“If you’ve got a low downside and a big upside, you go do it. If you’ve got a big downside and a small upside, you run away. The only time you have any work to do is when you have a big downside and a big upside.
- Sam Zell
Sam Zell is the largest owner of mobile home parks in the U.S. and is a huge advocate of the laws of risk vs. reward. He thinks so strongly of it that he puts the above mantra on his business card. We all understand the concept of risk vs. reward on a micro scale when buying a mobile home park – but what about the macro issues all owners and buyers face in light of a new political administration?
One of the biggest economic realities from the trillions spent by the U.S. government over the past year has been a spike in inflation. From home prices to bread and milk, costs throughout America are rising at the fastest pace in over a decade, and this is a startling revelation that will have a major impact coming soon. We predict a rise in interest rates, a plunge in the stock market, and a return to the mindset of the Carter era. The big winner in inflation are two asset sectors: 1) real estate and 2) precious metals. The bottom line is that hard assets hold their value and everything else gets annihilated. The goods news is that a mobile home park is a hard asset and should do well during an inflationary period. The bad news is that there may be a rise of interest rates that will impact cap rates and loan terms. We don’t expect to see a rise of more than a point or so (most economists agree with this) but the key is to keep pushing your mobile home park rents to build a firewall from this effect.
Migration from urban to suburban and exurban markets
The urban riots and the quarantine created a new reality in which people no longer see the benefit to living in a dense, urban market and instead are moving aggressively to American suburbs and exurbs in search of peace of mind and greater home-buying power. This is great news for park owners as virtually all U.S. mobile home parks are found in suburbs and exurbs. While downtown areas have been the bastion of office, hotel, retail, and apartment investors, the simple fact is that there are virtually no mobile home parks in the urban core. Why not? Mostly because mobile home parks are not a very high use of land and have long been torn down and replaced. Also, most cities never zoned the downtown area for mobile home parks, which they saw as more of a residential option.
Huge increases in home prices
If you thought 2008 was a high level of home prices, then check out where things stand now. While we don’t think these prices are sustainable, every time homes go up in cost it increases the demand for affordable housing. This is one issue that the government has no power to control. Biden has talked about spending billions to promote affordable housing, but the trick is not to simply build multi-family in blighted city areas, but to provide affordable housing in desirable markets that people actually want to live in. Mobile home parks are typically in areas that no longer allow any form of new affordable housing to be built, so the impact of any government initiatives should be moot.
Potential end of capital gains and 1031 options
The Biden administration has been talking about killing off the capital gains tax and 1031 rules for months now, but it has so far seen little traction. It’s definitely questionable whether there is actually support in Congress to take these actions. But in the event they end – and they have seen periods in American history where they ended – most park owners will probably simply wait out the end of the administration and the return of these tax benefits as it has always been cyclical. More owners may also simply opt to refinance their properties rather than to sell them, and this should reduce the number of parks that come on the market, making those for sale lower in number and seemingly more valuable.
Increase in minimum wage
This is one topic that is extremely beneficial to mobile home park owners. Since more minimum wage workers probably live in mobile home parks than any other group, having this segment get a huge raise will only allow for less difficulty in collections and more ability to raise rents to healthier levels. While it seems highly unlikely there will be any federal mandate on this issue (it already failed once) there is no question that you are seeing the possibility that some states will enact higher hourly pay scales. While this is going to be a huge hit to inflation, park owners are a huge beneficiary to any such actions.
Mobile home park owners have been an incredibly lucky group in recent times. We were classified as an “essential” industry and, other than eviction moratorium restrictions, did well during the pandemic. And now we’re in the right position on virtually all megatrends under the Biden administration. As a result, the macro “risk vs. reward” for our industry is still extremely favorable, and actually growing in appeal.