What makes mobile home parks unique investments?
In this short primer, 52TEN Co-Founder Jack Martin covers the basics and explains why these investments perform despite market cycles and volatility. Learn why mobile home parks are superior investments compared to apartments and other types of real estate.
Welcome to the first video in our mobile home park investment series. My name is Jack Martin. I’m the co-founder of 52TEN, and in this video, we’re going to talk about why mobile home parks are superior to other investments.
Here’s what we’re going to cover in this video:
- First, we’ll talk about what mobile home parks are and how they work.
- Then, we’ll touch on what makes them unique, and we’ll do some comparisons to other real estate.
- Then, we’ll wrap up with why they’re superior as an investment.
So, let’s talk about what mobile home parks are and how they work. If you can, imagine a giant parking lot – but instead of parking a car in each one of the parking spaces, you park a mobile home.
In this aerial photo of a mobile home park, you’ll see that each one of these individual spaces can be home to a mobile home. As the park owner, we own all the individual parking spaces for the homes, and we own everything else that’s associated with the mobile home park itself. But, each one of those mobile homes is owned by an individual tenant, and that tenant pays a monthly rental fee for the use of the parking space that their mobile home sits on.
As the park owner, we own the clubhouse, we take care of the office, and more – everything inside the clubhouse and everything outside the clubhouse is our responsibility, like:
- The furniture
- Cleaning the pool
- Taking care of the spa
- Making sure the roof doesn’t leak
- Making sure the air conditioners are all in good working order, etc.
This particular park also has a little area for a barbecue and a fire pit for the residents to use. It’s our responsibility to make sure that all of that is in good working order for the tenants.
Some parks will have laundry facilities, so it’s our responsibility to make sure that all those machines are in good working order. We also take care of all the common area landscaping.
Each one of the individual spaces is the responsibility of the tenant that’s renting that space, but if there’s grass that needs to be mowed, weed control, or tree trimming in the rest of the park, we take care of that. Some parks will have sport courts. This particular park has a shuffleboard court, and those need to be resurfaced from time to time. And then of course, if there’s a game room or something like what you see here, it’s our responsibility to make sure that these are always in great shape for the residents to use.
We also take care of the pavement. When this starts to get cracks, it’s our job to do those repairs. We fill potholes, and we try to extend the life of the pavement as long as we can. But when it gets past its useful life, then we’ll completely tear it out, and we’ll put brand-new pavement like what you see we recently did at this park.
This is one of our mobile home parks in Arizona. Here’s an example of a single-wide space in a mobile home park. The single-wide home would sit on this gravel area, the tenant would park their vehicles on the right here, and then on the left would be their sidewalk, their entry, their patio. Then these things that you see sticking up in the back are the utility connections.
Every parking space in a mobile home park will have its own water and sewer connection and its own power connection (sometimes they’ll have things like internet and natural gas).
Here’s an example of a double-wide space. It’s twice as wide, so half the home would sit on this side and half of the home would sit on this side. In the back of this photo, you see a six-foot-high block wall. That’s the perimeter fencing that runs around the entire property, so if that needs any repair, that would also be our responsibility.
Here, you see a single white home that was recently moved into one of our parks. Now this one hasn’t been set up yet, so it doesn’t have skirting or awnings or those kinds of things, but this is typically what it looks like when a home gets delivered to a park.
Here’s an example of a newer double-wide that was recently installed in one of our parks – this one’s all set up and ready to go and ready for a tenant to buy it and move in. When we have vacant spaces in a park, we’ll allow temporary rentals from RVs. This allows us to gain some income from each one of these vacant spaces until a home is delivered.
When we’re completely done repositioning a mobile home park, the goal is that each one of the parking spaces in the park will be filled with a mobile home. That home is owned by a tenant, and the tenant pays the park a monthly rental fee for the use of the space that their home sits on.
Now, let’s talk about what makes mobile home parks unique.
The first and most obvious one is that the mobile home park is the most affordable housing option that’s available. The next most-affordable option would be something like a two-bedroom apartment in the same neighborhood of a similar standard of living, but a mobile home park is half the cost of that next most-affordable option, and in many cases, it’s less than half the cost.
So, it’s this affordability that creates high demand. And even though this affordability is unique to mobile home parks, what’s also unique is that both in a strong economy when housing prices are getting out of reach and rental for an apartment unit is going through the roof, they’re a very attractive option. But also, in a recession when everybody is tightening their belts and they’re trying to shave down their monthly expenses, it’s common in the worst economic conditions that you can imagine there will be a waiting list at a mobile home park for tenants that are trying to get into the park. This is because of that affordability.
The second thing that makes mobile home parks unique is the fact that the tenants own their own homes. This creates all kinds of unique dynamics, but the first of those is that mobile home park tenants tend to have more of a homeowner mindset versus a renter mindset. If you think about the typical renter that’s going to rent an apartment, for example, their mindset is this is temporary. They might be thinking, “I’m going to stay here until I find something better, or I’m going to stay here until I’ve saved up to buy a home.”
But in a mobile home park when somebody comes to move in, they’re making a major financial commitment because they’re purchasing a home. They’re basically saying, “I want to own this home, I want to live in this park, and I intend to stay a long time.”
Also, because they own the home, we don’t have to do home repairs – the tenants do the repairs to their homes, we do repairs and maintenance to the park itself. So, we don’t have that obligation or that expense.
This creates what’s called “sticky tenants,” and this is just industry lingo that talks about tenants who stay a long time, they rarely move. In the mobile home park business on average, and this is across the United States, mobile home park tenants stay 15 years. This is significantly longer – over 10 times higher than the tenant that moves into an apartment or a single-family home.
This is what creates what’s called “low turnover.” I’m going to pause right here to make sure that I explain what turnover is: each time somebody moves out (let’s use an apartment as an example again), until such time that you have somebody moving in, that whole process there is
called “turning over.” You have to go re-paint and re-carpet and fix all of the damage caused by the previous tenant. And then, of course, you don’t have any income coming in during that period of time because there’s no tenant there. Then, you need to go do some kind of marketing to attract the next appropriate tenant and move them in.
That whole process of turning over a unit from one tenant to another is very expensive. You’re not receiving income, and then you’re spending money to recondition the unit. So, the more often that happens (the more often you have turnover), the less efficient the investment is. And the lower turnover that you have, the more efficient the investment is.
In this case, one of the things that’s unique about mobile home parks is low turnover.
Now, what happens if a mobile home park tenant moves? Let’s use an example that one of the tenants in one of our parks gets a job offer in another city or another state. There are really three things that they can do:
- They can sell their mobile home to somebody else.
- They can move their mobile home to another park or another city or another state.
- They could just walk away and abandon it, which rarely happens, but they still could do that.
Selling their mobile home makes the most economic sense because they want to get the greatest value for their home. So, they’ll advertise it for sale, they’ll find a buyer, and they’ll create an agreement on a price to sell their home. That new buyer will come into our office at our park and fill out the paperwork to lease the space.
This means that last month, the previous owner of the home paid the space rent, and next month, the new owner of the mobile home pays the space rent. It’s very efficient for us, and we don’t experience that high cost of turnover. If they don’t want to sell their home, they could move their home, but it doesn’t make a lot of economic sense because it costs five to ten thousand dollars to move a mobile home depending on the size and how far they need to move it. So, it just makes way more sense to sell the home, take the proceeds from that sale, move to this new location, and buy a home there with those proceeds.
And then of course, if somebody chose to walk away and abandon their home, we’d go through the proper paperwork, and after a period of time, we would gain title to that home.
Now, what happens if they don’t pay? So again, this is very unique, and it’s different from what most people are familiar with. If in a traditional rental environment somebody doesn’t pay their rent, the landlord fills out the proper paperwork and goes through the eviction process. Then they would remove the tenant from their unit.
In a mobile home park, if somebody doesn’t pay their rent, we still go through the eviction process. But when a mobile home park tenant gets evicted, they forfeit their mobile home to the park. This is extremely unique, and this dynamic creates a vested interest from mobile home park tenants to pay their rent. It wouldn’t make any sense to put a fifty-thousand-dollar home at risk just to skip a four or five hundred dollar monthly rental fee.
This creates very predictable rent payments that you can count on – when you’re looking at investments, predictability is a very powerful thing.
When we look back to the biggest surprise that we’ve seen in the rental business in the last decade, which was Covid, a great example is where we were able to collect 99% of our rental income – and no other real estate asset class can make that claim.
Renters knew that they couldn’t just take advantage of the situation, because at some point if they weren’t current on their rent, they would be risking the loss of their home. This is the only real estate type where the tenants in the property have a vested interest in making their rental payments on time.
Now, let’s talk about why mobile homes parks are superior as an investment. When you compare these to apartments, the first thing that jumps out is apartments don’t have sticky tenants. This is something that’s very exclusive to mobile home parks. Because apartments have much higher turnover and it’s extremely expensive, that leads to less stable cash flow – and in an investment when you have less stable cash flow, that automatically assumes higher risk.
When you’re evaluating an investment, it’s important to always look at the underlying fundamentals, like what could go wrong, and really look at worst-case scenarios. If we look back at 2008-11 when things were difficult, if you were invested in the wrong kind of real estate, there was not enough cash flow. So, you couldn’t receive the distribution that you were expecting, and if things got worse than that, potentially the sponsor might have to issue a capital call to help pay for the expenses because there’s not adequate cash flow.
In a worst-case scenario, the loan might become due, you don’t meet the debt service coverage ratio requirements by the lender, and they could call the loan and foreclose on the property. It’s always important to look at worst-case scenarios and understand those risks.
In mobile home parks, this is where they really start to shine. There’s no other real estate that has the advantages that mobile home parks have where we have high demand in good markets and in bad markets. So, in the middle of a recession, we can still have a waiting list for people that are fighting to get into our park.
Mobile home parks have sticky tenants, so we don’t experience the high cost of turnover that other real estate asset classes experience. And then, of course, all of that leads to stable cash flow. It’s really important, when you’re thinking about making an investment in real estate, to understand the stability of the cash flow.
That stable cash flow leads to a lower-risk investment. Even though in a worst-case scenario you may not want to sell your real estate at the bottom of a recession, at least you have cash flow, and that cash flow is something that you can count on. This is what protects you from that total loss scenario.
In summary, when you invest in a mobile home park, you should expect to receive attractive returns similar to what you can receive in other real estate, but you should also expect more stability in the investment itself. And, you should expect that there would be lower risk in the investment.
This wraps up our first video: Understanding Mobile Home Parks. I hope you understand what mobile home parks are, how they work, what makes them so unique, and why they’re superior as an investment.
Up next, in our second video, we’ll go over our investment thesis. We’re going to talk about a bigger macro picture of mobile home parks, we’re going to touch on supply and demand, we’re going to look at where the opportunity is and then how our strategy seeks to take advantage of that opportunity.
Thank you for watching, and I hope to see you in the next video as well.
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.