In the beginning, there was land. Then people built structures on that land. And from that moment on there were two types of people: 1) owners and 2) renters. Everyone had an equal opportunity to choose which category to fall into, and they knew their decision had a myriad of ramifications. "Owners" had to commit capital, maintain the property, worry about making mortgage payments, sometimes suffer though weather damage, and generally be more responsible. "Renters", on the other hand, shouldered no risk or effort in maintaining the structure, put up no capital to buy it, and generally had the freedom to run off whenever they chose to do so. Throughout most of American history, there was a premium paid to own (and control your own destiny) vs. renting and this ratio was about 15% more to own than to rent. However, here's the new reality, straight out of Wikipedia:
"in many current housing markets, the cost of owning a house is significantly higher than renting, sometimes even considered "three times more" depending on the specific location and current market conditions, primarily due to added expenses like property taxes, insurance, maintenance, and closing costs associated with home ownership."
That's right, the cost to own is three times more than to rent. Historically, when this ratio gets this out of whack there has to be a correction to bring the ratio back into line. But there's no way you can bring down the cost of housing due to structural shifts such as the simple fact that the average lot in the U.S. is $80,000 and the average cost to build a home is $200 per square foot, meaning a 1,500 sq. ft. house costs around $380,000 to construct (which coincidentally is almost exactly where the average single-family home price sits right now). As a result, the only thing that can give in this equation is rental rates. They will have to go up two to three times (based on the market) for the ratio to be healthy again. This is something that large apartment owner Grant Cardone has been writing about for months now.
Only 8% of Americans live in mobile homes and, of those, less than half live in mobile home parks. That's about 3% of the nation's renters. The other 97% are made up of mostly apartments as well as rental single-family homes. So let's focus first on the meat-and-potatoes of apartment and SF rents.
The average for this category nationwide is around $2,000 per month. To make the ratio of renting vs. owning back to its historic level, those rents would have to go to $4,000 per month. The median income in U.S. households is currently around $80,000. That means that, instead of 30% going to housing as the old formulas proposed, renters would be paying more like 60%. Is that possible? Well, according to the government's own statistics, it's already that high on the bottom 20% of wage earners, with these numbers straight out of Wikipedia:
"Among renters with the lowest incomes (bottom 20% of incomes), the median renter household spends 74.8% of its income on housing in the United States, 67.6% in Spain, 54.9% in Italy, and just 34.5% in Switzerland, 32.8% in the Netherlands, and 31.1% in France."
When this will occur on the categories higher than the bottom 20%, I have no idea. But I guess it's safe to say that America is a screwed up mess when it comes to apartments and single-family home rentals, and only destined to be far, far worse.
But now let's change over to just the mobile home park side of things…
The difference between owning and renting a mobile home in a mobile home park is a much different affair. Assuming the average lot rent in the U.S. is around $300 per month, and the average new mobile home costs $70,000, then the sum of lot rent and mortgage is roughly $1,000 per month. And that's pretty much right on what it costs to rent a mobile home pretty much nationwide. So while the apartment and single-family home industry has a ratio that is horrifically broken, mobile home parks are still roughly holding to the rent vs. own ratio that the U.S. was built on.
But here's where the equation in mobile home parks becomes completely out of whack with the rest of America and it's something that the general public – and most politicians – have no understanding of: AROUND 80% OF MOBILE HOMES ARE OWNED OUTRIGHT AND HAVE NO MORTGAGE. That's because the amortization length on mobile homes is very short coupled with the simple fact that used mobile homes often sell, within mobile home parks, for $1,000 to $5,000 cash. This makes the total cost to live in a mobile home in most markets simply the lot rent which means around $300 per month.
Under the rules of supply and demand, when park owners are offering $300 per month rent vs. $2,000 per month for apartments and SF, the phone rings off the hook. So just imagine what happens when those rents go to $4,000 per month. Mobile home park demand will grow exponentially.
As we all know with supply and demand, when the supply is limited, demand drives up pricing. Since you can't really build new mobile home parks since the 1970s, that means that prices can only go up. Way up. Perhaps double or triple where they stand today. And it's not due to the "evil" work of landlords but simply the economic laws of supply and demand.
Some groups would then respond with "then our only hope is to halt all mobile home park lot rent increases" but the problem with this – other than the legal issues – is that it will only accelerate the speed in which mobile home parks get torn down to facilitate building those $2,000 to $4,000 per month apartments. After all, mobile home park land is perfect in every way for apartment construction with great frontage, access to all utilities and the correct acreage in most cases.
It's also important to remember that housing is NOT the #1 cost for American households, but is actually outpaced by healthcare, childcare, transportation and taxes. Those have skyrocketed far more than lot rents have for mobile home park residents and should continue on a vertical trajectory into the future.
So here are the takeaways from all of this:
- Mobile home park lot rents are insanely cheap.
- Mobile home park lot rents will increase in-line with other housing rents and STILL be insanely cheap.
- There will be huge increases of rents in the apartment and SF sectors that will forever change the ratio paid for housing.
- Mobile home parks are the only sector that will NOT require this fundamental shift.
- If the nation cannot get the cost of healthcare, childcare, transportation and taxes under control then rent will be the least of America's problems.
- The Trump administration definitely has their work cut out for them.
- Mobile home park owners do not get nearly enough credit for the great work they do in providing America's only truly affordable housing.
To learn more about the science of mobile home park investing, consider attending our Mobile Home Park Boot Camp or Masterclass within the next few weeks. You will learn the correct way to identify, evaluate, negotiate, perform due diligence on, renegotiate, finance, turn-around and operate mobile home parks, and you can attend either virtually or in-person.