Why Invest in Mobile Home Parks?
Investors are always seeking new opportunities which offer reduced risk, yet significantly higher returns than can be achieved in traditional saving accounts or CDs. MHPs present such an opportunity; now more than ever, as we believe that we are currently in the midst of a unique and rare buying opportunity in the MHP industry.
Here are several key advantages that MHPs have over other asset classes:
Affordable Housing:
MHPs in which the residents can own their homes are as affordable as housing can get. In both good and bad economic times, there is ALWAYS a need for affordable housing. Currently, around 20% of families in the U.S. have a household income of $20,000 per year or less. This allows less than $500 per month in total housing costs. Only MHPs and low-income apartments fit this budget. And between the two, mobile homes are the preferred option, as they allow greater privacy, a small yard, and a safer “community” feeling.
Lower Maintenance:
When you compare MHPs to apartments, duplexes, and other multi-family investment properties, the maintenance costs are much lower. With mobile home parks, you are renting a lot and utility connections. The residents are responsible for maintaining their own homes and lots. The owner is not fixing toilets, replacing carpet, repairing holes in the wall, etc. Additionally, there are no major renovation costs needed to upgrade facilities and continue to attract customers over time. The MHP operator is only responsible for maintaining the land, not the mobile homes on that land.
Lower Operating Expenses:
One of the biggest advantages of MHP ownership is lower operating expenses. The average operating expenses for a MHP is around 40% of the gross income as compared to apartments, which typically have a 50-60% expense ratio.
Higher Cap Rates:
MHPs tend to sell at a capitalization rate of one to two points higher than most other types of investment real estate. Today’s investors generally prefer immediate cash flow versus hopes of eventual appreciation. While most other types of real estate have recently declined in value, MHPs are holding their value better for the reasons described above and the resulting availability of cash flow to their investors.
Tax Benefits – Accelerated Depreciation:
When comparing depreciation of MHPs to other investment properties, apartments have a large value attributable to the building itself and the building portion can generally be depreciated over 27.5 years However, for mobile home parks, the depreciable costs are typically the roads, water lines, sewer lines, electric poles and so forth. Since these are considered land improvements, they are typically depreciated over a much shorter period of 15 years. This increased depreciation over the first 15 years of ownership is a major tax benefit for many MHP investors.
Limited Competition:
Another advantage of MHPs is the barrier to entry for competition (i.e, new MHPs). In most areas of the country, it is difficult to obtain the proper zoning, meet all the requirements to build a new community, and still actually make a profit. Once all of the permits and licenses have been obtained, and the curbs, roads, driveways, utilities, pads and everything else has been built out, the owner still has to cover the carrying costs until enough homes have been brought into the park to break even, let alone start making a profit. MHPs are in limited supply and the barriers to entry due to high entry costs, adverse regulations, extensive government restrictions, and limited access to water and sewer connections, all of which make developing new parks unfeasible in most areas of the U.S. Additionally, MHPs do not make an attractive neighbor, and there is normally extreme resistance by nearby homeowners and business owners to allowing a new MHP to be built in a municipality.