Over the last decade, mobile home park investments have emerged as an appealing option for investors, offering significant advantages over other real estate asset classes. These advantages include stable cash flow, recession resilience, and outsized tax benefits – not to mention the potential for appreciation.
In spring of 2022, the Federal Reserve began raising interest rates to combat inflation, changing the landscape of real estate investments. While this policy has profoundly affected the broader real estate market, its impact on mobile home park investments has been mixed. Let’s dive into 5 areas impacting real estate and explore the mixed effect.
1. Higher Interest Rates May Slow Down Acquisitions
In general, higher interest rates make it more expensive to borrow money to finance an acquisition, potentially reducing the number of potential buyers in the market. This situation can also exert downward pressure on pricing for any owner who is forced to sell.
However, it is important to note that the mobile home park (MHP) industry remains relatively fragmented, characterized by mom-and-pop owners who aren’t motivated to sell unless they can secure the price they want. These owners are currently enjoying stable cash flow and are shielded from the volatility experienced in other commercial real estate. Therefore, high interest rates may not necessarily cause MHP pricing to adjust. Instead, higher rates have caused a slowdown in transaction velocity, as demonstrated by the chart below:
2. Higher Interest Rates May Limit Refinancing
Refinancing a property is a common practice to recoup capital, especially if major improvements have occurred at the property. However, higher interest rates translate to increased monthly payments, resulting in reduced cash flow. Therefore, refinancing is likely to only be pursued for properties with an approaching loan maturity date.
While most experienced park owners have already refinanced their loans at historically low interest rates, it remains highly feasible to refinance in the current market. In contrast, refinancing could be challenging for other commercial real estate (especially if performance has declined), limiting the pool of lenders willing to fund that loan.
However, due to the inherently stable performance of mobile home parks, refinancing would remain attractive to a wide audience of lenders.
3. Higher Interest Rates Require More Patience For Dispositions
Higher interest rates make financing the purchase of mobile home parks more expensive for buyers. This circumstance can diminish the pool of potential buyers and complicate the process of selling properties at premium pricing. However, mobile home parks continue to experience high demand, and owners who exercise patience should be able to sell their properties at a fair price, even in a rising interest rate environment.
For sellers seeking to achieve a premium price, seller financing is a common solution wherein the seller provides financing to the buyer at a lower interest rate than is currently available in the market.
4. Higher Interest Rates Fuels Demand For New Residents Seeking Affordable Home Ownership
This is where mobile home park investments shine. Most commercial real estate is experiencing reduced demand from tenants, forcing owners to lower rent and offer concessions. Mobile home parks, on the other hand, are experiencing the opposite phenomenon.
Rising interest rates have made it nearly impossible for buyers to afford entry-level homes. Comparatively, a manufactured home in the same neighborhood can be hundreds of thousands of dollars less expensive and come with an affordable monthly payment, in spite of higher rates.
The demand for affordable homes has never been higher, and as interest rates rise, the demand grows even stronger. With the limited supply of affordable housing options, mobile homes have quickly become the top choice for entry-level buyers. As a result, mobile home parks experience higher demand when interest rates are higher, playing an increasingly important role in meeting the housing needs of many Americans.
5. Higher Interest Rates May Increase Cost Of Operations
Higher interest rates can lead to higher costs for mobile home park owners in the form of expenses such as the cost of borrowing money to make capital improvements or the cost of financing inventory.
However, while other commercial real estate is experiencing stagnant or negative rent growth, high demand for affordable housing in mobile home parks drives continued rent growth. This upward trajectory in rent serves to mitigate the impact of rising interest rates on cash flow.
Mobile Home Park Investments Remain Resilient Despite Rising Interest Rates
Recent higher interest rates have had a mixed impacts on mobile home park investments, resulting in a favorable outlook overall.
On one hand, increased interest rates elevate the cost of borrowing to acquire mobile home parks, slowing down the transaction velocity in the marketplace.
Conversely, higher interest rates steer entry-level home buyers toward the only affordable option – the mobile home – resulting in heightened demand, rent growth, and increased park occupancy.
In conclusion, while the landscape of commercial real estate is shifting due to rising interest rates, mobile home park investments stand resilient to the overall impact. The heightened demand for affordable housing, coupled with the stability and unique advantages of mobile home parks, positions them as a standout choice for both owners and investors in the face of evolving market conditions. As interest rates rise, mobile home parks emerge not only as a sound investment, but also as a critical player in meeting the increased affordable housing demand.
This content is the perspective of the author and is not intended to be relied upon as a forecast, recommendation or investment advice, and is not an offer or solicitation to buy any securities or to adopt any investment strategy. The information and opinions contained in this content are derived from experience, historic data, and other sources deemed to be reliable, are as of the date of this content, and may change as subsequent conditions vary.