Warren Buffett has become a household name due to his massive success in the investing world. What makes him unique is that his story, and the investments he makes, are not particularly compelling. He does not take big swings at risky investing plays. Instead, he looks for high-quality companies that are fairly valued and invests heavily.
That means positions in historic banking companies like Wells Fargo and Bank Of America. It also means investing in companies that are heavily ingrained in our day to day lives, like Coca-Cola and Heinz. It is absolutely boring, and it absolutely works. A similar situation in the real estate world is the investment in affordable housing, particularly mobile home parks. The 10 million dollar houses of Los Angeles and the penthouse apartments of New York garner the most attention in the real estate world, but there are many more avenues to profit.
They are less flashy, but they do the job just as well, and often, even better. Hitting consistent singles works better than swinging big for home runs, and those singles are what we are after. While penthouses might grab the attention of mainstream investors, behind the scenes, there is an inefficiency taking place in the affordable housing space. This is an inefficiency that we are capitalizing on.
Market inefficiency can be defined as the opposite of the efficient market hypothesis. In the efficient market hypothesis, it is assumed that investors invest rationally and that every asset is valued correctly. In practice, we find that people are unreasonable and that markets are always inefficient. There are always assets that are undervalued and spaces that are underdeveloped.
What every smart investor is after is a market inefficiency that they can profit off of. These inefficiencies are often overlooked by typical investors, leading to big gains for the smart investors who noticed them. The shortage of affordable housing in the US is one of these inefficiencies.
Note: This article is supplemented with information from the 2017 Gap Report, sponsored by The National Low Income Housing Coalition (NLIHC)
Improvement of the economy is often measured by rises in world markets: Stocks, real estate, etc. Unfortunately, those with very low income do not own any assets. The result is that when economies improve, those that have money to invest get richer, and those without the money to invest stay the same.
A statistic that reflects this is that income for the poorest 10% of households in the US is 6% lower today than it was in 2006. That means despite the rise is markets, our poorest citizens have not seen much improvement. In total, more than 43 million Americans are in poverty and many of them struggle with the cost of their home. The following are some key findings from the NLIHC Gap Report from 2017, which analyzed the state of low-income households and their struggle to finding housing:
- 11.4 million ELI (extremely low income) renter households accounted for 26% of all U.S. renter households and nearly 10% of all households.
- The U.S. has a shortage of 7.4 million affordable and available rental homes for ELI renter households, resulting in 35 affordable and available units for every 100 ELI renter households.
- ELI renter households face a shortage of affordable and available rental homes in every state. The shortage ranges from just 15 affordable and available homes for every 100 ELI renter households in Nevada to 61 in Alabama.
ELI renter households face a shortage of affordable and available rental homes in every major metropolitan area. Among the 50 largest metropolitan areas, the shortage ranges from 12 affordable and available homes for every 100 ELI renter households in Las Vegas, NV to 46 in Boston, MA.
Those points are heavy on data and a bit thick, so here is the primary takeaway: There is a high demand for low-income housing, but there is a major shortage of it. That shortage is universal throughout the country, affecting every state and every metropolitan area. An additional factor is that middle-class families often choose low-income housing in order to save money and build their financial future. This means two things. One, the shortage of affordable housing is even worse for ELI renters, who will surely be rejected in favor of a higher earner. Second, this means that affordable housing is in even higher demand than you might think. This amounts to a major investment opportunity.
The attractiveness of this investment does not stop at profits. Another benefit is the good it does. When you look past the numbers, you see real people struggling with low income that need a place to live. Providing low-income housing options to them can lessen the burden of housing costs and perhaps can give them a foothold in rising out of their financial situation. It is not often that an investment is both an earner and a humanitarian effort, but in this situation, it is. Investing in affordable housing helps those who need it most.
In an economy that has been steadily rising for almost a decade, value can be hard to come by. Luckily, there are always inefficiencies that can be capitalized on. One of those inefficiencies is affordable housing. Poverty is still very much an issue in the US, and the supply of affordable housing does not meet the demand.
Our investment in mobile home parks is a play at profiting off of this demand, while also providing housing for low-income households. It is not often that you come across a smart investment that also has a humanitarian aspect. Our play in mobile home parks is a creative way to exploit a market inefficiency and is a force for good. Those two factors in conjunction make it a fantastic investment for you and for our country.