8 Excellent Reasons to Invest in Manufactured Homes
July 24, 2023
We’d love to connect with you.
Why Should You Invest in Manufactured Homes?
Although it’s not always one of the first things that comes to mind in real estate, manufactured homes are often present a terrific opportunity for property owners and landlords.
And during periods of economic instability, they’re especially beneficial for many reasons.
Value-add opportunities in multifamily rentals aren’t common these days. In the past, the odds were higher for finding a mom-and-pop operated apartment complex in a suitable location with enhancement opportunities. In today’s world, it’s risky to invest in something that doesn’t have the same upgrade opportunities.
Mobile homes, on the other hand, have more opportunity and a whopping 90% or so are mom-and-pop operators.
Mobile homes don’t typically need the knowledge or resources to maximize value. This, of course, means they’re often rife with room for improvement. Many owners live at the places they own and know the tenants. Many owners value a simpler operation with steady revenue instead of maximizing potential. They’re typically debt-free with very little overhead.
Acquiring a mobile home park in this zone and fine-tuning it to enhance ROI is often quite doable.
And, if all this isn’t enough to convince you to consider buying and then renting mobile homes, here are 8 great reasons.
Reason #1: Reliability
Mobile homes are one of the most reliable performers in the commercial real estate asset class. Their affordability and resistance to recessions make them a more constant option in a market of unpredictability.
According to Green Street Advisors, operating income from mobile parks increased by 87% from 2004 to 2018. The income never dropped, even during the Great Recession of 2008.
The average rent for a one-bedroom is often around $1,600 and mobile homes are often only a few hundred dollars per month. This disparity is a large part of their consistent appeal to renters. This holds true in strong economies where prices increase and weaker economies where job loss and wage reduction lead people to seek out affordable housing
Reason #2: Affordability
If you own a manufactured homes park, you’re going to have minimal maintenance costs compared to any other real sector. Additionally, capital expenses are predictable and inexpensive.
When you own a manufactured home park, you basically own land and infrastructure. Thus, you don’t need many contractors and even when you do the scope of work is typically limited. Contractors can be a big expense for residential and commercial housing, so this benefit is a real cost-saver.
Reason #3: Supply and Demand
Manufactured homes increase in demand every year while shrinking in supply. Government, developers, people resistant to mobile homes near their neighborhoods, and aging owners lead to about 100 parks closing each year. And there isn’t a surplus being constructed to replace those lost, either.
The affordable housing crisis continues, so that means affordable housing is in high demand. And it doesn’t get much better than affordable mobile homes. Low-paying jobs are also on the rise. And two plus two equals four here.
Additionally, around 10,000 people turn 65 every day. And, according to a 2019 study, six out of 10 of them have less than $10,000 saved.
Many of these people, though, have equity in their homes. This equity can typically be traded in for a manufactured home in a relatively nice park.
Reason #4: Long-term Tenants
Manufactured homes have extremely sticky tenants, especially when you stack them up against other kinds of tenants. This, of course, is every property owner’s dream. You want tenants that typically stay a long time. High tenant turnover is a nightmare and hard on your revenue.
Why is this often the case? Let’s look at an example scenario to paint the picture.
George lives in an apartment. He likes renting apartments and plans to rent for a long time. One day, he gets a notice about a rent increase of 5%. He’s paying $1,000 per month, so that’s a $50 per month hike. And now he knows that rent will probably go up even higher next year. He’s probably going to consider a move.
Suzie, on the other hand, lives in a manufactured home park. She’s paying $500 a month. A new owner buys the park, upgrades the amenities, and increases rent by 6%. Suzie, though, is still unlikely to move with the $530 per month cost. Why? Because the move would probably cost her thousands of dollars.
And if Suzie had a double-wide manufactured home, the cost would just about double.
Thus, people who live in manufactured homes are less likely to leave if rent is increased (assuming it isn’t astronomical or unfair). This is good for business because it allows you to enhance a park and charge more for rent without losing a ton of tenants.
Reason #5: Multiple Stakeholders
When it comes to your average professional manufactured home park, you would own the land and lease that and infrastructure to tenants. The tenants own their mobile homes, though. This creates a natural incentive for everyone to take care of everything.
This mutual responsibility creates a shared sense of ownership and often encourages everyone to pull their weight.
Reason #6: Financing
Of the approximately 44,000 mobile homes in the United States, only 4,000 or are owned professional investors. Around 40,000 are owned by people who built them or by smaller owners who inherited or bought them.
Most of these mobile home park owners didn’t get any financing.
Therefore, they’re often open to financing from interested parties in today’s market. If their occupancy is low or they don’t have well-kept records, banks won’t have much if any interest. Thus, they’ll almost always be more amenable to outside offers. The financing structure can usually be done in installments, which provides substantial tax benefits to the seller.
Owner financing means less uncertainty, less effort, and fewer obstacles to get past for the park operator. It’s important to note that owner financing is non-recourse, which means the debt is a type of loan secured by collateral, usually property. If the borrower defaults, the issuer can seize the collateral but cannot go to the borrower for any further compensation (even if the collateral does not cover the full value of the defaulted amount). This is a good debt structure for park operators.
Mobile home parks, however, are no longer unpopular financing options for banks. In fact, many banks now want to finance mobile home parks. One main reason for this change is that it’s an asset class with an extremely low default rate. Thus, the overall risk is also quite low.
Reason #7: Less Competition
The stigma of mobile park homes remains intact. Although it does seem to be changing, it’s still there.
This is an advantage for anyone who sees the potential of renting in this space. However, this might be the benefit that soon becomes a disadvantage. The revenue potential of renting mobile park homes is less of a secret than it’s ever been. And more property owners are continue to shed the stigma and realize the opportunities as time passes.
Reason #8: Taxes
Dirt and land ownership aren’t depreciable. So, at first, it’s hard to see where the tax benefits lie.
Infrastructure and land improvements are the answers. Infrastructure – meaning your roads, parking, pools, utilities, offices, and landscaping – is depreciable over 15 years on a straight-line basis. And so is goodwill.
The main value of most depreciable real estate is in the buildings, with a lesser portion assigned to the land.
Mobile home parks are different and more tax beneficial because of the difference. These parks are often more like a big parking lot where the cars (I.e., mobile homes) rarely leave because of the high cost of transportation. The owners rent the land to homeowners and are also responsible for maintaining utilities such as water lines, sewer lines, roads, etc. Mobile home parks usually only have a few buildings like an office, community center, and a maintenance shed. Thus, most depreciation is related to infrastructure (e.g., roads, water lines, sewage systems, parking lots).
As mentioned earlier, depreciation for infrastructure is calculated on a 15-year schedule, or 6.66 per year. That means 35% of the park’s value can be written off as infrastructure depreciation. The raw land represents about 30% of the asset value and the remaining 35% can be written off as goodwill.
So, 70% of the value of a mobile home park can be written off with a 15-year straight-line depreciation schedule. This is obviously meaningful for tax benefits.
As always, it’s wise to consult with a tax professional to get the best benefits you can.
Ownership of a mobile home park can be extremely rewarding. Renting to mobile home tenants is often lucrative.
If you weren’t thinking about investing in this asset class before this article, these eight reasons should be enough to make you take a deeper dive.