Mobile Home Park Investing Newsletter

The pending acquisition by SUN of two of the largest park owners in the U.S. -- American Land Lease and Green Courte – has the whole industry in an uproar as to what it all means to the future of the business. One shocking aspect was the price, which is about $70,000 per lot, at $1.32 billion. Equally odd is the cap rate, which is only barely above the apparent cost of funds. So what’s SUN doing? Nobody is really sure. Our opinion is that they are trying to prove to the stockholders that they really have a mission and that the stock should be higher. Or maybe they are trying to beat everyone to the punch of consolidation fever, which began with the announcement that Carlyle Group (the largest private equity group in the U.S.) had entered the mobile home park arena with the purchase of two parks in Florida last year. Regardless, it’s great news for the industry, as it will fuel higher appraisals, greater lender interest, and more ammunition to the theory that mobile home parks are coming of age as a legitimate form of real estate. If mobile home parks can attain investor demand in line with apartments, values would go up around 30%+ (the difference between mobile home park 10% cap rates and apartment 7% cap rates). The bottom line is that if you’ve been thinking about investing in mobile home parks, you better hurry up.

I am a huge fan of dollar stores. And apparently I am not alone in this matter. Dollar Tree – America’s largest dollar store chain -- has watched its stock rise from $41 in 2012 to $53 today. Meanwhile, the stock of Neiman Marcus – one of America’s priciest retailers -- has fallen from $30 to $17 over that same period. So why are dollar stores flourishing while the high-end stores are failing?

America is going broke

It comes as no shock that, statistically, the United States is becoming economically poorer. Over 20% of Americans have a household income of $20,000 per year or less – which is basically the poverty line based on how many kids you have. On top of that, 60% of all new jobs created since 2007 have been minimum wage jobs. And then you have those 10,000 baby boomers per day that are retiring into modest social security checks that only average $1,200 per month. Not since the Great Depression has the U.S. economy been so bleak and, unlike the 1930’s, there appears to be no quick fix to the problem. Neiman-Marcus has shoes that cost over $1,200 a pair – as much as the average retiree earns for a month. However, just about anyone can go to the dollar store and afford to buy one item. Mobile home parks flourish in times of economic decline.

Customers are demanding value

As consumers have less money to spend, they naturally are becoming much more conservative with their dollars. And why shouldn’t they? If you’re earning $7.25 per hour (minimum wage) and you go to Neiman-Marcus to buy a can of popcorn for $25, that means that you have to work 4 to 5 hours to make that purchase. At the dollar store, that same purchase is $1 and only required you to work for less than 10 minutes. This is true across all levels of American society. A simple trip to the mall will demonstrate this fact. Look at the sacks that people are carrying. They are from Bed, Bath and Beyond, H&M and other lower cost stores, and you are hard pressed to even find a single luxury good sack. We are at a moment in history where shoppers are not as gullible and value is the key to demand. The dollar store offers the ultimate value for the price. You are amazed that they can build, ship and sell these products for a dollar. Similarly, mobile home parks offer the lowest cost shelter in the U.S. – and that’s why the phone rings off the hook.

At the end of the day, you can’t spend what you can’t earn

The economic collapse of 2007 has proven that many people were living well beyond their means, thanks to zero down and no-income documentation loans. But in the absence of easy credit, the ability to overspend is eliminated. That’s why people have changed their spending habits – they do not have credit markets to enable them. When you shop at Dollar Tree, you have to pay in cash, check or debit card. They do not accept credit at all. In the same vein, our customers can actually afford a mobile home with their low earnings and completely without the existence of credit.

Conclusion

Mobile home parks are exactly in line with the current U.S. megatrends. Their rise to prominence exactly mirrors that of the dollar stores. That’s why we are as enthusiastic about the industry today as we were when we got in it 20 years ago. It just makes sense.

Kurt Kelley and his staff share various different sound bites you won't ever hear at their office. If you're looking for an insurance agent for your property, make sure to call Kurt's office at 800-458-4320.

SUN Communities recently announced that they are paying $1.32 billion for Green Courte and American Land Lease, which works out to almost $70,000 per lot (as opposed to the $55,000 per lot that SUN has on their books for the existing portfolio). The cap rate appears to be around 6%. But before you laugh, remember that an apartment sale at this price point would not even raise an eyebrow. Multi-family cap rates of 6% are common. So why are apartments so much more highly valued than mobile home parks? There’s really no reason. Apartments have many negative attributes that mobile home parks do not share, such as huge capital requirements to keep the apartments modernized and running. Apartments also have no barrier to tenants leaving and wrecking the revenue stream, while mobile home parks have a $5,000 hurdle to leaving the property, which no tenant can afford. Finally, mobile home parks are all about affordable housing, which is the fastest growing niche of real estate, while most apartments are not affordable to this growing demographic. While SUN’s pending purchase is not something we would want to buy, it does give a glimpse into the values of the future, and that future is only being held back until the industry gains a tiny bit more respect. It’s going to happen eventually, we just don’t know when. When the Berlin wall of stigma comes down, the values will soar.

The following article appeared in the Wall Street Journal recently. We think that this theme, while seemingly ridiculous from a financial perspective (if you add in the cost of the lot rent, higher-percent interest rate on the mobile home, and lack of appreciation, the mobile home examples hardly seem the financial bargain the writer claims), is extremely important in helping to reduce the stigma that most Americans hold against mobile homes and mobile home parks. When we toured the mobile home shows in Louisville and Tunica this year, it became clear that double-wide and triple-wide mobile homes can now be built so identical to stick built that nobody can tell the difference if you can hide the skirting behind concrete blocks that resemble a slab foundation. Of course, the price point on those homes is something like $130,000, which kind of leaves traditional mobile home buyers out of the mix. But the photos and stories of these new luxury mobile homes is going to eventually take down the Berlin wall of “trailer trash” analogies. We have already found this to be true in the northern states, where many retired people have bought mobile homes and you never hear the words “trailer” or “mobile home” but simply “house” and “home”. We would obviously love to remove the stigma against mobile homes and parks from the average U.S. mindset. The damage done by Jeff Foxworthy and a media that was obsessed with portraying mobile home residents as hillbillies and misfits will take a long while to eradicate. However, articles such as this one are a giant step forward to end the stigma forever, and allow mobile home parks to be perceived as a respectable form of dwelling. Read the article and decide for yourself.

Click Here To Read The Article

We have used many different Phase I providers over the years. But some recent events have changed our opinion on who the best Phase I provider is, and we want to spotlight some “beyond the call of duty assignments” that have saved the day on some deals recently. One of the most important occurred on a property we were buying in Indiana. The park already had a Phase I that had been done when the owner purchased it and financed it with a well-known bank. However, at the final hours when the deal was to close and be financed by a new lender, a Phase I issue popped up that we had never seen before. A disgruntled former manager of the park had called the EPA and claimed that the park was operating an illegal landfill, in which entire trailers were demolished and buried near a barn. Although the report was suspicious, it had to be substantiated before the deal could close. So Mike Renz immediately went to the subject area and, using a device that he developed, was able to do immediate boring and testing to prove that the claim was a lie. There’s probably no other Phase I provider in America who could do that work, or do it that fast, or do such a good job of it. As a result, we are now using Renz and Associates as our exclusive Phase I provider, and we suggest you look into using them, as well. You can contact Renz at (614) 538-0451.

Here’s some management wisdom from “How to Build and Operate a Mobile Home Park” by L.C. Michelon, published in 1955:

“Much of your income will come from services other than from space rentals. In a mobile home park, these include the laundry, the store, the gas station, mobile home services and sales, the bottled-gas franchise, the storing of mobile homes, the hauling of mobile homes short distances, telephone calls, and so on.”

If that was actually true today, we’d have no interest in owning a mobile home park. But at least it explains why there are all those buildings in the older parks – those were considered the money-makers!

We did a lot of conduit loans -- and regular bank loans -- in 2013. A common feature of those loans was Security Mortgage Group. If you are buying or financing a mobile home park, let Security Mortgage Group get you the loan. They'll get you better terms than you'll ever be able to find on your own. That's why the win the industry mortgage broker award virtually every year from MHI. If you have any loans you need help on, you can reach Anthony or Gerry at (585) 423-0230.