When you think of the next hot real estate deal, do mobile home parks cross your mind? You may have been getting visions of flashy shopping centers and tall office buildings instead. Perhaps a large-scale development with the future home of a household-name employer makes your list.
Mobile home parks have historically been overlooked as a core asset for commercial real estate investors’ portfolios; but gone are their days of being overlooked. These properties stand out as attractive opportunities, and their reputations are soaring. The tide turned when more investors realized the advantages mobile home parks have to offer, and this asset class moved from the fringe to the mainstream. Let’s examine the ways this shift occurred.
Well-Known Names Are in the Space
Influencer endorsements are a surefire way to attract attention. Advertisers have long used well-known names to sell – “If this celebrity loves it, it must be suitable for everyone.” In the investment world, well-known names include the legendary Warren Buffett and Sam Zell. And wouldn’t you know, both have staked their claim in mobile home parks.
Lifestyle Investing expert Justin Donald speaks to how these two prominent individuals have invested in mobile home parks. Donald elaborates on how “This mobile home park investing space is so attractive that these two individuals, two of the greatest investors of our time, are two of the biggest owners in this space.” Buffett’s Clayton Homes manufactures mobile homes and offers zero down financing, and the late Sam Zell acquired various parks over a decade.
Other investors study the strategies and heed the advice of these two. Naturally, people will be curious about why two of the greatest investors put their money into the same type of asset. What’s the secret behind mobile home parks that makes them so great? The answer lies in stable demand, low tenant turnover, lower expense ratios, and attractive returns.
Demand Remains Stable, Despite Macroeconomic Performance
Investors typically aim for two primary goals: a reasonable return and a steady income. They’re attracted to opportunities that offer both short-term and long-term gains. With real estate, those short-term wins come in the form of cash flow—translation: rent revenue. When you’re looking at long-term wins, it’s how much you can put in your pocket.
Say you bought a property for $100,000 and put $50,000 worth of improvements into it. You hold the property for a few years and then sell it for $250,000. Theoretically, you’ve walked away with $100,000 in profit. In real estate, your ability to achieve an acceptable return and steady income comes down to the asset’s demand. Your expense ratio also figures in.
Mobile home parks tend to experience consistent demand, even during recessions or economic downturns. Why? These homes are more affordable, and the need for affordable housing is increasing as inflation continues to rise. As of 2024’s first quarter, the average sale price of a traditional home was $513,100. Compare that to the average cost of a manufactured home, which is $148,100.
If your wages aren’t going up relative to inflation, you’re feeling the pinch. Buying a mobile home is a way to keep your budget in check. For those experiencing a loss of income due to life-related circumstances, reducing household expenses becomes a priority. More affordable housing can effectively slash a budget. Investors see steady demand for an asset that’s less susceptible to overall economic performance, which means consistent returns and dependable cash flow.
Tenants Tend to Stay Put
Vacancies cost money. You’ve got to pay a leasing agent to market to potential tenants. You may need to offer incentives, such as discounted rental rates, to attract people. Vacant spaces also send the wrong message. If vacancy rates are high, prospective residents wonder why.
Is there something about the space that’s making people move? Maybe the landlord isn’t pleasant to deal with, or the neighbors are difficult. There could also be unreasonable expenses, including higher-than-expected utility bills. When spaces are vacant, investors lose out on the rent potential and incur additional expenses.
Mobile home parks typically have lower turnover rates. Vacancy rates are low because it’s not easy to move a mobile home. You can’t pack up and leave like you can with an apartment. For investors, long-term tenants signal predictability and stability. They can be more confident in their asset’s performance from one month to the next. Mobile home parks come with less volatility, which is desirable from an investment standpoint.
Expense Ratios Are Typically Lower
Owning real estate means potential profit, but it also means a laundry list of recurring expenses. The list for commercial properties can include landscaping for the grounds, parking lot repairs, and fixes for roof leaks. Investors also have to pay a manager, either in-house or through a contracted property management company.
Shared utilities are an additional potential expense. Commercial office buildings require regular cleaning, and often they require security. Regular maintenance, such as repairing broken locks and replacing burned-out light bulbs, is yet another cost. These are functions that property management companies can handle, but added responsibilities come with higher fees. Similarly, investors who keep functions in-house have to hire additional staff.
Higher expense ratios mean less revenue is left over. Typically, mobile home parks have lower expense ratios than other types of commercial real estate. Under most business models, the tenants own their homes. So, property owners are only responsible for maintaining the common areas. This includes the community’s roads, exterior lighting, and any shared facilities.
The tenants are responsible for maintaining their individual properties and paying for the utilities they use. Because operating costs are lower for investors, there’s the potential to achieve a higher monthly and annual return. Those added profits are attractive, whether you’re a solopreneur or leading a private equity firm.
Mobile Home Parks: No Longer a Fringe Asset
There’s a saying about the quiet ones. You have to be cautious around them. It’s usually because something surprising is hidden beneath the surface. Mobile home parks have been like the quiet kid in the back of the classroom who suddenly says something profound. As an asset class, mobile home parks remained on the fringe due to misperceptions and stigmas.
However, as investors have taken a closer look, they have realized the benefits of investing in parks. Steadfast performance with lower risk is enticing. This results in manageable overhead costs with less hands-on work required. Mobile home parks are a way to balance a portfolio, hedge against higher risk assets, and get your investment feet wet. A predictable bet tends to win, whether you’re investing for yourself or an institution.