Mobile Home Park Mastery: Episode 1

Why Invest In Mobile Home Parks

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In this episode, Frank Rolfe discusses the reasons why people invest in mobile home parks.

Episode Transcript

Welcome to Mobile Home Park Mastery, this is Frank Rolfe. We're gonna discuss today the reasons why someone would want to invest in mobile home parks. Sure, it's a weird idea, let's invest in a bunch of old trailers sitting in what appears to be a field and make money with it. To many people that may seem like an odd proposition, and that's how I was if you go back to 1996 when I bought my first mobile home park called Glenhaven in Dallas, Texas. At the time I knew absolutely nothing about mobile home parks except I had driven by them over the years. I found them to be sometimes a little horrifying looking and a little scary, and I knew absolutely nothing about them.

So what did I do? I went down and got a concealed handgun license and there I reported to work right there at Glenvahen mobile home park sitting in a little trailer for about a year operating the mobile home park I had just purchased. And I learned a lot of over that time. I learned how to make money with parks, I learned the kind of parks you want to buy, the things you must watch out for. But one of the key things I learned from that first experience with my very first mobile home park is why the heck I would want to own such things. And once I learned that the reasons why I wanted to own one, I bought more and more. And today my partner Dave Reynolds and I are the fifth largest owner of mobile home parks in the US. But it began with just that one mobile home park. And I'd like to tell you what I learned as far as why you would want to invest in a mobile home park.

The first key reason easily summed up is money. Mobile home parks have the highest rate of return of any form of real estate. Now you might say, "Well why would that be? If they're so good why have I not heard of them in the past?" Well the reason is that basically they've been left out of the mainstream of real estate. They are not covered in any magazines or newspaper coverages or really no one ever even really talks about them. They always talk about the simple ones that everyone already knows about, like apartments, retail, office, those sectors they get all the publicity. But mobile home parks just don't. Maybe it's because there just aren't that many people who own mobile home parks. There's only about 44,000 mobile home parks in the US, which is only 1/10 of the number of apartment buildings. So probably it's just a fact that it's a very very small subset, but that doesn't make it any less lucrative. In fact it makes it more lucrative because the average American investor is not seeking it out. So therefore when you're in the mobile home park business you are not having to deal with the level of competition that you have to deal with in apartments and retail and the other sectors.

Now what kind of rate of return can you get on a mobile home park? Typically you're shooting for about a 20% cash on cash return. So let's put that in perspective. Your average CD out there at the bank is paying about 1% right now. Your average office or apartment or retail investor, they're striving to get about a 10% cash on cash return. But park owners are typically striving to get 20%. So that's two times the normal rate of return of the other sectors. And it's 20 times the rate of return on your CD at your local bank. So that's a very very high level of return.

The second reason people want to invest in mobile home parks is that they're very very stable. Let's explain why that would be. The word mobile home would suggest that these homes can be freely moved, easily, any time you'd like. But that's far from true. The typical mobile home costs around $3,000 to $5,000 to be moved from point A to point B, even if point A to point B is only about 200 feet in distance. That's because to move a mobile home you have to basically take the skirting off, disconnect all the utilities, jack it up in the air, install wheels and axles, get it back down on the ground, attach it to a truck, deliver it, and then you've got to do all those steps again. You have to connect all the utilities, you have to do what's called the set which is where you tie it down to the ground. You have to put the skirting back on, the decks back on, connect the air conditioner, and now you're finally ready to go. And the cost of that is several thousand dollars. Doesn't matter where you do it anywhere in the US, it's gonna cost you at least $3,000 or more to do that.

As a result mobile homes never move. So typically 98% of all mobile homes remain in the very spot where they were delivered from the factory. And because they don't move the revenues are extremely stable. In fact perhaps the most stable of any form of real estate. In all the other sectors, whether it's apartment or retail or office, it's a fact of life that residents come and go. And they can move about freely, it doesn't cost them very much money to move. They just hire a moving truck and off they go. But with a mobile home park the cost of moving the mobile home is often more than the actual value of the mobile home. So consequently they just stay right where they were. This is probably a reason why mobile home parks traditionally have the lowest default rate of any form of real estate loan. It's simply because the homes don't move so our customers are very very stable. Every night when you go to bed you know in the morning you'll have the same customers there.

Now sometimes the customer may abandon their home. They may need to seek employment somewhere else so they leave the home. But that's okay as the park owner because in most states there's laws on abandonment that allow you to take possession of the mobile home over a certain small span of time, and then you can sell it or rent it yourself to a new resident who then stays again for years and years and years. So stability is a real real big key.

Another big reason why you'd want to own mobile home parks is the supply is fixed. In all the other sectors of real estate, whether it's self storage or retail or apartment, you can pretty much build them new anywhere you want. So if you see a prime corner somewhere and you say, "Hey, that's a perfect spot for a shopping center," you can go to city hall and say, "I want to build a shopping center." And they'll say, "Hallelujah, we would love to have a shopping center," and they grant you the permit. And off you go and you build your new retail center.

Then what happens to the rest of the world? Well when you build that new center now there's more supply of centers out there, more retail square footage available. And that makes everyone else's a little less valuable. In fact if you build a new one on the corner it may take one that's on another corner that that corner is not as valuable as it was in the old days, and it really really cripples that center. Tenants move from that center over to the new one, right?

But in the mobile home park space they haven't allowed any significant number of parks to be built since about the 1980's. So right now we're entering about a half a century since most mobile home parks were built. And as a result, if you're familiar with supply and demand, you know that when there is no supply, and the demand remains static, it makes values go up. That's what supply and demand is all about. So the simple fact that you can't build mobile home parks any longer makes them with no longer reason go up in value every year simply because of the lack of supply.

Now for those who are thinking, "Well okay, maybe that's true, but maybe the new tiny home movement and the new desire for more affordable housing will make them build more new ones." Well think again. What happens with most cities is is there's two reasons why they won't allow new ones to be build. First off the stigma, because people don't like mobile home parks. They don't like the name, the sound, they don't like what the residents look like. And as a result any time you try to rezone a property to mobile home park, basically the entire populous of the city shows up against it. They bring flaming torches and say, "I don't want any mobile home park in my neighborhood," and the city fathers are therefore not going to approve it.

However there's another reason that's a little less known, but those in the industry are well familiar with it, mobile home parks lose a huge amount of money per year for the city that they're located in. Here's why. If you look at a typical mobile home park, and let's just pick one in my home state of Missouri, if you say that the mobile home lot is worth $30,000 each in that mobile home park, and the mobile home sitting on that lot is worth $5,000, that gives you a taxable value of $35,000. In Missouri, which is a 1% tax rate state, that would give the city $350 per year in tax revenue. But inside that mobile home park there's typically probably a couple kids that go to public school. And those kids cost the city $6,000 per year to educate. So now there's $12,000 out the door.

And then on top of that mobile home park residents frequently do not have health insurance or any access to healthcare, and they're the folks that go down to the emergency room for anything that may come up, because they have nowhere else they can go to get medical care, because our country has still not fixed its medical system. So if Timmy breaks his arm and goes down to the emergency room, now there's another $2,000 bill there. If Larry has trouble breathing because he thinks he may have pneumonia, off to the emergency room and there's another $2,000 there. So the bottom line is cities won't allow mobile home parks ever again going forward simply because they're heavy drains on city budgets. So as a result we don't see that ever changing.

Now if you say, "Well what about building out in the countryside? Couldn't they just go build some outside of the city limits?" Well they probably could but there's a few problems with that. First off when you get outside the city limits there's never city water or city sewer. So to build a park there you'd have to build a brand new water and sewer plant. That alone is going to cost you somewhere in excess of a million dollars. And on top of that when you get done there's no customers because you're not anywhere near anything anyone wants to be around, like jobs or shopping. So basically the supply is pretty much set in stone for the rest of our lifetime. And again, that creates huge value to the owner, to the investor in that mobile home park because it just doesn't have to compete with anyone else.

Another reason you'd want to own a mobile home park right now, which you're probably well aware of, is our nation's affordable housing crisis. It has gotten really ridiculous in America today on housing. The median home price in the US is about $200,000 per year. And the average apartment rent is about $1,170 per month. Now that may all sound fine and good to you, but you're probably not in that final lower half or lower third of American households. The lower third is earning only $30,000 per year in total household income, which means they only have about $600 a month to spend total on their housing for it to be truly affordable, yet apartments are twice that number. And homes are completely out of reach. They would never have the down payment or the credit to even begin to qualify for a home, much less afford it.

So where can an American household that's earning $30,000 per year or less live? Well there really is no option other than mobile home parks. We're the only thing out there that can deliver a housing unit in the price point of those households. And while that wasn't a big deal prior to 2007 when we all pretended like America's economy was going to be forever strong and saved through single family home speculation, it's now been proven that isn't what actually happens. And some of the stats since 200 are really quite horrifying. One is that 50% of all jobs in America today are $10 per hour or less. It's 50% of all new jobs created since 2007 are lower paying jobs.

In fact our fastest growing industry in America is fast food. That is our contribution to the world right now. We are the fast food kings. And many mobile home park residents in fact work in the fast food industry. But what does it have to offer? It never pays well. So basically we have been minting 50% of all jobs to folks who are going to be needing desperately affordable housing.

And then on top of that after the Great Recession, as everyone's probably aware, they found that most of the folks who were living in those custom homes really could not afford to live in them. In fact 70% of all Americans do not even have $1,000 in savings. So really our nation is getting perpetually poorer. It's kind of been in economic decline for a long time. We've masked that periodically with bubbles. We had the technology bubble, we had the housing bubble. When get the bubbles though, you set those aside, you'll see that traditionally our nation has been kind of on a downward trajectory on the economy and on household income. And as a result, affordable housing has become a gigantic topic in America.

Now people don't like to talk about it much as far as politicians go, because it's nearly impossible to solve. Therefore it makes them look kind of stupid, like they've been doing a bad job of governing the country, which probably they have, that they've got this massive number of people needing affordable housing, yet they have no affordable housing to give them. But what is the solution to that? Well, mobile home parks. We're not the whole solution, we can't house all the Americans who need affordable housing, but it does make our phone ring all the time.

We have a property in Iowa that's scored 100 calls per week, and that's without advertising. That was people calling desperately, just finding our listing on Google, driving by, word of mouth, saying, "Hey, I need a place to live. Do you have anything available in your mobile home park?" So when you're in the mobile home park business your demand is off the charts. And that's one big reason to buy a mobile home park is simply you're on the right side of that mega trend called affordable housing.

In fact you're on the right side of many mega trends, even beyond affordable housing. What about the whole baby boom mega trend of 10,000 people per day retiring? Where the heck do they go? Bear in mind that America's been lying forever about the economic strength of those who retire. Social Security in America pays an average of $1,200 per month. But the old idea was that Americans would be retiring with giant pensions. Well, where did those pensions go? They don't actually exist. Most Americans when they retire have no pension. They have very little in savings. And they have $1,200 a month coming in on that monthly check from Social Security. So where do they live? What do they do?

Well what many of them do is they downsize. They sell their home and then they try and find something that's much more affordable. And you guessed it, that's right, back into the mobile home park again, which is their only option for affordability. So the baby boom is another huge mega trend that goes in favor of mobile home park ownership.

There's also another mega trend, although it's not nearly as big as baby boomers or affordable housing, but it's that movement called tiny homes. I'm sure you've seen that on TV. There's no less than I think five TV shows concerning tiny homes. And what are tiny homes? It's a new movement of people who are saying, "You know what? I don't need to live in a space that's huge that I can't afford. I would rather live happily in a smaller space that I can afford and use whatever money I spend on my larger house towards doing things I really enjoy doing, such as recreation or travel." And it's a whole mindset that's really taking root in the fact that not only is our economy in America gotten down for the longest time, but also people are just kind of getting sick generally of materialism. They're just getting tired of always having to have big things and new things. And maybe turning the tables and saying, "Not how big a home can I live in but how small a home can I live in?"

Nevertheless the tiny home movement has suddenly made mobile home parks in many markets sheek again because now you have millennials and edgy urban people who are saying, "Hey, I really like mobile homes, the whole concept of mobile homes." People even like the fact that the mobile home is steeped in American culture. It's right up there with hot dogs and baseball. Mobile home parks are only really truly found in the United States in any major way. Canada has just a few, they have around 2,000 mobile home parks, and the rest of the world has virtually none. In Europe they have what are called caravan parks, but they're mostly just RV, and they're just an incredibly tiny number of them throughout the rest of the world. So it's truly an American icon.

Another reason you would want to invest in mobile home parks as a real estate sector is that the financing is so easily available in our industry. And that's because mobile home parks have always come in as one of the lowest default sectors of real estate for banks. Banks love the things, and they love them really because they know that when they make a loan in the mobile home park sphere they always get repaid. And that's hugely important to them obviously.

So when you have a mobile home park it's not that hard to get a loan on it. In fact in 20 years now we've never failed to be able to buy a mobile home park for lack of lending. And there's so many different options out there. There's seller financing, there's bank financing, there's CMBS which stands for commercial backed security, also known as conduit lending financing. There's even agency debt now which is Fannie Mae and Freddy Mac, they're now making loans. There's also hard money lenders, which we're not a big fan of, but is another option out there. But again, there's just so many different lending sources wanting to make these loans. In fact, when you're a mobile home park owner, after you get a little larger, a frequent call you will get will be from banks wanting to know if you have any loans for them. So the mobile home park sphere is so unusual that we actually are sought after by lenders wanting to make loans, which is a really great position to be in.

Also if you don't like going out there and finding loans from properties, in the mobile home park sector you can actually use what are called loan brokers, also known as capital market consultants. These folks will go out in the field and find you a loan. And they typically charge a one point fee at closing for their services. And it's a great option for many people to avoid having to build bank presentations and call on banks to let these folks do it for you. And they also do a very good job. We've been using loan brokers now for about 20 years, and we've never had a situation where they didn't A, obtain the loan, and B that the loan did not close on the deal. So we think that's another key reason you'd want to get in the business is that the lending is so good.

Another option is simply because we are typically buying from the moms and pops. And I think this is one of the unique attributes of mobile home parks over most of the other forms of real estate investment, and that is we are typically buying from the folks who built these mobile home parks. Bear in mind that most of the parks in the US were built in the 1950's through 1970's, and those people, known as the greatest generation and also the silent generation, well they're still alive operating those properties. And we're able to buy directly from the source.

Because we can buy directly from the source some unique things happen. Number one, we get really great deals on the properties we buy. And that is simply because the mobile home park that was being run by the mom and pop traditionally was not being run on all eight cylinders. It's maybe hitting on four or five, because mom and pop just truly did not have that good a handle on their business. And so when they go to sell it they'll sell it at a price that to them seems fair, but to you seems a bargain because there's so many things you could improve on. You could improve on occupancy, you can raise the rents, you can cut the cost. Just so many different avenues of increasing the net income. So you can get some really really good buys.

Another reason of course as we just discussed is seller financing. When you own a property free and clear that's the only time you can finance it. And since most mobile home park owners own them free and clear, seller financing is a very very frequent form of lending on a mobile home park. In most of our early deals, both Dave and I utilized that seller financing. That's how we financed all those parks. So again, it's a great great tool to get a loan on your property.

Another great thing about buying directly from mom and pop who own the property free and clear is that you have the ability to sometimes buy these with very very little down payment money. The very first park I bought, Glenhaven, I bought the park for $400,000. But I only had to put $10,000 down and the seller carried $390,000 fully amortizing for 30 years. That's an amazing loan. If you were to borrow that money at a bank you'd have to put at least 20% down, right? So that would have been $80,000. But I was offered the park at only $10,000 down. My second park I bought was only $5,000 down. My fifth park I bought with zero down. In fact Dave and I have collectively done about 12 zero down deals. These are deals where we bought the mobile home park and the seller financed 100% of the purchase price.

Now how is that possible? It's because when you own something free and clear there are no rules. You can do whatever you want. Banks would never do that. But mom and pop sellers would do that type of thing all the time if they like you. And that's a force that we'll be talking about on these podcasts called bonding. We'll save that for a later podcast.

But again, when you're working with the original moms and pops buying things, magical prices and magical terms can result. And I think that's a very important item to remember because again, there's no other sector of real estate that I'm aware of where you can do that. Yes, you can buy a self storage facility from the person who built it, but they built it three years ago, and they still have a giant mortgage and they can't really offer you anything. Do the kind of buying I'm talking about, you have to buy from people who have owned those properties for decades and paid the note off. So there really is no other sector that gives you that opportunity.

Another reason you'd want to buy mobile home parks is the fact that our rents are ridiculously low and poised to go much much higher in the months and years ahead. The average mobile home park lot rent in the US is roughly about $280 a month. That's right, $280 a month. That's a silly number when compared to apartments that average almost $1,000 a month more. Now you might say, "Well why are the rents so darn low?" That's a great question that people are still trying to analyze.

There's an economic over at Duke University right now writing a paper on it. But it looks like what happened mostly is that moms and pops just never adjusted their rents for inflation. Because when they built these properties back in the 50's and the 60's we didn't really have inflation, so they just didn't build that into their business model. As time went on they never kept up with inflation. If you look at a typical mobile home park built in the 1960's at a base rent of $50 per month, which was pretty much the lot rent in that era. That base rent today would be around $450 a month, so nearly double the current US average rent. And why is that? It's simply because mom and pop never raised their rents in line with inflation.

But that doesn't mean that the rents cannot go up significantly going forward. Although we have customers who are needing affordable housing, bear in mind that affordable housing represents a number of five or $600 a month, not $280. And since over 80% of all mobile homes are owed free and clear by their resident, that means that you could still raise those rents to where they need to be, $500 a month, still be massively affordable, still offer people exactly what they need, and yet be much more profitable for the park owner. Now a lot of that money is needed for capital improvements and better management. But a lot of the reason the price is so low is not market forces such as demand, but simply the fact that the rents were never raised. So we think that will be a big issue going forward for people.

Another reason you would want to buy a mobile home park is that it's an industry that is showing nothing but future consolidation. This past year there have been three $2 billion acquisitions of mobile home parks. Think of that, $2 billion per transaction, three of those. One was the sale of Carefree Communities to a US public company called Yes. Another was the sale of a company called RHP or Northstar to a Canadian public company called Brookfield. And the third was a mobile home park portfolio called Yes to a company called GIC which is the sovereign nation fund of Singapore. And what you're seeing in our industry is people are finally waking up and saying, "Wow, this is a great niche to invest in. I want a part of that." And so you have a lot of private equity groups, and also owners of other sectors of real estate. For example, Brookfield's an apartment owner. They're wanting to buy into the American affordable housing business.

And why I think this is a great reason why you'd want to buy a mobile home park today is that consolidation of any industry makes the values go up. If you look at self storage for example, which is three times more consolidated than mobile home parks, what do you find? You find that values skyrocketed while Public Storage and Extra Space and Sovereign and all the other large accumulators bought up most of the self storage space in the United States. So you're going to see basically a run up in values for no other reason than the fact that the industry is finally getting on the radar screen of the larger buyers and being consolidated.

So when you add it all together, what does it mean? It means that mobile home parks are one of the best investment options in the US today. I often say that affordable housing is not only America's greatest problem but also its greatest opportunity. And I think that any industry that has so many mega trends in its favor has to do well going forward. In fact we put our money where our mouth is. We own about 260 mobile home parks in the US. We have about 23,000 lots spanning 28 states. So we've invested and put our money on the table in this industry as much or more than anyone in the world. And I can tell you right now that we sleep very comfortably knowing we made the right bet, because everything's aligned for mobile home parks to do extremely well in the months and years going forward. I think everyone is probably already seeing that. If you look at the average mobile home park's performance over the last decade you will see nothing but an upward trajectory. And we think you'll continue to see that going forward simply because of the massive demand for affordable housing in America Today.

This is Frank Rolfe again with Mobile Home Park Mastery podcast. I'll be back shortly with some other news subjects and topics to go over with you. I appreciate your time, hope you enjoyed this, and talk to you soon.