A CD pays 4% right now, but inflation is at 6.5% -- so that’s a guaranteed loser. The S&P 500 is down 6% over the past year, so if you add on inflation, you’re actually down over 12%. In times of high inflation the only thing that matters is how fast you can increase revenue and net operating income. It’s like a NASCAR race and all that matters is how fast your investment can go to outpace inflation.
Why mobile home parks can go fast
When it comes to speed in increasing net income, mobile home parks can go really fast. There are numerous reasons for this:
- Ability to push rents without losing occupancy. The average U.S. mobile home park lot rent is around $300 per month. That’s over $1,000 per month less than apartment rents. Due to this huge discrepancy, mobile home park lot rents are positioned to more than double and still be imminently affordable. That’s already occurred in Denver, for example, where mobile home park lot rent are now nearly $900 per month and the parks have waiting lists. A key reason for this is that there have been no significant new mobile home parks built since the 1970s and this keeps the supply/demand feature of mobile home parks always favorable for the owner.
- Frequency of rent increases. Most mobile home park owners raise rents annually, although the leases are typically month-to-month which would allow for even more frequent increases if the owner so chooses.
- Ability to reduce costs. Mobile home parks often have inherent cost containment strategies due to poor business practices by some mom and pop sellers. These include submetering the water and passing the water/sewer costs on to tenants, as well as fixing main-line water leaks. Another cost center that can often be fixed is the amount spent on the on-site manager. On more than one occasion we have replaced managers earning over $100,000 per year with better talent that costs only $30,000 per year or so.
Why other investment options can’t
Other investment options can’t compete when it comes to speed, and for good reason:
- Inability to raise rents without losing occupancy. If you own a self-storage facility and raise the rents significantly, enough customers move out to displace that increase (and sometimes more than negate the increase in total revenue). This is true of pretty much all real estate sectors other than mobile home parks and, of course, equally impossible for most corporations if stocks are more to your liking.
- Rent increases are infrequent due to lease commitments. In office buildings and shopping malls, the leases are often measured in decades with no increases possible. Others have CPI increases built in to the agreements, but that keeps you from ever getting ahead of inflation. Stocks that sell consumer products can, of course, increase prices whenever they want but they do so infrequently due to massive competition.
- Rising costs. The profit margins on many businesses are extremely low. A grocery store, for example, has a profit margin of only around 1% of revenue. That means that a 7% rate of inflation means that costs go up roughly 7%. Mobile home parks have an expense ratio of only 30% to 40%, so a 7% inflation rate only impacts 30% to 40% of revenue and a 7% increase in pricing means you’re making more than half of the increase in profit.
How long will the race go on?
If all investments are locked in a race to outstrip inflation, when will it all end? After 14 years of virtually zero inflation, are we looking at 14 years of high inflation instead? There are several schools of thought.
- The Fed has lost its ability to cure inflation. Despite raising interest rates the Fed has made little success in its mission to cure high inflation. Perhaps that’s because interest rates are not the cure. Based on the last time that the U.S. suffered from inflation this high, the only way to bring it down it tied to reducing energy costs. The Biden administration made a terrible decision in promoting false hopes of powering America with solar and wind energy and shutting down all oil and gas production it could muster. Until the price of oil recedes (which is imminently attainable if the government opened the floodgates on oil and gas exploration as occurred during the Trump administration) there may be no way to stem the inflation frenzy.
- The next leg of the investment race is the coming recession. The Fed’s plan is to cure inflation by destroying the U.S. economy (rather than simply encouraging the oil and gas industry to increase production). As a result, a recession/depression is effectively a given. When the economy collapses, the race will change to one of trying to keep net income at current levels while consumer spending erodes. The good news is that mobile home parks actually do better when times are tough, as affordable housing goes up as the economy goes down.
Conclusion
There is no greater potential in any investment sector than mobile home parks. They are properly positioned to be a leader in the race to make money – and that race has become a battle of survival as inflation and economic uncertainty have hit levels not seen in 40 years. If you’re betting your financial future, you need to pick a winner.