When was the last time you saw two competing mobile home parks across the street from one another or even on the same city block?
The answer is likely never, because like you, we have never seen this phenomenon. We’re not saying it doesn’t exist. We’re just saying that in all our years of investing in this space, we’ve never seen it.
The same can’t be said about self-storage facilities, apartment complexes, retail centers, restaurants, senior living centers, student housing or professional offices. Those classes of commercial real estate are rife with competition.
The lack of competition is one of the reasons we at
Four Peaks love mobile home communities (“MHCs”).
Commercial real estate is competitive by nature and often can be brutal. How many times have you seen a new, shinier strip mall move across the street from an older one and “for lease” signs suddenly pop up at the older facility because traffic is now going to the new kid on the block? The same fate can fall on self-storage facilities, apartments, office buildings, and every other type of commercial real estate except for one – MHCs.
So, why are MHCs different? Why are they immune from the “Death Race” that is commercial real estate investing? Because most have zero worry about competition from new MHCs.
Most cities in America just aren’t allowing new MHCs to be built. Blame it on the stigma or whatever other excuses, but the fact is cities are refusing to zone for new MHCs. Maybe nobody wants a mobile home community in their neighborhood. So MHC owners are the only people in the commercial real estate world that have no worries about competition from new construction. This is one of the many reasons we prefer MHCs over other types of real estate.
Another reason for our love for
MHCs is they’re recession-resistant.
Many forms of commercial real estate are cyclical, with some sectors more correlated to the broader economy than others. Retail and office properties tend to get hit the worst during economic downturns.
During the Financial Crisis of 2007 and 2008 and its aftermath, while single-family housing values plummeted, one of the commercial real estate sectors that thrived was affordable housing, including apartments and mobile homes. Its recession-resistant nature coupled with the lack of competition drew us to MHCs.
Besides fitting all our basic requirements for investment including consistent income and recession resistance, MHCs also provide the most significant opportunity for growth.
On a macro level, since 2000, MHCs (falling under the manufactured housing umbrella) have consistently outperformed multi-family and other commercial sectors. On a micro level, MHCs offer the best turnaround opportunities.
With already high average acquisition cap rates of 7-10%, the allure of MHCs is the potential to make this cap rate even better. No other commercial sector offers this much potential. With MHCs, the cap rate can be raised with renovations and other property improvements.
Because of the lack of competition and the immovable nature of mobile homes themselves, rent can be raised without a fall in tenancy. The cost of moving a mobile home averages between $5,000 and $8,000 so a justified raise in rents will not likely affect tenancy.
Rents in other real estate sectors barely keep pace with the inflation rate, let alone increases. And with prevalent competition in other commercial sectors, increased rents could result in backlash and tenants moving to competing properties.
The potential for increased rents is why at Four Peaks we target distressed parks with low occupancy where with property improvements, occupancy and rent can be increased.
These ideal conditions provide us with the opportunity to achieve cap rates beyond 10%. Fortuitously, the nature of MHCs lends itself to finding distressed properties and these so-called diamonds in the rough.” That’s because many MHCs are owned by legacy owners who are not professional landlords. “Mom and pop” operators mismanage everything from income potential to operational standards. These mom and pop operations present market inefficiencies and challenges that, if approached correctly, can yield a tremendous profit.
For all of these reasons, we love the MHC commercial real estate class. It is unique to any other sector with its lack of competition and the localized nature of ownership that presents lucrative opportunities.