Why Mobile Home Park Investments Sustain Lower Cap Rates

Capitalization rate, or “cap rate,” is a metric used to measure and compare the profitability of commercial real estate investments. Cap rate is calculated by dividing the net operating income (NOI) of a property by its purchase price. Essentially, the cap rate of a property represents the yield on an annualized basis, assuming the property is purchased with cash.

In recent years, cap rates have risen due to a number of factors, including higher interest rates, inflation, and the increasing cost of capital. As a result of these factors, investors are demanding a higher return, which contributes to higher cap rates.

While cap rates for most commercial real estate have risen, rates for mobile home parks have remained relatively low, leaving many investors wondering why. Let’s explore the reasons behind this divergence.

Investment Income Outperforms Through All Market Cycles

Mobile home parks are a recession-resilient asset class. During economic downturns when renters are moving out of other types of real estate, new residents are moving into mobile home parks due to the affordability. This can cause the performance of mobile home park investments to improve while other commercial assets experience decline.

Shrinking Supply Causes Increased Demand

In addition to the increasing demand for affordable housing, there is a limited supply of mobile home parks. Each year, fewer parks are built compared to those that are knocked over for redevelopment, further shrinking supply.

There are also fewer willing sellers of mobile home parks than other types of commercial real estate. After all, MHP owners are sitting on stable cash flow and typically have little motivation to sell, except price. Therefore, investors are willing to pay a premium and accept a lower cap rate to gain access to the asset class.

Market Fragmentation Reduces Supply

The mobile home park industry is highly fragmented, meaning there are relatively few large owners and many smaller, individual owners. Fragmentation makes it difficult for buyers to find high-quality mobile home parks for sale, further contributing to low supply on the market.

Mobile Home Park Investments Offer Tax Advantages

There are significant tax benefits for mobile home park investments. For example, depreciation can be taken at a faster pace than most other types of real estate, which reduces taxable income. Mobile home parks also qualify for a greater degree of bonus depreciation due to the high percentage of land improvements. These tax advantages make mobile home parks even more attractive to investors, who are willing to pay a lower cap rate for a more tax-efficient investment.

Institutional Demand Has Increased

Mobile home parks’ recession resilience and stable performance have attracted institutional buyers. These buyers have longer investment time horizons, lower cost of capital, and lower yield requirements, all contributing to higher priced offers and sustained lower cap rates.

Institutional buyers also view mobile home parks as a covered land play, meaning parks are purchased for cash flow with the understanding that the land can be redeveloped for a different use in the future. This is because the land under a mobile home park (particularly in quality locations) is eventually worth more than the business of the park, allowing the owner to enjoy stable income for many years with multiple exit strategies in the future.

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.