When most investors think of affordable housing, they immediately think of the vehicle to address this niche as apartments. In fact, the majority of affordable housing stock is apartments. However, following the lemmings has never been a great investment tactic. Mobile home parks, and not apartments, are the correct option for high investment returns in this growing market segment.
Why affordable housing?
In our new, depressed economy, the only form of housing demand that is consistently growing is housing for poorer people - called "affordable housing". These are the people who often work minimum wage jobs and have few economic resources. A quick look at the "help wanted" section of your newspaper will demonstrate that most of the available job openings are in this "affordable" demographic. Section 8, the government program to house people who cannot afford housing, is also a part of this sector.
Why mobile home parks are superior in this niche
One of the great benefits of mobile home parks over apartments is that the owner is only responsible for the land under the mobile home, whereas apartment owners have to contend with the buildings. And being in charge of buildings with affordable housing customers is the great downfall of investing in this arena.
Affordable housing customers are notoriously rough on their dwellings. Their chaotic lifestyles, which often include very large numbers of children and a rough & tumble attitude, lead to large numbers of repair and maintenance problems. Virtually everything in the unit becomes broken over the span of their tenancy - the faucets, knobs, drawers, cabinets, windows, screens, doors, all need to be replaced. And that does not count the endless repair calls for stopped up toilets and sinks.
Apartment owners are deluged with these issues. When the phone rings at a mobile home park, the repair approach is much simpler. You just say "I'm sorry, but we don't own your home". In fact, the mobile home park owner is only responsible for the roads, landscaping, and delivery of water, sewer, gas and electric to the customer's lot
And don't forget about liability
One of the additional problems with affordable housing tenants is their endless appetite for litigation. They see the legal system as a means to make quick money, whether or not their claim is legitimate. These legal avenues can include black mold, formaldehyde, and sub-standard housing. They can also turn about any repair claim into a slip and fall or endangerment claim such as a faulty smoke detector.
With a mobile home park, these claims can't happen - you don't own the unit.
Why mobile home parks have higher returns
Mobile home parks have higher investment returns than apartments for two main reasons.
The first is that they are priced to allow a significantly higher return. Due to the lower investor demand for these properties, they are priced to often yield a 10% cap rate on the front end, as compared with a 7% in apartments. This is almost a 50% greater return.
The other reason mobile home park returns are higher is that the pricing information is often imperfect. The old moms and pops who own most mobile home parks are very poor at managing their properties. You can often increase the revenue by a huge amount - often 100% -- due to the lack of increasing rents over years to match the market. Additionally, most moms and pops have extremely poor cost-control systems. You will find mobile home parks that are carrying management overhead, in the form of salaries, that can be $50,000 on a park that should be $15,000. These kind of problems can be corrected virtually overnight and the returns are enormous.
And don't forget about seller financing
Most mobile home park sellers are happy to carry the paper. This virtually never happens in apartment complexes. Since most moms and pops own the property outright, they can afford to carry the financing, often with as little as 10% to 20% down - although in some cases they will even do 100% financing, if the property needs significant turn-around work
And this seller financing, unlike apartment complexes, is often non-recourse.
In a terrible environment for real estate financing, like we're in, this additional plus to mobile home parks is incredibly important.
If you want to invest in affordable housing - and that's just about the only slice of commercial real estate that is showing any future right now - you should aim for mobile home parks. They are less management intensive, have greater upside, and are priced to allow for much greater returns than apartments.
by: Frank Rolfe
About the Author:
Frank Rolfe is the CEO of American Home Communities, LP, which has ranked as high as the 63rd largest owner of manufactured home communities in the U.S. Frank and his partner, Dave Reynolds, are Mobile Home and RV Park Industry Experts and train new and current investors in these industries through detailed Home Study Courses and Bootcamps. For more information contact us at http://mobilehomeparkstore.com or at 1-800-950-1364.