Sure, the Federal government can’t keep up “quantitative easing” forever. $85 billion a month is a little pricey for a country that’s just been shut down due to the debt ceiling, right? But the inevitable end to the “easing” will boost interest rates higher, and it’s going to be a hot topic going forward. So if we assume that interest rates are probably going to increase, then what niche of real estate will perform well in an environment of interest rate uncertainty? The answer is mobile home parks.
Mobile home parks start off with an advantage – they have the highest return rates of any form of real estate. As a result, they are much more forgiving of interest rate increases. When you buy a mobile home park at a 10% cap rate, and the borrowing rate is 6%, you have room to accept a point increase. When you buy a retail center at a 7% cap rate, and the borrowing rate increases a point to 7%, then you’re in real trouble – you are basically upside down in the property. The best defense against higher interest rates starts with a good offense in the form of high rates of return.
One of the key differences between mobile home parks and all other real estate sectors is the existence of seller financing. This insulates you from the reality of higher rates, as sellers often charge below-market rates to being with. In addition, most seller rates are fixed and not subject to change. The same is true of conduit debt, which is a popular financing source for parks. This type of debt instrument offers 10- year terms and fixed interest rates.
Mobile home park leases are traditionally month-to-month. This allows you to increase the rent at will, with only 30 days advance notice. Most of the other forms of real estate have long leases. Apartment leases are normally one year in length, while retail center and office leases are often up to five years. When you have long leases, you lose the ability to adapt to rising interest rates.
When your business model is “affordable housing” then as the economy declines – which it surely will if interest rates increase – then your demand only grows stronger. Remember that mobile home parks focus on a niche that is based on a house with yard for around $200 to $500 per month, even in markets where apartments exceed $1,000 per month. There is nothing better positioned for a recession/depression than mobile home parks.
Many experts believe that the single biggest casualty of higher interest rates will be stick-built, single-family homes. It makes logical sense, right? The change in interest rates – even a quarter of point – has a gigantic effect on buyer demand and the ability to qualify for a mortgage. As single-family goes down the drain with rising rates, the big winner is mobile home parks, which always serve as the back-up plan to homeowners who can’t afford stick-built construction.
To see the wisdom in mobile home investing, it’s always a good idea to look around and see who else is involved in the industry. The largest owner of mobile home manufacturing and financing is Warren Buffet’s Berkshire Hathaway. You can’t get any better affirmation than that. And who owns the most mobile home parks? Sam Zell, the same guy that has been the largest owner of office buildings and apartments, and is known for phenomenal timing in real estate cycles. These two heavy hitters are in the industry to make money, and because they believe that the timing of affordable housing is excellent.
No other sector of real estate is as properly positioned to flourish in an environment of higher interest rates. If you believe that interest rates are going to rise in the future, then you should definitely be investing in mobile home parks. There is no greater contrarian investment – a real estate niche that goes up when the economy goes down.