The sudden rise in inflation to levels not seen in 40 years has changed the playing field for successful investments. Americans have become accustomed to inflation rates of 1% to 2%, and therefore tolerated investment returns that were only mid-single digits in everything from stocks to bonds. Even those who ventured into real estate often did so with REIT dividends of around 4%. The problem today is that inflation is nearing 10% per annum, and that means that successful investments going forward will have to exceed 10% just to keep your dollars on par with the cost of goods and services. And that does not include the impact of income taxes, which drive your total return down even further. The bottom line is that investments yielding less than 10% are of no actual benefit at all going forward.
What type of investments can exceed 10%?
There are no individual stocks, bonds, treasuries, CDs or any similar item that pays anywhere near 10%. So you can cross off anything peddled by your local investment broker. And that means all of the easy investments that you can buy virtually out of a catalog and that have immediate liquidity by just phoning Charles Schwab are exactly where you can’t find 10% returns. You have to put in much more effort going forward, as well as get out of your comfort zone.
The one tool that is required to beat 10%
In order for an investment to exceed 10% it’s mathematically impossible – except in rare occasions of single stocks that go viral – in the absence of leverage. Leverage means that the income production is harnessed not just with cash but with a mixture of cash and debt. Here’s a snapshot of how leverage yields higher returns:
Purchase price: $1 million
Net income of the property at purchase: $80,000 per year
Cap rate at purchase: 8%
Bank loan rate: 5%
Total amount of down payment (20%): $200,000
Total amount of loan (80%): $800,000
Total annual interest on the loan [$800,000 x 5%]: $40,000
Total cash-on-cash amount [$80,000 net income - $40,000 interest]: $40,000
Total cash-on-cash return [amount you receive for your down payment annually]: 20%
In this example, your $200,000 down payment generates $40,000 per year, or 20%. That’s double the rate of inflation. And it was made possible with leverage at around 20% down.
What investment options allow you to utilize leverage?
When you invest in traditional options – such as a CD – there is no leverage. Banks don’t do that. In fact, the only investment grade option that allows for leverage at lower interest rates is commercial real estate. Commercial real estate is a large universe of options which include apartments, retail centers, hotels, office building, mobile home parks, self-storage facilities and industrial warehouses. Each of these options has its own benefits and disadvantages, as well as alignment with the current American megatrends. But real estate has the one power that nothing else can match: large yields powered by leverage.
Why mobile home parks are your best bet among the 10%+ options
Of the commercial real estate options, the ones with the best attributes are mobile home parks. The reasons are numerous:
- Easy management. Since a mobile home park is effectively a “parking lot” for trailers you don’t have to worry about what goes on in the homes as far as repairs, but are simply renting land.
- Scarcity. Cities have not allowed new mobile home parks to be built for the past 50 years.
- Demand. Affordable housing is one of the most dominant trends in America. With house prices averaging over $200,000 and apartments averaging over $1,400 per month, mobile home parks are the only true affordable housing in the U.S. today.
- Good deals are still attainable. Mobile home parks are typically sold by the original “moms and pops” who can sell the parks at low prices and even often carry the debt themselves.
- Huge room to improve the net income. Because mobile home parks are owned by older moms and pops, they are often not running at peak operational efficiency. Most mobile home park deals come with built-in income enhancement simply in raising rents, cutting costs and filling vacant lots.
- Lower competition. Most investors have a stigma against mobile home parks and it’s the least competitive form of commercial real estate for that reason.
The days of the single-digit investment return are over. You won’t even keep pace with inflation. Hitting 10% to 20% is essential in America 2022. And you to have use leverage to do it and – of the real estate sectors to accomplish this – mobile home parks have the most going for them.
To learn the correct way to identify, evaluate, negotiate, perform due diligence on, renegotiate, finance, turn-around and operate mobile home parks consider attending our next Mobile Home Park Investor’s Boot Camp. It’s 100% live and 100% virtual, so there’s no travel time or cost. The event features 30 hours of discussions with Q&A throughout. And you come away with all the tools you will ever need, from leases and contracts to evaluation software and the complete list of all the mobile home parks in the U.S.