[Editor's Note: The White Coat Investor has officially unveiled our newest course, No Hype Real Estate Investing. It’s everything you need to know about creating a new income source while hedging against the volatile stock market—without all the hype. Taught by Dr. Jim Dahle and nearly 20 other instructors, it’s a comprehensive course that will teach you about the pros and cons of real estate investing, how to analyze the financials of a deal, how to think about the tax implications, and just about anything else you could imagine. You’re not going to want to miss this course!]

 

By Paul Moore, Guest Writer

How’s your fantasy life?

Do you ever fantasize about investing in Apple in 1990? Or in Amazon in 2001? Or in Berkshire Hathaway in the ‘70s?

I know a CPA who invested with Warren Buffett in the 1970s. He was strapped for cash once and sold his shares on a whim. He said those shares would be worth millions today. Or did you hear about the guy who sold about 100 Bitcoin to pay off his $600 debt to a friend? He bought some tools from the guy, and his friend begrudgingly accepted this questionable payment. That was worth about $4.2 million a decade later (and, even after Bitcoin has dropped in 2022, it's still worth about $2 million).

It pays to be in front of the curve.

But let’s be honest. Most of these speculative investments come to nothing and leave their investors disappointed. That’s what happened to me on numerous occasions in earlier decades. It’s hard to predict what will pay off.

Years ago, I had a chance to invest in mobile home parks. But, like most real estate investors at the time, I turned my nose up at the prospect.

That was a major miscalculation.

Sam Zell saw this opportunity before almost anyone else. And his investment in mobile home parks has been part of his formula to become America’s most successful real estate billionaire.

What did Sam see that most of us missed?

mobile home investing

 

The Stigma of Mobile Home Park Investing

I turned my nose up at mobile home park investing for years, and in fact, I barely considered the prospect. Maybe you’ve felt the same way. This stigma is one of the reasons I now love investing in mobile home parks. There is less competition. However, this is changing quickly as many investors at all levels have caught on.

Investors in manufactured housing live where we want to—and invest where it makes sense. And this investment class makes a whole lot of sense to me.

 

Supply and Demand of Mobile Homes

Manufactured housing is the only asset type I’m aware of that has an increasing demand and a decreasing supply every year. The number of mobile home parks in America is dwindling. Developers are gobbling up the land for other uses, or the pressure from city planners results in their demise. Some parks are so old and rundown that they just close up shop. I visited two parks like this in Fairbanks, Alaska, last year.

At the same time, there is an affordable housing crisis in America. It is real, and it’s not going away. The number of low-paying jobs is increasing, especially when indexing for the current inflation we’re experiencing. Healthcare laws have motivated employers to hire more part-time workers, and many young employees don’t have the skills or desire to fill current employment needs.

[Author’s Note: Not long before this post went to press, the White House announced major incentives to promote manufactured housing production and to remove barriers to mobile home ownership for millions of Americans. This could be a gamechanger to accelerate the benefits of an already wonderful investment opportunity. Our firm is currently increasing our efforts to seek out mobile home park opportunities on behalf of our investors.]

Have you heard that about 10,000 Americans turn 65 daily? Yet 6 in 10 have less than $10,000 saved for retirement. This potentially exacerbates the affordability crisis as older Americans are having a tough time affording pricier housing.

Fortunately, many of these retirees have home equity, and many of them are willing to trade their home equity for a mobile home on a rented lot at a reasonable cost. This gives them their own space, drive-up parking, a yard, and a sense of community.

But it’s not just low-income people who are converting to a mobile home park lifestyle. Keith, the father of a dear friend, was a respected doctor in southern California. He chaired national councils and golfed with President Ford. When he retired, he could have stayed on a southern California beach. But he chose to sell his home and buy a mobile home on a rented park lot near Palm Springs. This freed up cash and resulted in fewer responsibilities and more flexibility as he entered his retirement years.

The affordable housing crisis, the supply and demand imbalance, and sticky tenants make mobile home park investing a recession-resistant asset type that shouldn’t be overlooked as you build your investment portfolio. Speaking of sticky tenants . . .

 

Mobile Home Parks Have Sticky Tenants

Mobile homes aren’t really mobile. Tenants tend to stay in mobile home parks for a long time.

Apartment tenants might move to avoid a 7% rent hike. Someone paying $1,000 per month is looking at a $70 monthly increase, $840 annually, by signing that lease. Hiring a moving truck and some willing friends is all it takes to walk away, leaving a vacancy. But imagine getting a 7% rate hike in a mobile home park. A new operator comes in and cleans up the park, likely adding amenities and increasing safety. You’re paying $350 per month, and your increase is $24.50 monthly.

Is it likely you will spend about $5,000 to pack up and move that mobile home across town just to save about $25 per month, risking damage to the home and all the disruption to your family? Not really.

There is reportedly a 90%+ chance that mobile homes will remain at their original location for the life of that home. Some stats say the average mobile home park dweller remains on their rented lot for about 13 years—many times longer than apartment tenants.

 

Mobile Home Parks Have Lower Capital Expenses and Maintenance

Well-run manufactured housing communities have the lowest maintenance costs and capital expenses among any asset types we’ve invested in or reviewed. This is because these parks are typically leasing dirt and infrastructure to tenants. Tenants own (or are buying) the mobile homes. This means tenants do maintenance and repairs.

Check out this graphic:

manufactured housing capital expenditure

An oral surgeon I spoke to told me of his woes in building a 20-home portfolio to replace his income in retirement. He sounded excited at first. Then he began describing calls to painters between procedures and evening meetings with other contractors and tenants. His excitement gave way to a deep sigh, and he said, “I really don’t know if I can pull this off. I’m only on my third house, and this is driving me crazy.”

I’m in my third decade as a real estate investor. I love the prospect of not dealing with unreliable maintenance and construction crews as well as the toilets and trash that typify many rental properties. Speaking of tenants who own their own mobile homes . . .

 

Joint Stakeholders

My friend Tony is a medical professional. He owns and leases out 43 apartments on the side. He told me a tenant moved into one of his units on a recent Monday. Then, the tenant waited two whole days before setting the unit on fire.

Tony will have to deal with months of hassle, insurance, bids, negotiations, demo and construction, increased insurance premiums, and potential criminal and legal action as a result. This is a risk with any single-family or multifamily rental property.

This is one reason I love mobile home park investing. At least those that are done right, where the park owners own the land and infrastructure and then lease the dirt to tenants. Tony’s scenario would not happen at a well-run mobile home park asset.

 

Tax Efficiency

Tax efficiency is one of the most surprising aspects of mobile home park investing. Accelerated depreciation, derived from cost segregation studies, allows operators to take significant early paper losses from depreciation in the early years of commercial real estate ownership. The 2017 tax law changes allow most of that depreciation to be realized in year 1 of an investment.

Since these assets generally lease dirt to tenants, I expected accelerated depreciation to be minimal (since land isn’t depreciable). I was quite mistaken. A typical mobile home park’s value is about 20%-30% land, with the balance booked as infrastructure. This means that about 70% or more of the value can be depreciated, and the vast majority of that depreciation can be accelerated into year 1 under the current tax law.

Due to the tax classification of most of the infrastructure and the benefits of the new tax code, mobile home park operators and their investors usually get a sizable paper loss in year 1 of their ownership. This loss can be about 60%-70% of the acquisition price. When factoring in 50%-70% leverage, the investors often receive paper losses well above 100% of their equity investment. These losses can sometimes be used against prior profits or be carried forward for years, meaning investors’ cash flow will often not be taxed for a long time.

Medical professionals and other high net worth investors should keep in mind that it’s not how much we make but how much we keep—and for how long—that really matters. Taxes take a massive bite out of our income. But many physicians can hang onto a hundred thousand or more otherwise squandered dollars annually by convincing their spouse to attain real estate professional status (REPS). It won’t work for most, but those who pull this off can acquire considerable tax savings.

 

Mom-and-Pop Owners

This is my favorite thing about investing in mobile home parks. Though I wrote a 2016 book on apartment investing (The Perfect Investment), our firm has found that multifamily is not always “perfect” after all. It’s largely overheated. Many (especially rookie) syndicators have become speculators, and we decided not to play that game.

There are more than 40,000 mobile home parks in the United States. Though it is hard to track data since the asset type is so fragmented (which we love), it is estimated about 85%-90% of these are owned by mom-and-pops. Single-asset owners running their properties with few systems, financial controls, marketing, revenue management, or a sense of professionalism. Even some large parks are still run this way, as you’ll see in a moment.

They don’t need to—it wouldn’t be worth the hassle. They have already experienced massive gains in paper value, and all they need to do to unlock those gains is to sell the property. That is where a professional operator steps in.

A professional operator can spot intrinsic value in an unprofessionally managed mobile home park. Like Warren Buffett uncovering hidden value in undervalued companies, these operators can spot upside that’s invisible to the masses.

They are skilled at uncovering operational inefficiencies, bloated operating costs, value-add prospects, and expansion opportunities. Increasing the net operating income and adding safe leverage provides increased cash flow and accelerated asset appreciation. Plus, these operators know how to use the tax code to help their investors delay or avoid taxes on cash flow and, sometimes, on capital gains.

I have been investing with operators like this for years, and I’ve experienced healthy cash flow and outsized appreciation with the benefit of meaningful tax efficiency. We’ll close with an overview of one of these investments.

 

Southland Mobile Home Community—Louisville, Kentucky

southland

Our operating partner acquired Southland Mobile Home Community in Louisville in February 2020 for $7.1 million cash. He purchased this 311-lot property at a 6.5% cap rate on existing net operating income at 81% occupancy. Within a month of acquisition, the operator placed conservative (51% LTV) Fannie Mae debt on the project.

The operator purchased this property off-market from a mom-and-pop owner. The park’s original owner had passed away years before, and his wife had not visited the park since then. She was several states away and had a manager in charge. Five days after closing on the property, the operator received an unsolicited offer for $9.5 million. He turned it down with no counteroffer.

We were a bit surprised he would decline an opportunity for a 33% return on the asset and, more importantly, a 68% return on the equity within a week. However, the operator believed the property would be worth over $13 million after his team executed their value-add strategy within about three years.

The operator saw four ways to create significant value with this project. First, operating costs were bloated by more than $60,000. As a professional operator with an experienced team, our operator brought this into line. This simple change resulted in over $1 million dollars in increased asset value.

Second, the operator knew the lot rents were drastically below market (up to 35% low). He planned to raise rents over time. Because of the CRE value formula (Value = Net Operating Income ÷ Cap Rate), a small increase in monthly revenue (with no increased cost) and safe leverage can lead to a large change in value.

Third, the previous owner paid for water and sewer for all the tenants. This was common in yesteryear but not in large modern parks (and it is problematic for usage levels). The major local competitors all charged water and sewer to tenants. The operator’s team metered each mobile home and passed these costs back to tenants. The Net Operating Income (NOI) increase was $144,094. This simple change resulted in a value increase of over $2.2 million at a 6.5% cap rate.

Lastly, there were 50 or so vacant lots. This is a stumbling block for mom-and-pop owners. The most common solution is for the park owner to acquire and set up homes on-site and then try to sell them to new tenants. This requires a lot of capital, effort, and risk. But there can be a significant payoff by increasing occupancy (especially with new homes).

The operator got through the first three of his four initiatives. He hadn’t undertaken the last one when he received another unsolicited offer he couldn’t refuse. The operator accepted an offer from a large mobile home community operator and closed for $15 million in December 2020. Including cash flow along the way, this project generated a 347% IRR (and a 3.4x multiple on invested capital) at the project level over a 10-month hold period.

Here are some additional details for your review.

southland numbers

 

Conclusion

While the results of this investment were quite dramatic, the process to get there was characteristic for this operating partner. He executes similar strategies on a regular basis and, in fact, has documented average IRRs of over 60% over multiple years.

I’m glad I took off my blinders to consider this overlooked asset class. I wish I would have done it a decade or more ago, but it has still proved to be a great investment for me. Does it make sense for you to take a look as well?

Have you ever thought about investing in mobile homes? Why or why not? Is this something you could see yourself doing in the future? Comment below!

[Editor's Note: Paul Moore is Managing Partner of Wellings Capital. Wellings Capital is a paid advertiser and a WCI Recommended Real Estate Investing Company Partner. However, this is not a sponsored post. This article was submitted and approved according to our Guest Post Policy.]