Mobile home parks aren’t the words you’d expect to hear investors buzzing about. Nevertheless, the discussion of mobile home parks as attractive investment opportunities is growing, and there’s a lot to like. Low maintenance and tenant turnover, combined with steady cash flow, make the investment seem like a no-brainer.
For years, mobile home parks were overlooked. As an investment class, parks have been undervalued for their potential. That is, unless you were someone like Sam Zell or Warren Buffett with the magical foresight to realize the possibilities before everyone else did.
So, why now? What’s led this previously overlooked asset class to become a hot topic amongst real estate investors? Let’s explore some of the top reasons below.
Long-Term Value
Some real estate investments are meant to be held for a short time. For instance, if your strategy is to flip properties, the goal is to get in and get out as soon as possible. You buy buildings in need of a little TLC, fix them up, and hopefully make a profit. It’s a different approach that involves a higher degree of risk—and a lot more work.
While some investors are comfortable with this level of risk, others seek less uncertainty. They want a balance between long-term and short-term growth. A steady increase in value gives investors an acceptable eventual payoff. Meanwhile, predictable cash flow provides immediate income.
Investors can reinvest a portion of this income in a property, thereby further contributing to the asset’s market price increase. Consistent cash flow and steady gains in long-term value are key factors that make mobile home parks so attractive. The Sam Zell method is based on the idea of creating long-term value from parks.
Lifestyle Investing expert Justin Donald discusses the Zell approach to mobile home parks, explaining what’s behind the strategy. Donald says, “A consistent cash flow is achieved by acquiring parks, improving their quality, and holding onto them for a long time. Zell understands the unique dynamics, where residents own their homes but rent the land, which creates a more stable income and lower turnover.”
Low Turnover
The average tenant turnover rate for apartments is between 42% to 50%. Turnover costs for property owners rack up quickly. Apartment owners have missed out on rental income, as well as expenses for advertising, repairs, and utilities. The damage caused by each in-and-out tenant accumulates to a substantial amount over time. You’ll need to spend money to meet with and screen potential residents, as well as clean the newly vacated units. With multi-family dwellings, you could easily have more than one vacant unit at a time.
For each empty unit, you multiply your turnover costs each month. Reducing your turnover rate helps minimize revenue losses and control expenses. Mobile home parks tend to have low turnover rates due to the logistics involved in relocating a home. In a typical park, residents own their homes and pay lot rents. There may be shared facilities, such as a community park and an on-site laundry room, which the lot rents help pay for.
To find another place to live, mobile home park tenants must search for a new, established location and incur the costs of physically relocating their property. Local zoning restrictions may limit the number of options, making relocation too expensive and impractical. Typically, most residents are there for the long haul and likely to stay settled.
Lower turnover means investors can count on rent revenue forecasts. They’ll spend less on recruiting and screening new tenants. Additionally, well-maintained and upgraded parks speak for themselves, offering relaxation and beauty. Tenants want to live there. There are fewer incentives to leave the community, and positive word of mouth spreads quickly, helping to fill any vacancies promptly.
Recession-Resilient Demand
Depending on the source, the probability of a recession within the next year ranges from approximately 29% to 40%. Although recessions are part of a typical economic cycle, they mean cutbacks. Everyone’s tightening their belts, whether it’s holding off on hiring, retiring, or skipping weekly takeout meals.
For investors, a looming recession means shifting money to assets with less risk. The expected return may not be as flashy, but assets like CDs are safer than the start-up tech IPO. In real estate, certain property types are the equivalent of a CD’s sure bet. These asset classes tend to be recession-proof since there’s steady demand despite the economy’s overall performance.
Mobile home parks, of course, fit this bill. Affordable housing is a constant need, and it’s becoming increasingly difficult to find. In the U.S., there’s a shortage of 7.1 million affordable rental homes for low-income households. These are households at or below the federal poverty guideline of 30% of their geographic area’s median income. In other words, is the cost of housing no more than 30% of the area’s median income?
Because mobile homes tend to cost substantially less than the average single-family house or condominium, these properties offer an affordability factor. Demand remains high as people seek housing options that fit within their budgets. It doesn’t matter if they’re a retiree looking to downsize or a young family starting out. As more households deal with the realities of stagnant wages and rising prices, they’re seeking ways to reduce their most significant expenses.
Investor Variety
Individual investors aren’t the only ones drawn to mobile home parks. While mom-and-pop operations remain, institutional investors are getting in the game. This umbrella includes private equity firms, hedge funds, and real estate investment trusts (REITs). Some REITs focus on manufactured homes.
The advantages of investing in mobile home parks are no longer a secret. The stability of these assets helps funds balance out more risky investments. Long-term, steady cash flow also means foreseeable dividends and returns for shareholders.
With more institutional investors entering the market, competition for available mobile home parks is intensifying. Market competitiveness is also adding to potential returns as those looking to sell exit. The downside to increased competition from larger investment firms is that mom-and-pops are finding it hard to buy properties.
Institutional ownership can also lead to increased rents for existing residents, but not always. Finding a balance between needed upgrades, affordable rents, and reasonable return expectations is key. Leaders of private equity firms and investment funds should consider the financial needs of all stakeholders when making property-related decisions. Mobile home residents have been launching initiatives to push back against perceived unfair rent hikes and upkeep practices.
What Investors Say
Thanks to the positive investment potential mobile home parks offer investors, talk about this type of real estate is no longer quiet. Individuals and firms are seeking opportunities to acquire parks because of their long-term potential. Forecasted returns align with actual gains, featuring a predictable monthly cash flow that remains consistent year after year.
As with any investment, there are hurdles to consider. Investors who balance their needs with those of their tenants will find mobile home parks to be a worthwhile and attractive investment.