There are three key characteristics that separate good businesses from great businesses. Let’s examine those characteristics and a few examples – including one that may surprise you: mobile home parks.
3 Key Characteristics of a Great Business
High demand for the product or service:
Without demand, there are no customers. And of course, without customers, the business is unsustainable. High demand is critical.
When this characteristic is in place, high demand for the product or service cannot easily be impacted or diminished by others.
Performing well during a strong economy is one thing, but the true test of a great business is how well it performs during a recession. This characteristic is often overlooked, but critical for long-term success.
Limited competition and a high barrier of entry for new competitors:
When this characteristic is in place, high demand for the product or service cannot easily be impacted or diminished by others.
The ability to perform through market cycles, particularly when times are tough:
Performing well during a strong economy is one thing, but the true test of a great business is how well it performs during a recession. This characteristic is often overlooked, but critical for long-term success.
Examples of Great Businesses
When we think about familiar businesses that demonstrate these key characteristics, Starbucks and Verizon are strong role models. Here is how these companies have leveraged the three key characteristics of a great business.
Starbucks
StarbucksDEMAND: In addition to the demand created by the addictive habits of coffee, there is also demand for convenient locations and a place to meet. What Starbucks has created caters to the coffee enthusiast who wants the same experience every time, at every location, on nearly every corner. The demand should be sustainable, with the habit of drinking coffee being passed down to the next generation: the potential Starbucks customers of the future.
COMPETITION: Even though there is plenty of competition, Starbucks does a masterful job of creating a loyal following for their unique culture, to the point that it even includes its own language (e.g., “tall” instead of small, “venti” instead of large, etc.). Plenty of attempts have been made to copy their business model, but Starbucks continues to dominate with their culture, great service, consistent experience, and sheer number of locations.
RECESSION-PROOF: A coffee drinker with a daily habit that includes a trip to Starbucks will likely continue as a customer, even when things get difficult economically — especially when you consider it’s not easy to replicate the Starbucks experience at home.
Verizon
DEMAND: There is a powerful demand for connecting and communicating at a fast pace. Verizon has created a business that caters to the customer who is addicted to connectivity and wants the best coverage, the best speed, and the best service. Again, the demand should be sustainable, as customers have children who are potential future Verizon customers.
COMPETITION: In a market with plenty of competition, Verizon has focused on building a quality network with the best coverage, which has helped them attract a loyal customer base. Also, by investing heavily in fiber optics, they can deliver speed in a demanding market. For now, Verizon controls the greatest share of the market, provided they stay on the cutting edge as technology advances and regulations change.
RECESSION-PROOF: Customers who want the absolute best coverage will likely continue to use Verizon. When things get tough, most customers will continue to pay for the best, not willing to sacrifice coverage or speed in exchange for a lower-cost service.
Mobile Home Park Investments: A Great Business with All Three Characteristics
Another surprising business that demonstrates these characteristics is a mobile home park.
Mobile home parks are essentially giant parking lots with large spaces. Instead of parking cars in each space, people park mobile homes. The residents in the park pay a monthly fee to keep their mobile home in one of the spaces. This monthly rental fee contributes to the cash flow distributed to those who own the park.
What separates mobile home park investments from all other real estate investments is that the residents own and maintain their mobile home, so there is home ownership involved. This is why residents in a mobile home park rarely move (unlike other types of rental real estate). Once a space is filled, the income from that space is essentially permanent.
If a resident should decide to move, the most favorable option for them is to sell their home to avoid the cost of moving it. This results in a new resident for the park. In other words, even if a resident leaves, they often bring a new resident to take their place. This is one of the most powerful characteristics of mobile home parks, and one that most businesses cannot claim.
How do mobile home parks demonstrate the three key characteristics of a great business? Let’s take a look.
DEMAND: The demand for affordable housing has never been higher, and that trend will continue as traditional home prices rise and interest rates push buyers out of the market. The demand is so high that mobile home manufacturing often can’t keep up.
COMPETITION: From an affordability perspective, there is no real competition except from other existing mobile home parks. However, the number of existing parks is shrinking as older parks are being redeveloped into something else, and new ones are not being built. Cities rarely give approval for new parks to be built because high-density apartments create more tax revenue and therefore offer higher and better use in the eyes of the city. Because new parks are not being built and the inventory of parks continues to shrink, there are simply not enough spaces to accommodate the explosive demand for new mobile homes.
RECESSION-PROOF: People always need a place to live, even during a recession. The most affordable housing solution is a mobile home park. In addition to the likelihood that existing residents will stay for a long time, new demand for affordable housing increases even more during difficult times. In a market where there is already a supply shortage, a recession will only create more demand.
A Great Business – and a Great Investment
The model for a great business starts with high demand and limited competition. The ability to perform through a recession is the final ingredient needed to create the perfect business. While mobile home park investments may not be as glamorous as Starbucks or Verizon, they have a powerful combination of sustainable high demand, shrinking supply, and recession-resistance. The more expensive traditional housing gets, the better the conditions are for mobile home parks and their investors.
Mobile home parks create stable cash flow during all market cycles, and that’s what really matters to investors. Mobile home park investments are one of the best recession-resistant strategies available today, and the winners are those who have the foresight to invest in them.
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.
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