This week it was revealed that the U.S. had overstated the jobs number by 911,000 workers. That's the largest jobs revision in history and clearly means the economy Trump was given was already in free fall as far as job creation goes. It would appear that this was a deliberate attempt to give Biden positive talking points, but the scandal has a huge impact on one of the most important items for park owners: interest rates.
Starting in Q1 of 2022, Jerome Powell and the Federal Reserve decided to raise interest rates at the fastest pace in 40 years, and the net result was a doubling of mortgage interest rates. This put many mobile home park owners in a difficult position, with upward pressure on cap rates, downward pressure on values, and a hostile refinancing market.
Powell has shown zero interest in dropping rates since Trump took office, refusing to make even one reduction despite three interest rate reductions during the run-up to the Biden re-election bid. His personal anger with Trump is well-known and he has used every excuse to not drop rates even when it was obvious it was the worst choice not to (the last Fed meeting on interest rates included the first-ever dissention in Fed history).
The Federal Reserve is supposed to use its power for two purposes: 1) to reduce inflation and 2) to maximize employment. Powell has used the +911,000 jobs number as reasoning to keep rates high. But now he has lost this crutch and the markets are predicting an interest rate cut at the next Fed meeting, plus at least one more this year.
Are you ready for a new era of lower interest rates?
The best time to buy mobile home parks is when rates are on a downward trajectory
Look no further than 2008 to see this statement in full swing. With the advent of the Great Recession in 2007, interest rates plummeted in the U.S. from a 10-year Treasury rate of 5% to around 1%. Here's the net effect on what would have happened if you bought a mobile home park during that period:
Mobile home park value at a 8% cap rate with an NOI of $100,000 = $1,250,000
Mobile home park value at a 5% cap rate with an NOI of $100,000 = $2,00,000
In other words, if you bought a mobile home park in 2008 – and did not fill a single vacant lot or raise rent a single dollar – you would have made $750,000 in profit simply from interest rate fluctuation.
The time to refinance higher-rate debt is at hand
Mobile home park buyers since 2022 have relied on higher-rate bank debt – as high as 7% to 8% – to get deals closed. The current interest rate on Fannie/Freddie debt is already down to 5.75% or so, and it might get into the 4% range in the near future. This is a great opportunity to save a fortune in mortgage payments. Best yet, most bank loans are only 5 years in duration and are coming up for renewal soon. Even if you have to pay a one-time penalty, it may still make sense to consider refinancing to a lower cost loan.
It takes about a year to buy a mobile home park – better start now
Starting from scratch, it will take you about 90 days to learn the science behind selecting, buying, turning-around and operating mobile home parks like a professional. It will then probably take you several more months of working broker, on-line, direct mail and cold-calling leads to making offers and finding a suitable target property. Assuming you will then need around 60 days of due diligence and another 60 days or so to line-up financing, and your total elapsed time is around a year. Assuming that rates are starting their decent, if you want to play the "value creation through interest rate reduction" game you need to start right now.
Conclusion
Interest rates are about to decline. Mobile home park purchases will do very well during this period. If you want to learn more about mobile home park investing consider our virtual Boot Camp or in-person Master Class. But whatever you choose, you need to get going before that window of opportunity closes.