Written By Frank Rolfe
From the New York Times to Bloomberg, mobile home park investing is starting to be recognized as an attractive real estate sector. So what has made mobile home parks suddenly on the radar screen of the real estate community? The sector has always done extremely well, but investors are finally getting over the stigma and learning to appreciate the power of affordable housing. So why should you invest in mobile home parks?
Highest yields
Mobile home parks have the highest yields in commercial real estate, with starting cap rates often over 10%, and cash-on-cash returns of 20% standard fare. This is at a time in which apartment cap rates are often around 7% and retail cap rates are sometimes at 6% or lower. Because there are fewer buyers for mobile home parks than other real estate niches, the supply/demand formula has always given mobile home parks a higher going-in rate of return.
Hedge against U.S. economic decline
If you believe that the U.S. economy will continue to decline in the years ahead, under the weight of social programs and the drag of an aging population, then mobile home parks are virtually the only form of real estate that performs better in a recession. As America gets poorer, mobile home parks are the only form of housing devoted to this demographic.
Barriers to entry
One reason that mobile home parks have long held their value is the simple fact that virtually no city or town in the U.S. will allow new parks to be built. Why? Nobody wants a mobile home park as a neighbor, and their vocal dislike for mobile home parks eliminates any chance of political approval. In the entire United States, it is estimated that less than 10 new parks are built each year – less than the number that are torn down for re-development.
Barriers to moving out
Another interesting barrier is the difficulty tenants have in moving their home out of a mobile home park. It costs around $5,000 to move a mobile home, so virtually no tenants can ever afford to move. As a result, the revenues of mobile home parks are unbelievably stable. But what happens when a tenant cannot afford to continue to pay their rent? Then they normally abandon the home, and the park owner ends up with title under abandoned property laws.
Demand is giant and grows daily
Affordable housing is a giant topic in America right now. Over 20% of the U.S. population has a household income of $20,000 per year or less (which is nearly the poverty line). On top of that, there are 10,000 baby boomers retiring per day into social security checks that average only $14,400 per year. The demand for affordable housing literally grows daily, and this will continue for over a decade, according to most economists.
Conclusion
Mobile home parks offer higher greater returns and stability than any other real estate sector. They are the only real estate segment that grows stronger as the economy weakens. That’s probably why the two top investors in the mobile home park niche are Warren Buffet and Sam Zell.