7 REASONS TO INVEST IN MOBILE HOME PARKS RATHER THAN TRADITIONAL REAL ESTATE
By Jefferson Lilly
MHPs are an overlooked asset class
A low risk niche to invest that is very recession resistant
Maintenance costs are much lower than traditional real estate investments
Traditionally, people have invested in the four major food groups of real estate: office, multifamily, retail, and industrial. However, this idea of investing into mobile home parks has been overlooked. I want to share with you how investing in mobile home parks, can be an additional asset, and one investors should pay attention to. They are four, higher level, macroeconomic reasons that manufactured housing is a particularly good investment, as well as three microeconomic reasons. Essentially, this is a very low risk niche in which to invest.
On the macroeconomic level
1. This is a mispriced asset class.
Since some buyers still have a negative perception of this niche, prices are still reasonable and have not been bid up the way they have for traditional, multi-family apartment buildings over the last decade. Another key aspect is that since sellers by and large are mom-and-pop, they aren’t maximizing profitability or sale price. Lastly, unlike a lot of other real estate niches, mobile home parks have relatively few professional or institutional owner operators.
2. Government enforced oligopoly
Approximately, every city and county over the last 30 years has outlawed any new mobile home park construction. For that reason, the tax base for mobile home parks is quite low. There are no significant brick and mortar improvements to the land, for it to be taxed. Your typical mobile home park does not have the same tax base as an apartment building. Because of this reason, it’s illegal to build any more mobile home parks again. This means the supply curve of mobile home parks is fixed.
3. Supply is shrinking.
Approximately one percent of mobile home parks get plowed under every year and are redeveloped for higher and better use. This means, not only is the supply curve fixed, it's actually shrinking about 1 percent each year.
4. Demand is growing.
While supply shrinks, demand begins to grow because there's always a need for affordable housing. The demand grows about 1 percent along with population growth. However, that growth rate can increase. Since mobile homes are redeveloped at the rate of about one percent each year, those mobile home owners have to go somewhere, and will eventually infill the remaining mobile home parks. This increases the demand by about 2 percent each year.
On the microeconomic level
5. The tenants are very stable.
The cost to move a mobile home, is around five thousand dollars. Since this is a place for individuals who want affordable housing, they most likely will not want to eat the cost of moving their mobile home. This shows the stability of them, because if they wanted to move across town, they would sell their mobile home in place, in the park and buy a mobile home in different community. The word “mobile home” is a bit of a misnomer. The homes are not actually that mobile. They're tied down permanently with the same plumbing and electrical connections as that of a regular, site-built house.
6. The maintenance costs are relatively low.
Because the tenants own their own homes, the maintenance costs are relatively low. Comparing the repair and maintenance of mobile homes, (which is around five percent of revenues) to apartment buildings, (which is around 15 percent) shows just how much one could save by investing in the mobile home community. The reason mobile home repair and maintenance is so low is because the tenants own their homes and it's up to them to maintain their space. Property owners just have to maintain the land. This means, repairing a pothole, repaving every 10 or 20 years, mowing the grass, and taking care of plumbing, which is the biggest expense. Even with these expenses, it’s still about a third of what an apartment building owner would pay.
7. There is high depreciation.
The roads, asphalt or concrete are depreciated. Roads are approximately 15 year property. Fencing and signage are an additional seven. The pipes in the ground, water, and sewer are about a 27.5 year property, which is the longest property owners have. And if there is overpay that is then amortization of goodwill, which is amortized over 15 years. On average, property owners are able to depreciate as much as traditional multi-family investing, which is about 75 percent of your purchase price. Lastly, because property owners are not buying bricks and mortar,which is twenty-seven and a half years, they’re able to depreciate or amortize that same amount over 18 years. Property owners are then able to generate around 70 percent more depreciation, for fewer years, while being able to pass on a much greater tax benefit to investors.
Given these points, there are so many benefits to investing in a mobile home park, rather than the traditional real estate. With the security of stable tenants, low maintenance costs, high depreciation, it makes mobile home investing low risk.
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