Mobile Home Parks (MHP’s) Are Arguably One Of, If Not The Hottest Investment Classes Of Today.

Tons of new and experienced investors are jumping on board to take advantage of this previously misunderstood asset class. MHP’s have proven to be one of the highest yielding and reliable investments, especially when compared to similar-kind investments (i.e. self-storage & multifamily apartments). Having that said, in previous years (especially pre-2018) the MHP space was much less investor populated with different metrics that we are seeing today.

To help you navigate todays MHP market so you can take advantage of this exciting asset class, I’d like to share with you; how MHP’s changed my life, why MHP’s are getting so much attention, what the MHP space used to look like prior to 2018, and what has changed post 2018. Then in a subsequent blog article I’m going to teach you how to navigate profitable mobile home park investments in today’s market. That being said, let’s dig in.

How MHP’s Have Changed My Life

I excitingly (and humbly) achieved financial freedom through MHP investing in a mere 2.5 years. Today, I not only have financial freedom, in addition, I have time freedom and location freedom (financial, time & location freedoms combined = True Freedom). I have so much gratitude for this asset class. It’s been a catalyst for me to live a self-designed freedom-lifestyle as I expand my generational legacy of wealth, consequently helping many others along the way.

I wasn’t always a MHP investor though. In fact, I used to be a blue collared worker. A Steel fabricator / Welder to be precise. I grew up down under (in Australia) where to the best of my knowledge at the age of 17, I was at a crossroads with 2 choices; #1 continue to complete high school then proceed to university, to move on and get a J.O.B, or, #2 get a J.O.B as a blue collared worker (later to find out I had an abundance of choices within my reach, that at the time I was not privy to). Deciding at these crossroads was easy for me, as the thought of continuing schooling was daunting with the illusion of extreme boredom and dissatisfaction for me. It’s not that I didn’t like education, in fact, I’m obsessed with growth and education. It’s just wasn’t a fan of traditional schooling which I felt held me back from my creativity and full capabilities. I wasn’t excited about option #2 either, although that seemed the less of 2 evils, so I chose one of the top paying blue-collared professions, steel fabrication & welding.

For the next 17 years, I knew I was dissatisfied with the career path I’d chosen. And the more time went on, the more my dissatisfaction increased. Yet, it was (at the time) the best way I knew to make money, so I kept on along that path, working my way up “the ladder.” Fast forward and 17 year’s deep in this profession, I was so physically, mentally and spiritually burnt out, that an alternative profession was the only thing that could lead to feeling satisfied again (for me and for my wife!)

In the land of opportunities, I explored the 3 top ways to make money; Stock Market, Owning a Business and Real Estate. (trust me, as a man who’s traveled to over 60 countries and owned businesses on 3 continents, I can honestly and confidently say that the United States of America provides such abundant opportunities and low barriers of entry in real estate and business, that as an expat it’s like a kid landing in a candy shop of never-ending supplies! It’s easy for me to see why foreigners consistently come to the U.S and crush it. I’m now a U.S citizen and proud of it! I feel so strongly about investing in U.S real estate that, me and my mates wrote a book about it.) I digress. After trying my hand at all 3, I found I was spinning plates and having mediocre success. It was very clear that Real Estate was the best option for many reasons, but there are so many ways to make money in real estate, where do I start? I knew I had to laser focus on one asset class and one asset class only if I was to have the highest possibility of success. So, I looked at as many real estate asset classes as possible and looked at real life profit and loss statements for each of the main asset classes and noticed an unfair advantage that MHP’s had over other asset classes. Due to the incomparably high cash flow while owning a MHP, and the exciting proportionality-large equity payouts at the end of a MHP investment cycle it became clear very quickly that MHP investing was a wise move.

Additionally, I had a discussion with my mother in law who had firsthand experience as a MHP tenant. She proceeded to tell me she owned her mobile home in a MHP, and regardless of her ownership of that home, still had to pay $1,000 a month in lot rent to the park owner / landlord (this was a California based MHP, hence the high lot rent amount. The national average for affordable housing MHP’s runs around $250-$300 a month). I ran outside and counted over 100 homes in that community, did the math (100 x $1,000 = $100,000 a month in revenue!). I was sold and decided to go all-in. I became thoroughly obsessed with MHP’s and read every book and took every class on the topic that I could.

Once committed to and educated in this asset class, I took 3 months to get my 1st park under contract. At the time, I had a negative net worth, unseasoned credit (as I hadn’t been in the U.S long enough to build solid credit), and a mere $2,000 in the bank. I used the power of syndication (bringing investors and their capital into the deal, while providing those investors an opportunity to be part of a deal they would otherwise not have the time, resources or experience to be involved in), and had the current lender roll over the loan from the sellers to us the buyers. It took 3 months for me to close on that deal and once I saw what I’d created from nothing via MHP investing, I was down right addicted to this asset class. I continued to expand my MHP portfolio and as mentioned attained financial freedom 2.5 years after acquiring my 1st MHP. So excited about this asset class, I wanted to share this hidden knowledge with others so they too could take advantage. Before I started seriously perusing financial freedom, I honestly did not know it was possible for me and certainly not so easy. I felt it was my duty to pass on the financial freedom gospel and how it’s so possible for many of us who think it’s not. I began with a 1 day educational bus tour to one of my parks in Sothern California, then progressed to host multi-day MHP investing workshops. I created a 20 hour MHP investing home-study course, then began hosting single day “how to raise capital like a pro” events that also turned into a home study course. I wanted everyone to join me in this success!

I rode the MHP investing wave to the top, until inevitably the cat was officially out of the bag that MHP investing was highly profitable, proven, sustainable, reliable and repeatable. Prior to 2018 I was one of the only MHP Investors at any given real estate meet up or networking events, to which I heard a common response to this asset class “MHP’s are profitable? I thought they were all dumps?) But in early 2018 that changed and all-of a sudden there where multiple MHP Investors in the room and my most common responses where “yeah, I’ve heard MHP’s are cash-cows” or “me too, I’m perusing / I own MHP’s”.

This massive influx of new MHP investors has changed the MHP Investing playing field (not necessarily for the worse), consequently resulting in a handful of crucial changes that MHP investors need to make to remain profitable. Before I dig deeper into comparing MHP’s prior to 2018 vs. post 2018, I think it’s important to cover why MHP’s are getting so much attention…

And before I begin, I’d like to note, there are generally 2 classes of MHP’s:

#1 (this is NOT affordable housing) is 4 to 5 star (out of 5 star) MHP’s that people choose to live in for non-financial reasons. These parks are often gated, even guarded communities that have paved streets with curbed gutters, amenities such as pools or community event center, and lot rents typically above $500 a month.

#2 is affordable housing MHP’s that people live in mostly due to economic reasons. These parks are 3 stars or less with little to no amenities. These parks make up the majority of MHP’s in America and this is the type of MHP that I’m talking about for the rest of this article.

In my opinion the sweet spot in MHP’s is buying 2-3 star parks and turning them into 3-4 star parks. Of course, I’m open to buying 4 star parks. We just don’t see that many attractive deals in that sector.

Why MHP’s Are Getting So Much Attention

1. Supply & Demand – the need for affordable housing is arguably the highest need in the real estate sector in 2020 (extremely high demand). In 2018, 38.1 million people lived in Poverty USA. That means the “poverty” rate for 2018 was 11.8% (https://www.povertyusa.org/facts). “Low income” is calculated as 200% of the poverty rate and those numbers too are daunting. No matter where you get your numbers, low income & poverty in America are epidemic’s. A serious problem we cannot turn a blind eye to. This matched with the low supply of mobile home park inventory of roughly 45,000 parks (this number decreases year-over-year due to more MHP’s being closed-down, to be replaced by high rises, than MHP’s being built), creates an ever expanding supply and demand in favor of mobile home park owners. Put simply, if you buy the right park in the right market, you phone should be ringing off the hook with qualified applicants wanting to move into your park. Furthermore, with higher than ever interest in mobile home park purchases, MHP’s are becoming easier and easier to sell which helps with your exit strategy.

2. Annual Lot Rent Increases – it’s expected in the mobile home park space that lots rents will increase annually. It’s common to see 5%-15% annual lot rent (and mobile home rent for new tenants) increase and sometimes you’ll need to increase rents up to or exceeding 20% to come close to market rents (if the sellers did not raise rents to match the market). If cap rates and occupancy stayed the same, just by merely raising rents each year for 3+ years, park owners can create handsome profits at refinance or sale with little effort. If cap rates further compress and if your occupancy increases along with the increase of rents, then you have leveraged the formula for massive potential mobile home park profits.

3. Recession Resistant – Mobile home parks are positioned in an interesting place within the real estate sector. Mobile Homes are typically the most affordable type of housing. The national average lot rents run around $250-$300 per lot per month with trash pick up included. I like to use $300 as a more conservative average, as rents are consistently trending upwards. Depending on the set up of each park, tenants may also need to pay for utilities (gas, electric, water, sewer etc.) Let’s be ultra conservative and say that with utility expenses included, $300 expands up to $500 a month. What if we experience some type of financial meltdown or correction in the future? (it’s more like when, than what if. Some type of financial correction in the U.S is inevitable, and much closer to us than we may think!) Think about it. In that scenario, when you can no longer afford $500 a month in monthly accommodation costs, where are you going to go? Unfortunately, you’d be led to live with family or friends, perhaps you’d sleep in a car or god forbid, you’d be homeless. Point being, there not many options if you can’t afford to live in a mobile home park. Look at this scenario from a macro standpoint, and where are the people who own houses, condos, rent apartments etc. going to go? Well, if they can’t afford where they are out, they move down the housing rung, one or 2 notches. MHP’s are essentially the bottom housing rung, so that means the compression of everyone moving down from above, results in even more increased demand for MHP’s (drastically increased demand), with the same dwindling MHP inventory (supply). MHP’s already perform well, and in a recession, typically perform better.  This is something to take into heavy consideration given the current and near future state of the economy. Due to this, I know a whole niche of investors that are geared towards recession resistant investments only.

4. Stability – being that we are in the affordable housing sectors and that most tenants live in mobile home parks for financial reasons, the cost to move a mobile home is typically higher that the financial capabilities of the homeowner. Therefore, once a mobile home is set in a mobile home park, it typically stays there. If a homeowner needs to move, they more commonly sell their home to another approved tenant, leave their mobile home at the park and buy a new mobile home at their next location.

5. Historically Strong Cash Flow – MHP’s have gain the nickname over the years as “Cash Cows” due to the high cash flow that has historically been produced in the mobile home park space. This is what caught my attention from day one. If you are buying stabilized parks (roughly 70% tenant occupancy and above) it’s almost expected to have solid cash flow straight out of the gate. Operators in comparable asset classes (self-storage, multifamily apartments) often offer preferred returns to investors where investors are expected to receive say 6-8% return on investment each year as a “preferred return”. This is not a guarantee to investors, but more of an I owe you and that investors will get paid this before the operators get paid. If the preferred return (often abbreviated as “pref”) is not met in any given year then it rolls over and adds to the next year in a cumulative way. For example, if a specific investment offers a 8% pref and for some reason only 2% of that pref was met that year, then the remaining 6% roll over and adds on to the next years pref. This accumulates year on year, then at a sale event, investors get paid their pref in full before other profits are split between them and the operators. Similar set ups exist in the MHP space, although it’s much easier and more common to not only hit our pref each year, but to exceed that due to the high cash flow. I’m going to touch on “forced appreciation” below, which not only increases equity, it also increases cash flow.

6. Large Potential Equity Payouts at Sale of Asset – MHP’s have historically had high purchase caps in the double-digit range. As time has progressed cap rates have compressed. This means those who purchased at 15% caps could later sell at 12% caps, those who purchased at 12% caps, could later sell at 9% caps and so on. It’s getting more challenging to meet the same equitable profits as earlier years due to the recent cap rate compression, although with the right mobile home park investing business plan, and by leveraging forced appreciation, there is still plenty of profits to be had in the mobile home park sector.

7. Attractive Financing Options – Loan default rates in the mobile home and mobile home park spaces are historically lower than most other asset classes. FANNIE & FREDIE knew this and jumped on board to provide exceptional financing programs for 3 star plus MHP’s. FANNIE even offers 30 year fixed rate options with their Manufactured Housing (Mobile Home Park) Loan Program (http://www.crefcoa.com/manufactured-housing-loans-fn.html). In addition, many other commercial lenders have competitive financing options with 4-5% interest rates, up to 80% LTV’s, 30 year amortization with 5, 7, 10 & 15 year balloons. The parks that larger commercial lenders won’t touch (i.e. $2 million purchase price and less), can be financed by smaller local banks, and short of any of the above financing options to work for a park owners, many park sellers are open to carrying some or all of the financing for reasonable and some-times extremely favorable terms to the park buyer. There are also bridge loans for otherwise “unfinanceable” parks, that help get an ugly deal across the finish line while you make the necessary improvements to make the park more financeable (this can work for really low occupancy parks as you increase occupancy to a more desirable number).

8. Warren Buffet’s Acquisition of Clayton Homes – Clayton Homes is the largest builder of manufactured housing and modular homes in the U.S. In 2002, Clayton earned a revenue of $1.2 billion, in 2003 Warren Buffet’s Berkshire Hathaway Inc. purchased Clayton Homes for $1.7 billion. In 2007, Clayton Homes’ revenue was $3.66 billion. Enough said. Warren Buffet makes highly calculated (and historically wise) investment decisions. It was only natural than many others joined ship shortly after. (https://en.wikipedia.org/wiki/Clayton_Homes)

9. 21st Mortgage CASH Program – a consequent effect of Berkshire Hathaway buying Clayton Homes was the introduction of Clayton Homes teaming up with 21st Mortgage to introduce the “CASH” program. This program provided an avenue for park owners to get their hands on new Clayton mobile homes that get transported to the park owner’s community (transportation costs are the responsibility of the park owner). Then the park owner has a certain timeframe where he can market the home for sale, then send park screened applicants to 21st mortgage for financing. Essentially this means tenants get their home financed, park owner barely comes out of pocket, park owner gets a $40,000+ new mobile home in their community, and a new paying tenant, home repairs and maintenance are the responsibility of the homeowner (not the park), 21st mortgage gets to finance a plethora of mobile homes, and park owner avoids the legalities that where introduced with chattel loans after the 2008 financial meltdown. Of course, a park owner has to have some skin in the game so as park owners we essentially guarantee or back stop the loan and take over the financial responsibility if tenant defaults while we find another tenant. This has been a game changer for park owners and is a win-win-win for everyone involved. Although there were earlier attempts at the same type structure, the CASH program was introduced in a perfect time of need and has been a huge success since. As time has progressed, 21st mortgage now will do the same structure with most of the major mobile home manufacturers which makes this set up possible for many park owners nationwide. There are other similar type programs available with other lenders too. This general business model does not work in all markets as not all markets can support the financial requirements of tenants to pay the needed monthly payments to make these programs work. For the majority of markets it works in, this is certainly a major bonus to the park owner.

10. Forced Appreciation – Mobile Home Park owners have the advantage of filling vacant mobile home park spaces with new or used homes, then filling those homes with qualified tenants. Additionally, in some cases, new lots can be added to existing parks to further increase occupancy. At a lot rent of $300 a month, a 30% operating expenses, and a market cap rate of 8%, this means each new lot that becomes filled with a home and qualified paying tenant adds $27,000 of overall value to the park [$300 (lot rent) x 12 (months) x .6 (operating income) / .08 (cap rate) = $27,000 (new filled lot value)]. Match this with the low cost to park owners with the CASH program and multiply this by as many lots that you can fill in your park and you’ve created a low risk / high reward way to increase your parks value. More on this later as we dig into how forced appreciation can be one of the best tactics in your profitable mobile home park investing business plan in todays market.

11. Section 8 vouchers Used Towards Purchase of Mobile Homes – for those of you familiar with section 8, essentially the government pays a landlord rent on behalf of low-income tenants. This has been used to pay rent in the apartment and mobile home park space in the past, although now section 8 can pay towards the purchase of a mobile home. This is win-win for the park owner and for section 8 tenants.

12. Proven Track Record – MHP’s used to be generally looked at as “trailer parks” (we all know the stigma that comes with that. Think “trailer park boys”, “slumlords”, “Jerry Springer” or the show “COPS”) or a wild card as an investment (because of the lack of solid historical data). All the while mobile home park investors nationwide were bringing in high cash flow and large equity payouts fixing up and improving mobile home parks (a MHP flip takes roughly 3-7 years). It took a while to create a solid, rinse and repeat history of successful mobile home park investing. Albeit, there was enough of a track record for Warren Buffet to join the mobile home industry in 2003. Not too long after came 21st Mortgage CASH program, FANNIE & FREDIE financing for MHP’s, Section 8 Mobile Home purchase ability, and numerous large institutional buyers. Consequently, many investors from other asset classes have jumped fence to join the MHP Investing craze.

In summary, combine all the above together and you are faced with one abundantly attractive asset class. One mobile home park could change your life financially, two or more MHP’s could make you financially free, five or more MHP’s could not only change your life financially, but change the financial life of your descendants for generations to come. No wonder mobile home parks are the hottest asset class in 2020!

What The MHP Space Used To Look Like Prior To 2018

Many years ago, MHP investing was like the wild-wild west. MHP’s were relatively easy to get your hands on. It was common that there would only be one buyer putting an offer in or negotiating to purchase a specific park. It was a buyers’ market. You could buy a park for up to and exceeding a 15% purchase cap rate. EMD’s were so small they hardly even counted. Many of the parks where in the need of professional management and needed much love an attention to improve curb appeal and NOI. There were not as many mobile home park financing options, so seller financing was not uncommon. The people selling mobile home parks were moms and pops that generally lacked tight operations & professionalism, giving professional park buyers the upper hand in purchase & negotiations, leaving much more meat on the bone for the buyer. Basically, MHP’s were abundant, buyers were few and there where many well priced MHP’s in need of physical and financial improvement all of which was possible to big financial advantage to park buyers.

I joined the MHP sector in 2015 when I purchased my 1st park. At that time, it was still common to find good value add mobile home parks in the 10-12% purchase cap rate range. In late 2017 it was getting hard to find any decent mobile home parks for a 9%+ purchase cap rate. And post 2018 even high risk, low quality mobile home parks trade for <8% purchase cap rate.

These times (prior to 2018) won the mobile home park industry the attention that is has today with the rinse and repeat benefits of park ownership. Since 2018 the mobile home park playing field has changed. Let’s take a look at how and why…

What The MHP Space Looks Like Post 2018

As previously mentioned, momentum built over time as large institutions jumped on board the MHP investment train. Warren Buffet was a huge contributor as Berkshire Hathaway purchased Clayton Homes back in 2003, then later introduced the CASH program providing super attractive mobile home financing options for park owners and park tenants. Many similar programs where to follow. Financing options are abundant and are so much better than before, it’s exciting. Section 8 is on board to help section 8 tenants purchase mobile homes and there’s a ton of historical data showing the epic track record of this asset class.

All the while cap rates had already compressed in other asset classes and it was clear that when comparing other, assets like self-storage or multifamily apartments to similar priced mobile home parks, MHP’s proved to be far superior in financial gain, especially when matched with the increased stability of MHP’s over other asset classes. It was only inevitable that when the cat was out of the bag (for sure by 2018), that many new investors would be joining this hot asset class and that many other investors would jump ship from their previous asset class to be part of the epic mobile home park movement.

It may have become clear by now as you read this article that mobile home park purchase cap rates have compressed and consequently resulting in higher “buy-in” prices for mobile home park owners today and less profit spread on the table for future exits. Although this is partially true and in fact MHP purchase prices are higher than they have ever been historically, there is still meat on the bone for investors to join this asset class as long as they are aware of how to successfully evaluate, purchase and operate MHP’s in todays given market.

Despite the recent increase in MHP purchase prices, there are advantages today that did not exist in the past. As mentioned, abundant and attractive financing options help increase the spread between financing interest rate and purchase cap rate. This is a huge advantage as financing terms where significantly less favorable before this asset class was proven to be sustainably successful. Section 8 vouchers to purchase mobile homes is a huge game changer. Higher quality of mobile home parks and mobile home park management, higher than ever and consistently increasing lot rents, higher than ever demand for affordable housing and lower than ever mobile home park inventory all help park owners in today’s market.

If you are a park owner, you’ve likely taken advantage of the cap rate compression in recent years and massively profited from this market shift. I have definitely been taking advantage of this shift and in one case been fortunate enough to return over 57% annual returns to investors involved in my deals (this 57% annual return was an accumulation of cash flow and equity for a park we owned for a little over 4 years).

I’d like to note that large private equity funds and large institutional buyers mostly focus on the 4-5 star parks (not affordable housing) so they are not too much of our competition in the affordable housing mobile home park space. New competition is made up of newbie investors wanting to buy into the mobile home park space, and other seasoned investors from other asset classes, jumping ship to join the profitable MHP space.

Summary

So, by now you’re probably thinking “ok, I get it, this MHP gig seems to be totally worthwhile, but how do I profit with these recent market changes?” Don’t worry, I’m covering this in depth in my next blog article!

You may also be thinking “If there is more competition than ever in the MHP space, why are you about to tell us in your next blog article, how we can best profit given the current MHP market conditions?”

The answer to that is simple: #1 I see it as my ethical obligation as a mobile home park investing educator to help point out some of the main ways new MHP investors can minimize pitfalls and maximize profits, #2 I truly believe we live in a world of abundance and they is more than enough MHP’s for us to all profit from, #3 If new MHP investors incorrectly evaluate and overpay for MHP’s, this will artificially drive up MHP purchase prices and further compress cap rates making it harder for MHP deals to pencil out.

Regarding my latter point, I’ve already seen this happen in the MHP space where newbies have come in un-educated, or using evaluation methods from other asset classes, then overpaid and under-performed only to bring those same parks back on the market after losing their hard earned $$$, and expecting buyers to pay unreasonable prices to reduce the pain of their loss. To completely eliminate that from happening is impossible, yet if you are reading this (and my future blog articles) and you’re wanting to break into the MHP space, I’m glad you will get to know some important ins and outs to profitability, before you take down your first or next park.

I’m assuming by now you understand the MHP space on at least a slightly deeper level. Now that you understand the basics of this asset class, in my next blog article, I dig into “how to navigate profitable mobile home park investments in today’s market.” As times and circumstances change, we too need to move with, or even better, stay ahead of the game. The same old tricks that used to work prior to 2018 do not apply today.

Your Real Estate Mate, Bryce Robertson

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