Prior to the pandemic, most economists predicted the next U.S. recession would begin in 2021. However, they still do. Effectively, the Covid-19 outbreak was simply a prelude to a larger economic event, which historically always falls immediately following the U.S. Presidential election. In this case it’s all about the final reckoning of the debt of those businesses that failed (hotels, restaurants, retail stores, etc.) coupled with displacement of workers in non-essential industries and state/cityfiscal calamity as the result of plummeting tax income. The bottom line is that if you think it’s all upside in 2021, you’re not aligned with economic models and probability, nor are you being realistic. Talk is cheap – and we heard a good bit of it during the election – but the fact is that America is well positioned to go further down the tubes in 2021 and with perhaps greater acceleration.
In times like these, smart investors assess what the options are for “contrarian” investment. These are sectors that actually have greater sales and demand during bad times, coupled with barriers to competition so that everyone can’t just jump into that line of business. And unless you are able to turn back the hands of time and start Amazon, then the next best thing is to buy a mobile home park (or several). Indeed, there is no greater “contrarian” investment available today. So why is a mobile home park a successful “contrarian” option? There are several reasons:
- The demand for “affordable housing” goes up in bad economic times. Mobile homes are the least expensive form of dwelling in the U.S. During economic declines, the demand for cheap housing skyrockets, and this places mobile home parks in the sweet spot of demand during every crisis. Most mobile home parks receive around 20 to 30 calls per week looking for affordable housing, and the best receive over 100 per week. The giant demand for mobile homes is what fuels higher rents and strong occupancy, and only grows as the economy diminishes.
- There is a huge barrier to new construction in virtually every city in the U.S. Warren Buffett always talks of a “moat” -- which means a barrier to competition – as one of the key drivers to a successful business model. And mobile home parks have perhaps the largest moat in the U.S.: the complete shutdown of zoning for new mobile home park construction in virtually every American market. And it’s not a new feature as it’s been that way for over a half-century.
- The customers never leave because the value is so high. Mobile home parks have the most steady revenues of any real estate sector and for good reason: nobody wants to give up their spot in line. Mobile home parks offer the lowest cost detached housing in the U.S. and there is a fixed supply of them. If you own a 3 bedroom/2 bath mobile home outright (and it’s estimated that 80% of those in mobile home parks have no mortgage), then you only pay the lot rent which averages $280 per month in the U.S. That’s $1,000 per month less than an apartment alternative. So if the customer sells, rents or walks away from their mobile home, their financial life is ruined. This inherent value is what keeps mobile home parks around full capacity regardless of the economy.
At the same time there are several unique features of mobile home parks that make them unusually high-yielding from the onset:
- You can buy them from the original moms and pops at lower prices. This simple feature produces a huge amount of value for the buyer. Moms and pops are less sophisticated and, therefore, they ask less for properties and there is always plenty of room for improvement in the net income by increasing rents and occupancy coupled with lowering costs (typically manager and utility line items).
- You can obtain extremely attractive interest rates on loans. Even though most Americans have never considered mobile home parks as an investment, banks sure have. Mobile home parks have the lowest default rate of any real estate sector and, as a result, they are much in demand by lenders. Mobile home parks have essentially four basic lending groups: 1) seller financing 2) bank financing 3) CMBS financing and 4) Fannie Mae/Freddie Mac financing – and these all offer rates that run from around 2.8% to 5%.
- Their rents are ridiculously low with plenty of upside. The average lot rent in an American mobile home park is around $280 per month. In many markets that’s $1,000 per month less than a competing apartment. The reason ties back to the mom and pop management of the sector, and a refusal to raise rents in-line with inflation. When mobile home parks were built in the 1960s, for example, the standard lot rent was around $50 per month. In today’s dollars that’s around $500 per month.So what happened? Mom and pops engaged in their own form of “quantitative easing” and kept rents artificially low. But the bottom line is that most mobile home park lot rents are ridiculously low and need to be raised dramatically to be back in-line with market forces.
So if you’re currently making your financial plans for 2021 and want to position yourself to profit from the coming national recession, then you should focus on “contrarian” plays with mobile home parks at the top of the list. There are around 44,000 mobile home parks in the U.S. and only around 4,000 of those are institutionally owned, leaving almost 90% of the industry up for grabs. But this window of opportunity will not last long as investors search for ways to hedge the coming U.S. collapse.