Investment Analysis

Manufactured Homes

Interest increases in this niche.

By Richard Close |

It is evident that demographic trends are creating a greater need for affordable housing for the largest aging population in our nation’s history. Financial analysts are reporting that big investors are betting heavily on the rising demand for low-cost housing, particularly manufactured homes.

Extremely popular in the 1990s, when syndications and real estate investment trusts invested heavily in this niche industry, today mobile home communities are attracting a new tier of private portfolios acquiring midsize parks. Big investors, such as Equity Lifestyle Properties, with more than 100 communities, prefer well-located large properties of 200 or more spaces.

The Carlyle Group, a private equity firm, recently acquired two manufactured-housing communities for a total of $30.8 million, according to The Wall Street Journal. Investors already active in this often overlooked specialty market are aware of its steady cash flow and potential for significant land appreciation. This flexible acquisition is suitable for long- or short-term investment, expansion, and/or future development plans.

“Trailer parks” of yesteryear are now trending as manufactured-home communities with increased consumer interest as either retirement or vacation homes. Singlewide trailers and aluminum-sided, flat-roofed structures have been replaced by an assortment of modern modular or manufactured homes with vaulted ceilings, second stories, granite counters, stainless appliances, fireplaces, shingled roofs, two-car garages, and countless other features that have rendered them nearly indistinguishable from stick-built single-family residences.

Today’s manufactured-home communities are competing with planned-housing developments with upscale amenities such as swimming pools, gyms, walking trails, dog parks, tennis courts, and even golf courses, but at affordable prices.

“It’s a straightforward formula,” says Clarke Fairbrother, President of Newport Pacific Capital Co. “As single-family home prices continue to increase, manufactured-home park rents can also go up. Even then, mobile-home living is a good value. Additionally, as the job market improves, the financial stability of the tenants improves, making for a reliable return on investment.”

Investment Potential

While some older properties may have small sites that will not accommodate the newer, larger homes, these can often be purchased for half the cost of building a new community, and the obsolete utilities and amenities can be upgraded to command increased monthly land rental rates and a higher return on invested capital. Existing sites can also be repositioned and enlarged, and oftentimes adjacent land can be acquired to expand older communities.

Retirement meccas such as Arizona and Florida have an abundance of land and communities, and California has large, well-located parks in coastal, wine, or desert regions. Because of a quirk in California state law, there isn’t a well-defined marketplace for buyers. A large percentage of purchases and sales take place without public listing of the property. Specialized brokers, financial institutions, and lawyers network within the industry to facilitate acquisitions.

Who Lives in Manufactured Housing

Compared to apartment complexes, manufactured-home communities have an average annual occupancy turnover rate of 5 percent versus 55 percent for apartment dwellers. Due to steep relocation costs, manufactured homes are typically sold on site. The homeowners tend to stay in place, with the same pride of ownership found in single-family home neighborhoods.

For the right property and investor, there are a variety of future options for these developments. Some entrepreneurial investors over the past decade have undertaken subdivision of their communities, offering the individual lots for purchase. Often these lots are sold for more than 200 percent above their value as a rental lot.

Or, if desired, the land can be sold to a developer for its highest and best use, with minimal demolition expense. Depending on its location, it may potentially be suitable for industrial, commercial, mixed-use, or multifamily housing.

Real estate financing is available from certain lenders who recognize and value the predictable income stream, with higher-end properties qualifying for more favorable terms. Capitalization rates will vary based on quality and characteristics of specific properties and in 2014 may likely range from 4 percent to 6 percent. Valuation structures and regulatory issues will vary between states.

Most manufactured-home communities are somewhat of a hybrid in which residents own their homes and lease the land beneath from the property owner. However, some community owners rent both the homes and land to the tenants. There are a variety of business models depending on long- and short-term investment goals. Many communities are now marketing to specific demographic groups, such as young working families that may be priced out of the stick-built market, or retirees who want the amenities, security, and communal activities these affordable communities offer.

Richard Close is a partner with the real estate law firm Gilchrist & Rutter PC in Santa Monica, Calif. Contact him at rclose@gilchristrutter.com.