Posted by ray@lcorn on May 10, 2001 at 11:56:15:
Kenneth,
You may be stepping over dollars to pick up dimes. Some of the most lucrative opportunities in real estate are small, rundown mobile home parks. I’m going to share with you an excerpt from my book, “Dealmaker’s giude to Mobile Home Parks” that discusses exactly why these properties are a wealth of opportunity.
excerpt**
In recent years, Mobile Home Parks have become one of the most desired property types in commercial real estate. There is no question that their inherent value has been noticed and realized by many major players in the residential income property arena. Why that is so, is a question that must be answered in order to begin to understand the fundamentals of mobile home park ownership, and why they perform so well as a real estate investment. A first time owner will not necessarily perish without this knowledge, but neither would they be likely to develop the full potential of the property. I think it is worth the time to examine and understand some basic facts and characteristics about this much maligned, and often misunderstood, investment property.
Three major factors have influenced the course of development from the trailer camps of the forties and fifties, to the present day mobile home community. First, the increased size of the homes and the concomitant increase in moving expense changed the nature of the parks themselves. Second, the continued affordability of the mobile home as a housing type relative to site-built and rental housing opens the market for the homes to a wide portion of the population. Third, the effect of restrictive and even oppressive zoning restrictions regarding the development of mobile home communities and the placement of individual mobile homes is a crucial link in the chain of understanding the mechanics of a mobile home park.
Size: The Immobile Mobile Home
In the short fifty or so years of history of manufactured housing, the average single-section mobile home has doubled in length, from forty to over eighty feet, and width, from eight to sixteen feet. The increased size, and the inclusion of more and more amenities, has brought the product to its place in the market as a practical housing solution for an ever-growing number of people. But the larger size is also more expensive to transport. In fact, once a mobile home is set up on its first permanent siting, there is a real economic barrier to moving the home again. Costs range from $250 for a mere pull and drop from Point A to Point B, to $2,000 and up for a complete tear down, transport and set-up. Obviously, that amount of money would represent a sizable expense to any homeowner, and results in more and more mobile homes that aren’t mobile at all. Therefore, once sited, the mobile home owner becomes almost a captive tenant to the community. No other rental property types other than high-end commercial buildings have a tenant ownership feature built into the product.
The parks
In a similar way, mobile home parks have also changed to reflect not only the increased size of the homes, but also the increased stability of the residents. They have evolved from semi-permanent campgrounds known as “trailer” camps in the fifties, to parks with sites for “coaches” in the sixties, and then finally to the home community hosting the large manufactured homes of today. As the size of the home has increased, so too the typical park has had to increase not only the size of its sites, but also in the number and nature of the amenities and services provided. For a park to be considered mid-grade in today’s market, it must have as minimum physical attributes paved and lighted streets, underground utilities, and passive playground areas. It should be located near schools, shopping and employers, and have on-site management. Superior communities will also have Laundromats, clubhouses and active recreation features. Many feature extensive landscaping and architecturally designed streetscapes, creating a real sense of quality and stability.
Profits and Stability
The end result of this major shift in the product from a temporary housing alternative to a permanent housing type has created a type of investment income property type that is unparalleled in stability and returns to the investor. Due to the cost of moving from one community to another being prohibitive, residents tend to stay in place until selling the home, which most likely will remain in place with the new owner. The owners tend to become “community minded”, that is, they care about the nature and condition of their neighborhood enough to take an initiative in its care and upkeep. This is a tremendous help to the park owner in maintaining the quality of the investment. It is akin to the difference between an apartment building owned by its tenants as opposed to transient renters.
Affordability: It’s the Monthly Payment, not the Price
Manufactured housing represents an opportunity for home ownership for the cost of an apartment. The development of long-term, competitive rate financing for mobile homes has opened the door of home ownership to thousands of people who would otherwise be destined to forever be renters. The availability of credit financing has fluctuated with the economy as a whole over the years, especially for mobile homes. On a relative basis, retail mobile home financing has served as the bulwark against the rising tide of our national population in the face of ever-spiraling costs of providing conventional housing. Mobile homes have never been touted as the end-all and be-all solution to affordable housing. However no other alternative has emerged that provides safe, well-constructed shelter at a price comparable to apartment rent. The mobile home industry was addressing the issue of affordable housing long before it became the cause de jour for the charity set.
When combined with a home purchased with affordable financing, the rental mobile home space provides the last piece in the puzzle of affordable housing. By renting the land necessary for the occupancy of the home, the mobile home owner has accomplished the goal of owning decent shelter with the lowest possible initial price, without having to finance the cost of the land and improvements. The attraction of the mobile home versus an apartment includes this ownership factor, as well as increased privacy, autonomy of services and the convenience of access.
The Market
The market segment served by mobile home parks has traditionally been comprised of two major groups: the young or newly married “starter families”, and the older “empty-nester” couples or singles. These two market groups just happen to be two of the most dynamic, fast-changing segments of our population. These demographic trends bode well for the future of the target market for mobile home parks, and will shape the face of mobile home parks as investments in the years to come. Understanding that mobile home communities exist to serve their residents will provide the owner with invaluable insight into creating a quality investment. Essential to the maximization of returns and the most profitable focus of property improvements is the understanding of the needs and desires of the residents.
- John and Jane Doe
These young couples or singles starting out are typically working in jobs involved or relating to manufacturing or service sector jobs, are often dual income households, and typically with small children. They typically spend upwards of forty percent of their household income on housing expenses, not including utilities. People in this market segment make up the backbone of our population. This is John and Jane Doe, the average American. They will continue to populate and propagate, providing a steady market for the manufactured housing industry for years to come.
The sustained economic expansion of the past seven years has also had an effect on the market by creating almost full employment, which in turn raises the income of the average worker, freeing more disposable income for new and better amenities in their homes and communities. In accordance with the theory that “a rising tide floats all boats”, as the average wage worker improves his salary and standard of living, the investor is able to realize higher returns and able to afford capital investment to increase the value and quality of the community.
- Grandma and Grandpa Doe
The other large market segment of the market for mobile homes is the “empty-nester”, and/or retiree. As the baby boom generation ages and retires, more Americans will be alive over the age of sixty-five in the next decade than ever before in our history. As in the past, this group will demand more and better amenities in the communities they inhabit. The increase in the number of age-restricted parks for senior citizens will continue to grow in conjunction with the aging of the population as a whole.
Zoning: Monopoly Power
Mobile Home Parks are the property type that people either love or hate. Wearied from countless hours spent in public hearings, listening to angry residents spout gloom and doom predictions for entire communities if a new park were to be approved, local land-use planners across the country responded with ever more onerous zoning ordinances and regulations. Zoning as a growth management tool has been applied and misapplied to the control or elimination of mobile home parks in many ways across this country. Congress found it necessary to preserve the rights of those who live in manufactured housing by passing legislation at the federal level that prohibits localities from excluding the use and placement of manufactured housing. Without going into an arcane recital of the evolution of federal government control of the manufactured housing industry, allow me to say that without the federal government, mobile homes would not enjoy the popularity, quality, and affordability that they do today. But this has also led to mobile homes being the most maligned segment of the housing industry.
Communities across the country have faced the ever rising numbers of mobile homes with alarm and concern. Given the relative speed of the development of the mobile home and the parks that host them, few localities have had any type of coherent or effective development standards in place when they started to develop. As a result, many thought the way to deal with the problems created by the proliferation of substandard parks was to just ban them as a permitted use in any zoning category. And they did. But then Congress came along and mandated that for communities to continue to receive federal monies for housing programs, they had to have in place certain provisions for the promotion and construction of affordable housing, and could not discriminate against housing built for that purpose. Shazaam! With that one fell swoop, most zoning laws in the country were obsolete, and the localities scrambled to create special zoning districts that both accomplished the aim to limit the number of mobile homes permitted in their jurisdiction, and still comply with the federal requirements for affordable housing.
As a result, many communities now have special zoning districts that will allow the development of mobile home communities, whether they be typical land-lease communities or variations of the co-op or condominium style properties. The catch is that in many cases it is next to impossible to successfully rezone property into the required category.
Franchise anyone?
And that creates an interesting situation for those parks already constructed. In many areas, the difficulty of developing new parks has given existing parks what amounts to a government sponsored franchise. There is no other income property type so protected. This, among all the other reasons offered as the advantages of owning a park, is by far the most powerful. By owning a mobile home park in a highly restrictive community, you essentially have a franchise? a protected area of operation, with no limit other than the free market on your ability to maximize the returns. While it is true that new parks are hard to develop, the end result is that existing parks become ever more valuable, and that is good news for the investor. It also makes the case open and shut for the acquisition of currently substandard parks, and for investing the necessary funds to create a lasting, stable investment.
It is ironic that the very measures that the planners and politicians have employed to attempt to hurry the demise of mobile home parks or forbid their development within their jurisdictions has produced a protected monopoly. In my years of service as a planning commissioner in my home county I have often tried to educate my fellow citizens to the fact that the more rigid the restrictions placed on mobile home parks, the more entrenched will be the status quo for the existing parks. Conversely, if sensible development standards are put in place to encourage the development of new parks and the improvement of older ones, the action of the free market will dictate that the superior product will become the standard. This then achieves the goals of cleaner, more appealing communities where the opposite approach of egregious regulation and restriction has stifled the market. For the most part, the logic falls on deaf ears.
We will leave the discussion of zoning changes and the development process of mobile home communities for another text. But for our purposes here, it is critical to understand the cause and effect of this unique phenomenon enough to see where it affords us an excellent opportunity for uncommonly high investment returns.