Not all commercial real estate is created equal. Some is reliant on “good times” and economic boom like shopping centers, hotels and office buildings. And others are “contrarian” and flourish when times are terrible. And the most “contrarian” investment property in the U.S. is the classic “trailer park”. Essentially a parking lot for mobile homes, these properties are 100% focused on affordable housing – a product that goes up in demand in inverse proportion to the decline of the U.S. economy. So how does the mobile home park asset class fit into the current torrent of U.S. bad news?
High Interest Rates
In March 2022, the Chairman of the Federal Reserve began an aggressive trajectory in raising rates. He rapidly increased them from around 0.25% to around 5.5% -- the highest in 40 years. That ushered in higher mortgage rates on real estate as well as higher cap rates and lower valuations. There’s no way that anyone can spin higher rates as a good thing for the real estate industry, but what’s important to note is that the increases are now over and the next direction on interest rates is down. And there’s no better time to buy real estate than when interest rates are in decline. Since the higher yields of mobile home parks are created by the use of leverage – the ability to obtain a mortgage at 70% to 80% LTV. If you buy a mobile home park with a 1-point spread between the interest rate on the loan and the cap rate on the property, you will hit more than a 10% cash-on-cash return. Increase that spread to 2-points and you hit around 16% and 3-points garner around 22%. When rates are going down all you have to do is simply bring in your rents and pay bills and you will make a fortune as the spread increases (and so does the value of the mobile home park). There has not been a buying opportunity like right now since rates declined starting in 2008.
The Pending Recession
Most American real estate sectors revolve around “luxuries” – things that nobody really needs. Whether it’s a boat marina or a shopping mall, they can only flourish when economic times are booming. But in the case of mobile home parks, the demand actually increases as the economy tanks. This contrarian nature is unique, with the only other sector following the same path being Class-C and worse apartment offerings. This basic product is called “affordable housing” and it’s one of America’s greatest problem as there is a massive shortage with no ability to build more due to current construction costs. It’s a time-proven performance as mobile home parks were the big winner of the Great Recession which began in 2007/2008. Mobile home parks are the dollar store of housing and, just like Wal-Mart, they have become the hot commodity of a housing market in which single-family homes are around $400,000 and apartment rents average $2,000 per month. It’s worthy of note that the average mobile home park lot rent is around $300 per month nationwide, which is literally around 90% off the apartment rents.
The Real Estate Lending Apocalypse
You haven’t seen it covered by the media much yet, but there is around two trillion dollars of commercial real estate mortgages coming due over the next two years. The majority of this is office building and shopping mall debt. And the losses will be staggering, as most of these loans were made at a time when the U.S. was booming and the impact of the internet on retail and office was not yet fully felt. For example, the largest office building in St. Louis – One AT&T Tower – recently sold for 98% less than it cost to build, yielding less than $4 million at auction for a 1.4 million square feet high-rise building. These types of losses will bring lenders to their knees and potentially trigger bank failures nationwide. The losses will be just as severe on shopping malls and hotels, which are also part of the problem. But the lending disaster on these “luxury” holdings will have little impact on mobile home parks for several reasons:
- Many mobile home park deals are seller-financed, so they do not require getting a loan through a traditional lender at all. This allows you to sit out the movie.
- Over half of all mobile home park loans (by volume) are financed with Fannie Mae and Freddie Mac, which are also known as “institutional debt”. This is rooted in the U.S. government and is extremely stable even in times of economic uncertainty. But more importantly, only housing sectors can borrow from them. Office, retail and hotels are not allowed to borrow from Fannie Mae and Freddie Mac.
- Mobile home parks have the lowest default rate of all real estate sectors, so even in tough banking times, mobile home parks get priority treatment with their VIP status for lenders that need solid loans to pay the bills.
For these reasons we do not anticipate the “lending apocalypse” to extend to the mobile home park industry.
Conclusion
There are, without question, some seismic problems for the United States that will hit soon. There will be winners and losers from this inevitable occurrence. Mobile home parks will be one of the only sectors that will offer superior returns coupled with investment safety while everything else is sinking.
And now is a great time to buy into a “contrarian” industry such as mobile home parks.
For more information on how to buy and operate mobile home parks you should consider attending our Mobile Home Park Investor’s Boot Camp. It’s a three-day immersion weekend covering the correct way to identify, evaluate, negotiate, perform due diligence on, renegotiate, finance, turn-around and operate mobile home parks. It’s 100% live with Q&A throughout, yet 100% virtual so you have no travel time or cost.