Throughout history, there are certain match-ups that always result in predictable success. The bow and arrow defeats the knight in armor. The knight in armor defeats the poorly-equipped serf. The Gatling gun defeats all of them. The same is true with certain real estate niches. Some just always to outperform the others. And the all-time winner has always been mobile home parks. That’s why they were first on the list in the book The Millionaire Next Door. That’s why the two biggest names in the industry are Warren Buffet and Sam Zell. But why do mobile home park investors always seem to win?
An unfair advantage regarding customer retention
The first reason that mobile home park investors always win is because they have an unfair advantage built into the business model. The customers can’t leave. It costs $5,000 to move a mobile home. Since the customers have no money, if they can’t pay the rent, they simply vacate their homes, and then the park owner takes the home through abandoned property laws. That’s why the revenues are so unbelievably consistent.
Incredibly favorable supply and demand; because you can’t build any new ones
While most cities recognize the need for affordable housing, nobody wants it in their backyard. As a result, virtually every city in the United States refuses to allow new mobile home parks to be built. This inability to increase the supply of parks to meet rising demand means that rents are always going up and occupancy is always high. There are only around 10 new mobile home parks built per year in the entire United States. There are more self-storage facilities built than that in some cities alone.
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Highest cap rates in real estate
Mobile home parks are the only form of commercial real estate that regularly change hands at 10% cap rates. Apartments are more like 7% and some retail properties are down to 6%. Higher cap rates mean higher yields. It’s been that way for decades.
Room to push cap rates even higher
Since most mobile home parks are owned by the original moms & pops – and not sophisticated owners – there is always room for improvement in their operations. We have a park in Kankakee, Illinois that we took from a negative 1 % cap rate to a positive 20% cap rate in one year. The most common turnarounds are raising rents, billing back water and sewer, fixing leaking water lines, and cutting costs (most of the time replacing the manager with a much lower cost employee).
Seller financing that boosts returns
One top of the above strategic advantages comes the ability to obtain seller financing. This gives mobile home parks that final extra boost, as seller financing is traditionally lower interest rates and lower down payments than regular bank financing. This gives mobile home parks even more spectacular cash-on-cash returns – kind of like linking nitrous to a race car engine’s fuel supply.
In the battle of commercial real estate profits, mobile home park owners always win. Sure, it seems unfair due to the advantages that mobile home parks have over the other forms of real estate. Maybe that’s why more and more investors are shifting to mobile home parks from the alternative real estate niches.