We recently bought a mobile home park that appraised for $1,000,000 more than we paid for it. The bank didn’t even know how to react to such an occurrence, as that never happens in apartments, retail, office, hotels, self-storage – you name it. So how can mobile home park pricing – and yields – be so different than the other sectors of commercial real estate? It’s really just a combination of items.
Most investors find mobile home parks a scary proposition. They are conditioned by urban myths and the negative bias by the media to believe that mobile home park residents are a bunch of Jeff Foxworthy’s hillbillies right out of an episode of Cops. This misconception – which is completely false – keeps the supply of park buyers greatly reduced when compared to the other real estate niches. So basically, the oversupply of sellers against an undersupply of buyers equals lower prices.
Just as the supply of buyers is held back by a negative perception of mobile home park customers, so is the supply of new mobile home parks in the U.S. held back by city and county zoning officials. There were fewer than 10 mobile home parks built in the entire U.S. last year. That’s against a backdrop of a rising tide of lower-income Americans desperate for a place to live that they can afford. Roughly 30% of U.S. households have a combined income of $20,000 per year or less. This gives that demographic a budget of roughly $500 per month for housing. Only mobile home parks can meet this price. The average apartment rent in the U.S. last year, by contrast, was around $1,070 per month. Warren Buffet talked about this household formation problem in an interview last year. Will city and county officials reverse course and start zoning land for new mobile home parks. Unlikely. Nobody wants a mobile home park next to their house or business.
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Sure, mobile home parks are on the right side of the supply/demand curve in a lot of ways. But one of the unique features of mobile home parks is in the unusual relationship between the park and the tenant – they can’t ever afford to leave. It costs around $3,000 to move a mobile home from point A to point B. So, basically the tenant has a $3,000 penalty hurdle to ever leave the mobile home park. As a result, the tenants will pay any rent raise without protest. We’ve raised the rents in parks from $100 to $275 within 60 days of purchase – and not lost a tenant. And if they do abandon their home, the park owner seizes it as abandoned property and re-sells it to a new tenant.
Another big factor in the high yields of mobile home parks is the fact that most sellers are the original mom & pop builders. Mobile home parks are a relatively young sector of commercial real estate, with the majority of parks being built in the 1970’s and 1980’s. As a result, you are normally buying from the original owner. These moms & pops are not very educated on values, as well as not well versed in negotiating. Since they own the parks free and clear, in most cases, they can sell for whatever they deem fair, and carry the financing to boot.
Mobile home parks offer the highest yields in commercial real estate right now, due to a number of factors. These trends to not appear to be fading. That’s probably why Sam Zell is the largest owner of mobile home parks in the U.S. (through ELS) and Warren Buffet is the largest owner of mobile home manufacturing, retailing and financing in the U.S. (through Berkshire Hathaway). “Affordable housing” is sure to be a continuing issue as the American economy unwinds and nearly 10,000 baby boomers per day retire into a small residual income of subsidies.