Most companies perform well during a great economy, but one of the true tests of a great business is how it performs during a recession. When seeking the “perfect business,” it is important to analyze three characteristics that are critical to long-term success. Let’s examine these key characteristics in businesses everyone is familiar with and compare how the business of owning mobile home parks stacks up against them.
What is the Business of Owning Mobile Home Parks?
Before we get to the comparison, let’s learn a little bit about the business of mobile home parks. The business starts with understanding the right kind of parks to acquire, and how to find them. Once an appropriate park is acquired, the day-to-day business includes overseeing management, maintenance, and improvements to the park, so it continues to be a desirable place to live. The underlying goal of the business is to build stable cash-flow that can be distributed to investors or owners of the park.
A mobile home park is essentially a giant parking lot with common amenities and utility connections for each parking “space” in the park. The residents in the park pay a monthly fee to keep their mobile home* on a space. This monthly fee contributes to the cash-flow that can be distributed to investors or owners of the park.
*An important note is that the residents own and maintain their mobile home, but they pay a monthly fee to rent the space it sits on. The business of owning mobile home parks focuses on the operations of the park itself, not the maintenance of individual mobile homes.
Frequently stereotyped as “trailer trash,” mobile home parks are one of the most often misunderstood investments. However, they have unique strengths most businesses don’t have, including higher cash-flow, limited competition, and strong recession resistance.
Those powerful strengths make them attractive as a business, so mobile home parks are no longer the hidden investment secret they once were. Well-known private equity firms are secretly buying parks at a voracious pace and are building large portfolios of these high-cash-flow investments.
3 Key Characteristics of a “Perfect Business”
- The first and most important characteristic of any business is adequate demand for its products or services. Without demand, there are no customers, and, of course, without customers the business cannot succeed. The mark of a “perfect business” is one with high consumer demand for the product or service they provide.
- The second attractive characteristic is limited competition, or a clear ability to dominate the competition. The mark of a “perfect business” is a business in which high demand for the product or service cannot easily be impacted or diminished by a competitor.
- The third, and often overlooked characteristic is the ability to perform through market cycles, including during a recession. The mark of a “perfect business” is one that has the intrinsic ability to continue to perform through difficult times.
Comparison to Starbucks and Verizon
To make a worthy comparison, let’s look at proven businesses we are all familiar with, to demonstrate these three key characteristics. Then let’s compare the results to the business of owning of mobile home parks.
- Demand. In addition to the demand created by the daily habits of coffee drinkers, there is also demand for convenient locations and a place to meet on just about every corner. What Starbucks has created caters to the coffee lover who wants the same coffee experience every time, at every location. On the surface, this appears to be a perfect business when you consider how this habit of drinking coffee is passed down to the next generation, who are 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 that even includes its own language. Plenty of attempts have been made to copy their business model, but Starbucks continues to dominate with their culture, great service, same experience every time, and their sheer number of locations.
- Recession. A coffee a drinker with a daily habit that includes a trip to Starbucks will likely continue as a customer until affordability becomes involved in the decision. When things get difficult economically, people can make coffee at home and carve this out of their budget. Even though Starbucks has done a masterful job of creating culture and raving fans, a $5 coffee is still a luxury item, and customers can pause their daily trips to Starbucks during a recession.
- Demand. There is a powerful demand for connection in today’s world and a need to communicate at a fast pace. What Verizon has created caters to the customer who is addicted to connectivity and wants the best coverage, the best speed, and the best service. On the surface, this appears to be the perfect business when you consider the continued growing demand created by children, who are potential Verizon customers of the future.
- 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 have given themselves the ability to deliver speed in a demanding market. For now, they control the greatest share of the market, but they are exposed to changes in technology and regulation that could lower the barrier to entry for competitors. And new competition is emerging from cable companies and among existing competitors who have proposed mergers.
- Recession. Customers who want the best coverage will likely continue to use Verizon, but when things get tough, there will always be cheaper options available for those willing to sacrifice some coverage or speed in exchange for a lower-cost service.
Mobile Home Parks
- Demand. The demand for affordable living has never been higher, and that trend will continue as the gap between the upper and lower class expands, and as baby boomers retire. Today, there is so much demand that the mobile homes themselves cannot be manufactured fast enough to meet the consumer’s desire to own them.
- Competition. From an affordability perspective, there is no real competition, except from other parks. The problem is, parks are going away, and new ones are not being built, so there are not enough parks to accommodate the growing demand. However, if a resident decides to move across the country or to a different park, the truth is moving a mobile home is difficult and expensive. Because of that, the more attractive option for a resident is to sell their home to avoid the cost of moving the it. That results in a “new customer” for the park. In other words, even if a customer leaves, they often bring a new customer to take their place. This is one of the most powerful characteristics of the business of owning mobile home parks and one that most businesses cannot claim.
- Recession. The most affordable housing solution is a mobile home park, and people always need a place to live, even during a recession. In addition to the likelihood that the existing residents will stay, new demand for affordable housing increases during difficult times. In a market where there is already a shortage of supply, a recession will only create more demand.
With the 3 key characteristics in mind, how do these three businesses stack up against one another?
- The businesses of Starbucks, Verizon, and mobile home parks are all built around high consumer demand.
- Starbucks and Verizon have both found ways to outpace the competition, while parks don’t really have much competition.
- When it comes to performance during times of a recession, mobile home parks emerge as the clear winner.
- Both Starbucks and Verizon lose customers to the competition all the time, but when that occurs the customer leaving doesn’t bring a replacement customer. With mobile home parks, the opposite is often true.
The model for a “perfect 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 parks may not be as glamorous as Starbucks or Verizon, they have a unique ability to create stable cash flow during all market cycles, and that’s what really matters to investors. An investment in a mobile home park is one of the best recession-resistant strategies available today, and the winners are those who have the foresight to invest in them.
Jack Martin is a principal at 52TEN, an Arizona company focused on Mobile Home and RV parks.
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