Warren Buffett has long championed the concept that all great business models share one big attribute: a “moat”. This “moat” protects that business from competition and from other damaging risks to profitability. Mobile home parks have long held the position of having one of the largest “moats” in the United States, and it just keeps getting wider and deeper, to the chagrin of many who find it “unfair”. In this Mobile Home Park Mastery podcast, we’re going to analyze why the “moat” keeps growing and why it’s the result of megatrends that nobody has the power to divert.
Episode 187: The “Moat” Keeps Getting Wider And Deeper Transcript
Warren Buffet has always described successful businesses as having one key characteristic and that's having a moat. A moat is what defends that business from competition. This is Frank Rolfe from Mobile Home Park Mastery Podcast.
We're going to talk about the moat with mobile home parks, and the fact that moat just keeps growing much to the chagrin of those who hate our industry. So let's first start about the geographic barriers that we have to the competition, the first part of the moat. Well, the first geographic barrier we have is this current phenomenon. It accelerated under COVID but it began before that, and that's what called by Zillow as the great reshuffling. Now what's the great reshuffling? It's people wanting to leave the urban core of cities and metro areas and push out into the suburbs and the exurbs. And why that grows our moat is simply because most mobile home parks are located in the suburbs and exurbs. If you drive around any city - Pittsburgh, New York, even St. Louis - you won't find hardly any, if any, mobile home parks within that city center. All of the mobile home parks are located out on the fringes, and suddenly those fringes are what's hot. So the first part of our moat which keeps growing is simply our locations. We are suburban and exurban by nature, and that's growing as far as demand.
Next, the desirability barrier we have because mobile home parks are just way more attractive to customers today than apartments. I know there are those who would say no, that's ridiculous, everyone wants to live in an apartment. No, they don't. If you said that you haven't been selling mobile homes over the last few years. We hear the same story from virtually every customer that comes in. not only do they love our product but they hate their apartment they currently live in. Why do they hate it so? Well, it's simple. They don't like people knocking on their walls and ceilings. They don't like having to park 200 yards from their front door in some random parking lot. They don't like the fact that they have no yard. They don't like the fact that all of their neighbors are transients that never stick around so they build absolutely no relationships with their neighbors. People today want something more. The pandemic really has taught people a whole lot about housing. Many people stuck at home in those apartments realize they really hate them. On top of that, apartment owners don't keep their product up. There's no nationwide push from class B and C and D apartment owners to really put much CAPEX back in. In many ways apartment have become what mobile home parks used to be: mom and pop owners who never really put any money back into the property, and just took it all out as it went. Mobile home parks, on the other hand, today are exactly what the customers want. One of the biggest attractions of all, of course, is detached housing with its very own yard. And that's why desirability has allowed us to expand our moat.
Then you have the affordable housing gap. Basically, single family home prices keep going up. In fact, right now they're right at or exceeding the levels prior to 2007 and 2008 great recession beginnings. The single family home prices have crept right back up. People said when they all collapsed, "Oh, they'll never go up again." Well, they have. And as single family home prices have gone up, so have apartment rents. Apartment rents right now are the highest they've ever been in American history. That means that mobile home park owners share an unusual position. Our rents are so low by comparison to the other housing sources. A typical mobile home park lot rent in America in a major metro is about $1,000 a month less than a corresponding apartment. A single family, well forget that. No one is going to be able to afford that. Single family home prices in America right now average over $200,000, anything but affordable. So again the affordability moat, it just keeps widening.
I might add another thing that's helping it widen is the fact that mobile home park owners have been able to establish financing programs for new mobile homes, which allows them to price these homes very affordably. When in the old days, it didn't exist. Programs like the cash program didn't exist that many years ago. So there wasn't the ability to compete with apartments in many cases, but today it does exist. So we're able to, again, widen that moat through affordability.
Then of course you have the biggest moat of them all and that is the fact that virtually every city in the United States bans new construction of mobile homes. Now why do they do that? People all the time think it's just some kind of attitudinal problem or basically ignorance. It's not ignorance at all. It's actually based on wisdom. You see, mobile home parks lose money for cities in a big way. If you have a mobile home park with a used home on it, your typical tax you'd pay out on the occupied lot in a 1% state might be $500 on a $50,000 lot valuation. An old mobile home might be valued at another $5,000, so basically $550 would be the tax revenue for the city, but the cost of tuition for one single child in that home is about $8,000 a year. If you take the amount of money that flows out of mobile home parks and the need for city services, and compare that to the amount of money that flows in from tax you'd rapidly see that mobile home parks cost cities money. Now, they can't say that because that's in violation of all the duty to serve programs out of the US government. So instead they pin it on the residents, saying the residents hate mobile home parks, that they don't want to have them. There's that concept NIMB - not in my backyard. Well, that's not coming from the neighbors. Of course, they share that opinion but cities use that as a marketing tool to hide the fact they don't want new mobile home parks to be built.
And on top of that, cities are getting more broke by the day so the odds of them ever saying you know what we're being pretty prosperous right now, we're taking in way more tax money than we're losing so hey, let's open up the barriers to more affordable housing, those words will never be said in America, not today, not for decades to come. Since there is no additional supply of mobile home parks that creates one of the greatest moats in all of American real estate. Can you name any other sector of real estate that has no supply allowed? Self storage, apartment, office, retail, industrial? Nope, cities don't ban any of those, they promote those. You call a chamber of commerce with your proposed self storage concept they'll be all over you. They'll be calling you back every three days, "Hey, what more can we do to get you to come to our city?" Same with an apartment builder. Only mobile home parks have this issue, but it's not a problem. Nothing wrong with it. It's been that way for about a half a century now, and that's given us an incredible moat.
So why do we need a moat anyway? Well, I think we would all agree Warren Buffet, an amazing investor, one of the best runs in history as far as making money with his investment, and I think we would all agree that in today's crazy times in America with so much instability and uncertainty, one of the key things you would want or any business would want to succeed is that sense of protection and stability provided by a moat. Some businesses don't have any. You open up a pizza shop, anyone can open a pizza shop next door, down the street, no moat at all. Other industries have tiny little moats like little streams, little creeks. Maybe you think you've got a little bit of a moat with your self storage facility because gosh darn it you can't build one exactly next door because that's a park, but of course you can build one three tracks over. But the mobile home park industry we have a moat that is just gigantic. It's the size of the Great Lakes, and it just keeps getting bigger, wider, and deeper every day. Is it because mobile home park owners are geniuses? Well, to some degree they're at least people that spotted the moat and realized that over time it would grow. But I don't think anyone ever anticipated it to grow at the speed that it's growing.
Again, part of that is inspired by the pandemic, or it at least accelerated it. A lot of it is also just born of the fact that many other industries have not done a very good job of reducing that moat. If apartment owners did a better job of providing a better product, okay that might be some competition. If you were able to come up with a new form of detached dwelling with a yard that could beat our ridiculously low prices, okay, that might work. If urban corers could find a way to attract people to return and say, "Come on back to the heart of the city. You really want to be here, don't you?" Then okay, that might do something. If city government said, "You know what? Losing money is good for the city. Let's lose all the money we can," okay, but you'll never see any of those ever happen, will you? And that's why mobile home park moats will continue to grow, to widen, to deepen, every day, every year going forward.
This is Frank Rolfe, Mobile Home Mastery Podcast. Hope you enjoy this. Talk to you again soon.