owners and compare it to the top 100 mobile home park operators. It’s amazing that the 99th top owner of mobile home parks owns around 500 spaces, while the 99th largest apartment owner has 20,000 units. The reason this is important is that there are still a lot of good deals out there.
AND…because there are a lot of mom and pop owners, it is MUCH easier to find a park with the ability to get seller financing.
Let me paint a picture of a very common type of mobile home park owner: Bob and Sally bought a mobile home park back in the 80s to produce some cash and help fund their retirement. They managed the property themselves from the beginning. Soon the management consumed them so eventually they moved into the park, where they spent the next 30 years owning and operating the park. Now they are in their 60s and are ready to retire from the day to day park life. They no longer want to manage it and are ready to pick up and move out of the area. They are not reinvesting, they just want a break from the headaches of running a park.
Well guess what? They own the thing free and clear. So, naturally rather than pay taxes often they are willing to carry the note and collect a steady pay check for the next 5, 7 years or even longer!
The beauty of a lot of mom and pop owners is that there is a significant portion of parks across the country with no debt. This presents the ability to buy parks with seller financing. I can’t think of a better way to buy a piece of cash flowing real estate, especially if you can come up with terms that work for everyone.
Reason number is accelerated depreciation.
Wait, I thought mobile homes were personal property meaning you can’t depreciate them. Ah, but wait just a second. You get to depreciate the improvements to the land. AND, the depreciation is over 15 years instead of 27 ½ like apartments. So, what you end up getting is increased depreciation, which shelters more tax up front. You don’t get it as long, but 15 years is still quite a long time. Most people don't know about this one and it's one of my favorites. This proves a huge reduction in taxes on your cash flow. How nice is that?
And finally, a clean, safe park, in the right area, is in high demand. Right now, in many parts of the country we are experiencing increasing housing prices. So much so that people are being priced out of areas that they may have lived in for years. Portland is a perfect example of this. The need for affordable housing is very real and will continue to grow in the years to come.
Despite all the negative stigmas with mobile home parks, there are a lot of nice, well-run parks that provide a fantastic affordable housing solution for many people. Additionally, because of the rent-credit program that can be implemented in mobile home parks, we provide some people the chance to own their own home. Often, these people would not have the opportunity to do so otherwise. Talk about a win-win situation.
This is just a glimpse into why mobile home parks are one of my favorite types of commercial real investments. If you never considered this asset class before, I hope this gives you an idea of how fantastic these can really be. I urge you to look more into this fantastic asset class and change the way you think about them. It just might be the smartest thing you do.