I love mobile home parks because they are great investments! This is the first of a 2-part blog that outlines the pros and cons of investing in mobile home parks (MHPs), which are a unique type of income producing property (IncP.) In the next blog, I’ll walk us through an evaluation of a MHP currently on the market to assess its merits as a potential investment for one of our partnerships. Without further delay, here’s what I consider the primary qualitative or soft reasons for investing in mobile home parks.
- Strong Demand for Affordable Housing – Although there are many “five-star”/ lifestyle manufactured housing communities, the vast majority of MHPs provide affordable housing to their residents. The demand for affordable housing exceeds supply and this trend will accelerate over the next 20 years with 10,000 baby boomers retiring every day.
- Limited Supply – The supply of mobile home parks is limited and most municipalities want to keep it that way! In fact, the number of parks is shrinking each year as they are bulldozed to build freeways, business parks and Wal-Marts.
- No Toilets to Fix – If an investor rents just the spaces and stays out of the home rental business (which is what I recommend,) the tenant is responsible for maintaining their own home. This means no late night phone calls about toilets, heaters, leaks, etc…
- Tenants for Life, Low Turnover – A mobile home, once delivered and setup with skirting and utility attachments, is likely to stay put for a long time. Mobile homes are difficult and expensive to move (especially true for the multi-section homes.)
- Favorable Tax Provisions – Depreciation rates for structures is 27.5 years and land improvements is much more favorable at just 15 years. Assuming an investor only rents spaces (does not own and rent homes,) most of the purchase price of a MHP can be depreciated as land improvements providing a tremendous tax benefit.
- Available Financing – Banks and other lenders have discovered mobile home parks are a very stable and low risk asset class. 30 year, non-recourse financing at very competitive rates is available for good properties in good locations that have been well-managed and maintained.
- Mom & Pop Business – Small partnerships and individual investors (folks like you and I) own 50% or more of the 38,000 MHPs in the US. There are many benefits to owning a small business, both financial (write-offs) and personal (flexible schedule, part-time employment in retirement, etc…)
Like all types of IncP, there are downsides and most can be mitigated with well-defined and implemented investment and property management plans:
- Aging Infrastructure – Many MHPs were built in the 50’s and 60’s and their gas, water and electrical systems are failing and the repairs will be expensive. Adequate funding of reserves (at the time of purchase and each year thereafter) will be required to minimize the effects of this expense on the return on investment.
- Obsolescence – Many of the older MHPs are converted “trailer courts” located in remote areas where a highway has been bypassed by a freeway. Turnover and vacancy will be perpetual problems for which there may be no solution.
- Limited Financing for Homes – Bank financing for the mobile homes (not the MHP) can be difficult if not impossible to obtain. This makes filling spaces a challenge for park owners who lack the resources or inclination to buy homes, sell and carry notes for their new residents.
- Government Regulation – Each year brings new regulations and laws that raise the cost and increase the liability of owning mobile home parks. This includes water testing requirements (for parks with private utilities,) fire protection standards, tenants rights laws and the list goes on and on…
Again, in part 2 of this blog, I’ll step through the underwriting for a property currently on the market and share my thought about merits of the investment. Finally, in upcoming blogs, I’ll provide additional detail about each of the bullets listed above, the pros and cons about investing in MHPs.
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