Mobile Home Park Mastery: Episode 9

The Current Mobile Home Park Investment Climate

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We’ve gone over the state of the mobile home park product, as well as what to expect mobile home park investing to look like on paper. In this final issue of our three-part series, we’re going to discuss the mobile home park investment climate today – from the views of city and federal government, to those of lenders, Wall Street and the media. It’s an important glimpse into who the friends of the industry are – and who are not.

Episode Transcript

What's it like out there? I don't mean the weather. I mean the investment climate for investing in mobile home parks. I'm going to break this analysis into five areas. City, federal, lending, Wall Street, and the media. Let's first start off with the city's opinions of mobile home park owners today. As usual, it's not favorable, but that's a good thing. Today is unfavorable with respect as supposed to how it was 20 years ago when Dave and I got in the industry where it was unfavorable with a complete lack of respect. By that, I mean that cities do not like mobile home parks being in the boundaries contrary to what they may say. They have no desire to allow anymore to ever be built, which is fantastic is you own a mobile home park because it keeps the supply completely capped.

At least today, they can't put on the appearance of not caring. They have to because of all of the media publicity at affordable housing, and all the claims on discrimination against people who have lower incomes. They have to at least pretend to be civil, and that's a good thing. What we're seeing today are situation where cities don't want new parks, wish you weren't there, but still fully respect the laws of grandfathering and of playing fair. It's really an ideal environment for mobile home park investors. What attracts many people to mobile home parks is the simple breakdown in the supply and demand formula. With all of the forms of real estate you can build new properties almost anywhere you like. If you have an apartment complex somewhere, you're looking to buying it, you're always worried, will they build another or newer one across the street or down the block.

That's not something that park owners have to worry about. That's because cities just basically don't like mobile home parks. At the same time, let's go over why they don't like them, because one reason people don't realize is purely economic. Everyone thinks cities don't like mobile home parks because they frankly just don't look that nice, and as a result a lot of cities don't see them as a good addition to development in the city boundaries. But really there's a bigger issue at play, because you can make the same argument on other uses. Self storage isn't very attractive either. What is it that makes mobile home parks look particularly bad to them? That is what happens to them financially. If you have a mobile home parks in most cities in America, and let's just model this assuming you've got a Missouri 1% tax rate. What it means is if the land is worth 30,000 and the mobile home is valued at 5,000, you've got $35,000 of taxable assessment, taxed at 1%, which yields $350 per year to the city.

That's all fine and dandy until you think about what happens inside that home. In most mobile home parks, you've got a lot of children. This children have to go to school. As a result, when you go to school, they're going to be spending $5,000 to $8,000 per year, per kid in school costs. What does it mean? It means that that person who's paying 350 in tax who has two kids is probably costing the city around $10,000 a year. Multiply that times a hundred and you start to get the picture. Will cities ever like mobile home parks? I don't think so. I think even though as time goes on and the parks could even turn around and become a little classier, a little more mainstream, the issue will never change regarding the taxation.

Look at what happens if you change that from mobile home park to self storage, for example. Let's say the self storage facility values its units at $20,000 per unit. Yes, that's only $200 a year in tax, but at the same time, bear in mind, there's no cost in that. There's no tuition, there's no hospital, no fire, no police. You can pretty much get the picture. The big change though from 20 years ago to today is the fact that the cities, again, treat us with respect. They realized that they've got to have affordable housing that the federal government mandates, which we'll talk about in a minute, and as a result, they really can't get rid of you. They've come to accept mobile home park owners as just a part of their environment for the long term, and they're not even dreaming of only to eliminate you, they just don't want anymore.

Now, let's look at the federal government and how it currently relates to the investment climate out there. Federal government right now is on a huge love affair with the mobile home park. It kind of came out of nowhere. It was a love affair from a half century ago when the federal government was the largest owner of mobile homes in the US. They own about 400,000 units of them in world war two. However, for about half a century, they got divorced, they went their own way. They remarried and really started supporting the apartment industry, and the stick-build industry. But now they've come back. It's kind of like a love story. What's happened now is the government realized that it should not have gone its errant ways regarding affordable housing. That maybe what we offer, our product is the best solution they've got to beat the affordable housing crisis.

Why is that? Well, apartments, as we all know, are subsidized. What happens when you have an apartment complex is, you put on a person on some kind of section eight program, affordable housing program, and the tax payers pay the differential. That, however, is not really a very workable plan if you're trying to fix things long term. Because it means that all of your folks living in those apartments are being subsidized and that never ends. However, if they lived in the mobile home in a mobile home park, as soon as they get that mobile home paid off, they have a huge reduction in cost. Such that, the mobile home park actually is the only solution to the affordable housing crisis that's not subsidized. It's dawning on everyone. Suddenly they're, "Hey, this is a really good idea." Last year, the HR3700 allowing you to use section eight vouchers to buy mobile homes.

They haven't enacted it yet because HUD's been dragging their feet for the longest time. No one knows why. But Hud will ultimately have to enact it, and it, again is one more sign of support by the federal government to the industry. Other things going on out there are the discussion of getting back in the mortgage creation business Fannie Mae and Freddie Mac for mobile home buyers. That will be fantastic if they would do that. They haven't done that again in about half a century. A very welcome news if they were to do that. They've also been breaking down the doors of lending products for the industry, offering agency debt through Fannie Mae and Freddie Mac. They've even been supporting greater initiatives on grandfathering. That's where you know, and then finally, they're even looking at tax credit programs to foster the industry.

Just recently, there was a proposal, although it didn't go anywhere, of giving park owners tax credits if they elect not to redevelop the property but leave it as a mobile home park. We're seeing really quite a rekindling of that old love affair with the federal government. That's a huge part of the current investment climate for mobile home parks.

Number three is lending. We've also got a huge love affair going out with banks. This is a hard-earned love affair. This is more like the movie The Notebook, I think. What you have is mobile home parks have been proving the lenders time and time again that there are good loan product by rarely defaulting. We had the lowest default rate year after year. Sometimes tied with self storage, a couple times they've edged us out, but we are by far right at the top of the heap, as far as low default rates. Lenders have taken note. Now, over the last 20 years, lenders actually like what we do and are very eager and aggressive to make new loans in our sector. We're really looking very good on the investment climate with lending. It's getting all the better now because of all these new agency net products brought up by Fannie Mae and Freddie Mac. Now there are even more debt borrowing options out there.

Again, why? Because we earned it by making our payments, by not defaulting. Those are things lenders like to see. Sure, we're not glamorous, we're not a big old beautiful office tower made of steel and glass. It's very impressive to take your wife by or just to stand in the lobby and admire what you've made a loan on. But the fact of the matter is office buildings go upside down all the time. Office building defaults are not that uncommon. Mobile home park defaults are very uncommon and that has made the lending environment out there very, very strong for what we do.

Next, Wall Street. What is it the investment climate on like with Wall Street right now? Well, very, very favorable. Look at the stocks and the REITs, they've gone insane. ELS, SUN and UMH are up majorly over the last 24 months. Why is that? Because again, people are seeing that mobile home parks could offer the only non-subsidized solution to affordable housing. As a result, investors have been rewarding these companies by buying up their shares. The yield at ELS has plunged as low as about 3.6% dividend, yet people keep buying the stock. Why is that? They very much believe in the product, they believe in affordable housing. They also believe that rents will continue to go up in those parks. They're really not buying the 3.6 dividend. What they're thinking is where will this be five to 10 years from now.

Just look at the headlines on all the Wall Street publications regarding these rates. You can Google it up. You'll see that Wall Street really, really have grown very, very attracted to the mobile home park sector. That's fantastic. There aren't that many publicly traded mobile home park REITs. Right now in the US, there's only three. SUN, ELS, and UMH. However, you have a new entry, Brookfield Asset. It's a public REIT out of Canada. They recently bought up RHP, also known as NorthStar. Now you have both American and Canadian REITs involved in the market, and that's a fantastic thing. If you want to go one step off of mainstream Wall Street, all off things that are traded publicly, just look at the Carlyle Group. Largest private equity group in the United States now buying mobile home parks. No one's exactly sure how many they've bought. It's been rumored to be between 2,000 and 4,000 lots. Never the less, it's another Wall Street group that's saying, "Hey, I really like this asset type. I think I'm going to get involved in it." They've done so in a big way.

They're not alone. If you go to the MHI event in Chicago, which is annual, and it's coming up here in a few weeks, you'll find constantly people there in dark suits wearing name tags with various private equity group names on them. There's no shortage of folks right now who see affordable housing is a giant mega trend and they want to share in that. They want to invest in that mega trend and profit by it. Right now, I don't think I've ever seen Wall Street more favorable on the industry. You can't really go back too far and even find a mobile home park REIT. I think the earliest was Chateau. They did a fine job, but my gosh, that's been a long time ago. Really, if you look at ELS, which I think is a product of the 90's, we don't have that long of a track record. Wall Street didn't even like us enough to let us be public for the longest time. Now, suddenly they're dawning on them that we are really something that's worthy of investment.

The returns on those REITs are so impressive. I think people will be remembering that for a long time to come. Finally, the media. Where do we stand as far as investments and the media? Well, that comes in several different formats. You first got where we stand as far as the television and news channels. They continue to like to show shows such as Cops, and Myrtle Manor, and these various things that get people to view. Most people consider that the show Cops is the best chance they have of scenes, some sex and violence strictly on the mobile home park edition so they happily tune in. From a television perspective, there's still no positive show on the industry. I don't know if that will ever even change, because people when they hear the words "trailer park," they get all excited but not for positive reasons.

Look at the more intelligent forms of media. Things like the Wall Street Journal, and Time, those kind of items. You'll see nothing but a bountiful bouquet of affection on the part of the media in mobile home parks. Look at some recent examples. Look at the time magazine article called The Home Of The Future. Is that not impressive? Here you have a situation of a magazine that looks at a mobile home as the product of the future. The reason they chose the mobile home and the mobile home park was our sense of community. In fact, in the article, they said that we are the gated community of the less affluent. That's a huge plus having Time Magazine, which is one of the largest circulations in the world raving about the product. Look at the Wall Street Journal and all the great things they have said in recent times about the industry. Look at the New York Times that came out to Boot Camp and hung out with myself and talked to Dave. Look at what they wrote about the industry.

Look at all the great things going on. Even look at the most recent National Geographic, which is not really a television, it's Cable news show, who came out to my house here in Ste. Genevieve and they went with me for a day up to the parks we own in St. Louis. Again, what you find is that people are really starting to like what we do. They're not going it in a way that's dishonest. If you talk to the reporters, they're really just fascinated how there was this real estate sector that they've never heard of before, which is doing all these great things for people who need affordable housing, and they have absolutely no idea we existed. It's shocking how few people have ever been in a mobile home park, or ever gave it the time of day, or even bother to drive in the driveway if they didn't have a friend or relative who live in there.

In the media scene, my gosh, these guys are providing a detached dwelling with a yard, you can park by your front door, you can be a home owner, have a sense of community. How much was that again? How can it be that cheap? Over and over, when you talk to the media, you'll find that they're just in disbelief in a world which apartments are $1,200 a month roughly on average, we're producing a product that's only maybe often a fourth of that in cost. That is so much better. It's not just American media that's starting to like this. I just did a show with the Italian TV station, RAI. They are non-profit out of Italy. In fact, I was on the show with the largest circulation in Italy, of these news show products. It's on the affordable housing crisis in Italy. They came to the US to see what the US is doing regarding the affordable housing crisis. They were blown away by the product.

I took them out to our mobile home park in Sugar Creek, in Fenton, Missouri with a brand new home. Not a super top of the line home, but a good home. Three bedroom, two baths, right around a 1,000 square feet. I walked the reporter and the camera men through the home. They did some filming. We had to have a translator there. I asked the reporter, "What would this home cost in Italy?" He looked at the home, he looked at me, he looked at the window, and he told me, in Italian, which had to be translated that if this home was not a mobile home, but was in a foundation in Italy, it would be priced at about $300,000. All the way up to $500,000 if it was in a big city like Rome. Then, I asked him, "What would this rent for in Italy?" He said that a place like that whether it was an apartment or a condo, or a stick-build in Italy, would rent for between $3,000 and $5,000 per month.

That's not Italian dollars, that's US dollars. Think of how more astounding their costs are than our costs. Wow. What a differential. Again, affordable housing crisis isn't just an American phenomenon. It's a world phenomenon. You're starting to see more positive media attributes of our industry that we've ever seen before. Why? Because again, we work. We're not subsidized. People like us. They like have a yard. They like not having neighbors knocking on their walls and ceilings. We offer a great product and it's incredibly inexpensive. Finally the media is waking up and saying, "Gosh, you know what, that is pretty interesting. We did not know this existed. Now that we've seen it, we're really, really impressed."

Let's review it one last time and sum it up. Thumb up or thumb down. Let's look at the view points on our investment niche. City, positive on the fact we do provide affordable housing and respectful of us, however, thumbs down on building new ones and that's great. Federal, two thumbs up. They love what we're doing. They love the idea of unsubsidized affordable housing. They're bending over backwards right now based on that Duty To Serve mandate. Fannie Mae and Freddie Mac are spending overtime hours working up new ways to make loans on mobile homes and mobile home parks. Look at lenders, two thumbs up. Lenders love what we're doing. They love the fact we don't default. They love the fact that the residents are very, very stable. They're very happy. Therefore our revenues rarely deviate from the budget, and we can make our note payments.

Wall Street, two thumbs up. They're liking what we're doing. Public markets are liking us, and private equity markets are liking us. Why shouldn't they? We have so much upside, and we have such a great product. Finally, the media. Those are folks who have trashed us for decades. All the time, if you look at the television depiction of mobile home parks and mobile home park tenants, it's awful. Trailer park boys, Myrtle Manor, the show Cops, the comedian Jeff Foxworthy who had a lot of media time there at one moment in his career. All these folks, very negative, trying to stereotype everyone in the industry to being trailer trash. However, it's changed now. The intelligent outlets, the Wall Street Journals, the Time Magazines, they are realizing what a great asset we are to America that provide affordable housing to people who need it.

I think you'll see even more of that going on in the future. Again, the investment climate for mobile home parks right now in our view point, extremely positive. We'll be back next week with another podcast. This is Frank Rolfe. Thanks for spending some time. I hope you learned something.