Are you a savvy real-estate or property investor looking for the “next big thing”? Or maybe just someone who wants to invest some money in tangible assets that stand a fair chance of providing you with a good return? Chances are you haven’t thought about investing in mobile home parks. We can hardly blame you, the two ideas don’t seem all too compatible at first glance.
Due to the stereotypes associated with mobile homes and mobile home owners, they are still perceived in a less than stellar light. However, the simple fact of the matter is that in a day and age where real estate prices are rising at a time when wages aren’t, it’s no wonder that more and more families turn to mobile homes as an affordable alternative. Not to mention the potential for “niche” parks, which we’re covering in our series: Mobile Home Park Ideas. These parks may seem shocking at first, but they’re working for their owners and providing an important public service.
We want to help you figure out how to start a mobile home park. In this article, we’ll introduce you to investing in mobile home parks. Part two of the series will cover the purchasing process, where you can find parks to buy, and the considerations you should take when buying a mobile home park.
Why invest in mobile home parks?
Whenever explaining the benefits of investing in mobile home parks to someone, one of the first questions they are bound to ask is “But, don’t you have a high tenant turnover?” One of the main reasons behind this question is the fact that mobile homes are technically supposed to be able to be moved from one location to another, hence the name. However, in reality, more often than not this is rarely the case.
Another reason people doubt the veracity of this factor is because they still compare them mentally to trailer parks. The divide between the two is much greater than you might imagine.
Difference #1: Mobile homes aren’t terribly mobile
Mobile home moving costs are extremely costly. A typical move within even the same state or county could cost between $5,000-$6,000. For most people in the financial bracket of mobile home owners, that’s a bit too steep. Despite their name, most mobile homes stay put at the same location for their entire life, up to 98% in fact. That’s another reason behind the push for officially renaming them “manufactured housing” instead of “mobile homes”.
Difference #2: Tenants want stability
Ok, so if the homes themselves are unlikely to be moved, what about the tenants? Or if the home is being leased out? Let’s not forget that for the majority of occupants, there is a very good reason why they live in mobile homes despite the stigma and stereotypes attached to this kind of housing. Compared to real estate or apartments and condos in cities, they are still considered affordable housing.
The average mobile home rent plus lot rent is still well below the $1,200+ average monthly rental for apartments across the U.S. In many cases, it’s below half that price. If the occupants own the mobile home and just rent the lot it’s closer to $300 in rent per month. Even with the rental of the home included it could be half that of an apartment.
For most, it would be a huge financial leap to then move to an apartment or stick-built home. The majority of occupants would realistically view a mobile home as their residence for at least the foreseeable future once they move in. It’s then easy to see why they would rather pay the 10% increase in rental every year than move to another form of housing.
Demand for affordable housing
As we briefly mentioned, wages are shrinking whilst inflation is costing prices (especially that of housing) to rise on a seemingly endless basis. According to wage statistics gathered by the Social Security Administration, 50% of wage earners, or roughly 25% of the population, receive net compensation of less than $30,000 a year.
If we then take into account the fact that it’s recommended to spend in between 25% and 30% of your earnings on housing, that leaves these people with only $7,000-$8,000 a year ($600-$700 a month) to spend on their housing needs. As you can see this is way below the average $1,200/month rent in the U.S.
If you own a piece of real estate, you also need to think about property insurance, taxes and so on. These are cold hard numbers that prove a large portion of the citizenry are dependent on low-cost housing such as mobile homes and that this trend isn’t likely to change anytime soon.
To compound matters, we are now at the stage where the infamous baby boomers are reaching the age of retirement. We all know that for the vast majority of us, retirement is always an exercise in frugality and stretching each and every dollar bill. There is simply no knowing what problems will pop up as we age or how long these savings will be needed.
Furthermore, it’s estimated that most of the current crop of retirees above the age of 65 have nowhere near enough. The median 401k savings is around $148,000. If they were to use that money over a period of 20 years, it would only amount to $600 per month. As you can see, it’s no wonder that mobile homes have become a saving grace for many of the older generation.
Looking at these numbers, it’s hard to argue with the statement that mobile homes already have a huge demand that will only grow in the coming years. At the moment almost 6.5% of the population already live in mobile homes.
This ties in nicely with our previous section. It might surprise you to hear that even though there is such a demand for mobile homes, the number of mobile home parks is barely growing (if at all). In fact, it actually seems as if the number of parks is shrinking year by year. It’s basic economics that the price will go up if there is a limited supply that can no longer meet the demand for it. So, why aren’t more mobile home parks being built? Good question!
The biggest reason is that cities don’t allow these parks to be built in or around them. This is largely due to the stereotypes surrounding mobile home parks as well as keeping land open for more lucrative construction projects later on. The assertion that well-managed mobile home parks could be the answer to the current affordable housing crisis seems lost on them.
Because of the stereotypes surrounding mobile homes, mobile home parks, and their occupants, the inhabitants of cities themselves are often against the construction of mobile home parks as well. They fear unsavory individuals filling up their neighborhoods, rising crime, an unsightly trailer park, and losing value on their own homes as a result.
Nowhere to build
This means that the only recourse left if you want to build a park is to head out to the middle of nowhere. The problems with this approach are obvious. First, very few people will be OK living so far away from their jobs and other conveniences of modern life we now take for granted such as grocery stores and restaurants. Second, the land might not have access to municipal utilities such as water and electricity. You will need to install these out of your own pocket and it could run over millions of dollars. Not to mention the continuous maintenance and upkeep.
Another reason why it’s so difficult to develop new mobile home parks is that they’re very difficult to finance. Construction projects of any kind are difficult to finance in the first place at the moment because of the risk involved. New mobile home parks have the added risk of very low initial liquidity.
To make any sort of money and recoup your costs you will need a high occupancy rate from the get-go. The problem is, it’s expensive to fill a lot with a mobile home and you are unlikely to find enough people who are willing to do so. That means you will have to do it yourself which could run you another few million dollars.
All these factors leave us in the ironic situation we find ourselves in right now. One where buying existing mobile home parks that already have high occupancy rates are an excellent investment, whereas new ones are basically financial suicide. Ultimately, this should lead to mobile home parks marching upward in value for the foreseeable future.
High capitalization rate
The problem with any type of investment is usually the long time in which it takes for you to recoup your expenses and start “making money.” Unfortunately, this is just a part of investing that you will have to make peace with. It’s financial planning for the future and as such, you should always try and hold on to this perspective.
One of the biggest upshots of buying existing mobile home parks is the relatively high and uninterrupted initial ROI. The capitalization rate is basically the percentage of your investment that you earn back every year since making it. Let’s look at an example using completely arbitrary values:
Let’s say you buy a mobile home park at $5 million. On average you receive a combined lot rent or occupancy rent of around $400 per month. If you have 100 homes or lots in your park that’s equal to $40,000 per month. That means you annually make around $520,000 on rent alone. If your costs are $20,000, you come out on top with $500,000. This is 10% of your initial investment. We say that this mobile home park investment had a capitalization rate of 10%.
Mobile home parks that already have a good occupancy rate should keep ticking over money as usual after you buy it. One of the huge benefits of mobile home parks over other types of developments is that the maintenance costs are generally much less. This results in a higher capitalization rate.
This term refers to the owners of mobile home parks who are still more often than not, normal people like you and me and not bigtime Warren Buffett-esque investors. The reason why this is in your favor is that they can be easier work with. Most of the time they want to sell their park because they want to retire from its responsibilities. Having someone who wants to sell for motivations other than money is always a bonus.
You should be able to haggle a little to get a good price. On top of that, a lot of time they will allow you to buy the park on the basis that you pay it off over time. This is called sellers financing and allows you to be able to buy the park without jumping through the hoops and dealing with the difficulties of ensuring financing from a bank or lender.
Excellent form of diversification
Most of us that have a mind for investment know how important it is to not put all your eggs in one basket. Mobile home parks are a bit of an anomaly which means that they aren’t as affected by other markets as other types of investments. The links between mobile home parks and Wall Street, for instance, are very weak indeed.
There are many factors that contribute to this status of mobile home parks, one of them being the fact that the limited (and dwindling) supply in a time of rising housing costs rigs the game in its favor. The other is that, as we have explained, the gulf in prices between mobile homes and traditional homes means that there isn’t really much competition worth mentioning.
If you think about how a mobile home is structured, you can also see how it is a layered investment opportunity. You have the land, the park’s amenities and infrastructure, the mobile homes, and the tenants themselves all in one place.
Are you ready to learn how to start a mobile home park?
In order to understand how to start a mobile home park, it’s important you understand what your investment will look like. As you can see, mobile home parks are an excellent investment opportunity, which is only made better because of how it is generally overlooked and dismissed out of hand. In the continuation of this article, we’ll take a look at the next step in the process: how to buy a mobile home park and what you need to know before you hand over your cash.