Ten years ago, mobile-home parks suffered from an image problem and languished in the back of the proverbial real estate investment closet. Savvy investors were aware of their generally low acquisition price tags, attractive operating expense history, and stable rental base—but they just weren’t glamour properties.
But like bell-bottom jeans, investors have rediscovered this property type and a new generation of investors is trying it on for size. Rechristened manufactured housing, this affordable, unsubsidized U.S. housing alternative accounts for almost one in three new homes purchased today, up from one in four in 1984. Nationwide, manufactured-home communities—both new and existing ones—are expanding, spurred by manufactured homes’ affordability and lenders who now offer buyers 30-year in addition to 15-year mortgages, a wider choice of available products (including luxury items such as whirlpool baths and wood-burning fireplaces), and rewritten zoning regulations in many areas that now permit the once-forbidden manufactured-home communities.
As a result, manufactured-home communities, with their historic return on investment (ROI) potential and high level of Wall Street publicity, are a popular real estate asset type, offering opportunities for investors and developers. Large, high-end class A properties garner maximum transaction prices from real estate investment trusts (REITs) and other major investors. Older, midsized class B and C properties also are in high demand, with investors willing to do whatever it takes to maximize their ROI near and far term. Novice and experienced investors alike are examining even functionally obsolete properties. Rental home sites too small for today’s 80-foot-by-16-foot single-section and 60-foot-by-28-foot multisection homes are possible turnaround properties or "sleeping giants" that may have redevelopment potential or properly zoned development land immediately adjacent to the core investment property.
It’s hard to identify any state with more new manufactured-home community development than Texas, especially the El Paso and Austin markets. But for the first time in 20 years, new manufactured-home communities are being built and/or expanded all across the United States.
According to respondents to the 1998 Allen Report survey (representing about 35 percent of U.S. manufactured-home community multiproperty portfolio owner/operators), 30 new manufactured-home communities representing 8,154 home sites were completed during 1997—and the pace escalated throughout 1998. This surge is being driven by the scarcity of existing properties available for purchase, loosening of local regulatory barriers against affordable housing in general, and an abundance of mortgage money—though development dollars are still the hardest to obtain.
Investors are expanding many existing manufactured-home communities for two reasons. First, it’s generally easier to secure funds and approval for a manufactured-home community expansion than for a new one because of the risk involved. Second, 80 percent of all U.S. manufactured-home communities have fewer than 100 home sites. Owner/operators who want to maximize the value of their investment and interest REIT buyers must have a minimum of 200 sites developed and occupied per property.
REITs have given a big boost to manufactured-home communities—Chicago-based financier Sam Zell’s 1994 initial public offering was composed of a few dozen manufactured-home communities. They quickly gained respectability with Wall Street and within two years, boasted five REITs: MHC; Chateau Properties; ROC Communities; Sun Communities; and United Mobile Homes. (Chateau and ROC have since merged to form Chateau Communities.)
REITs have followed a predictable pattern to maximize funds from operation results. They boost internal rates of return by enforcing strict on-site and home office operational expense efficiencies; aggressively acquire additional like-properties for their portfolios; merge with another REIT; lately they develop new properties (often through joint ventures with entrepreneurial would-be developers), and expand present holdings by adding new rental home sites.
Despite all these activities, the percentage of investment-grade manufactured-home communities controlled by REITs via outright ownership and/or fee management only grew from 2.5 percent in 1994 to 3.8 percent in 1997, according to 1998 Allen Report statistics.
A lack of candor in reporting property performance can be a stumbling block to marketing manufactured-home communities and even ongoing REIT operations. Private owner/operators have been slow to embrace profitability-enhancing measures such as professional property management. Even REITs’ quarterly 10Q reports often do not disclose per-property performance measures such as net operating income, average site rent, and economic occupancy levels, instead relying on total property portfolio indicators. Since REIT analysts demand such property information and other asset types report it as a matter of course, private owner/operators of manufactured-home communities have had to upgrade their reporting methods to attract REIT attention. REITs, in turn, have been pressured to be more forthcoming with per-property net operating income statistics.
While trophy properties that have 250 or more rental sites, 95 percent or higher occupancy, good location, and market-leading rents are in the hands of major public and private portfolio owners, there’s still plenty of opportunity for new investors and developers. The fragmentation of the industry, along with continuing and artificial zoning barriers to entry, make it well worth searching out investment opportunities.
What should you look for in such an income-producing property? First consider whether the property is fully developed. If so, ROI growth potential may be limited; if not, the property may be a sleeping giant with 100 existing sites and the potential of developing 200 additional sites on adjoining raw land.
When considering a fully developed manufactured-home community as an investment, evaluate seven major areas that affect economic feasibility.
How accessible and visible is the property? Is it close to stable employers, key services, and desired recreation? Does the target-market population have a bona fide need for homes and will sales support this affordable housing alternative? If existing and future occupancy is an issue, perform further absorption analysis during evaluation.
Is the property appealing? You generally will pay a premium for a "showcase" property. However, if the asset is run-down due to lax property management, it may be a turnaround opportunity, which should be reflected by a discounted sales price. You can resolve most property management issues without large capital expenditures, and they often result directly in increased occupancy and potential for higher rents. However, overcoming a poor local reputation can be a hard-fought battle. Start with a realistic perspective of all obstacles you must overcome.
When you look around, what do you see? Evaluate the width and condition of all streets, overhead versus underground electric lines (underground lines are preferred), and identify deferred maintenance tasks.
What can’t you see? Ask detailed questions about utilities. Water lines, natural gas lines, and electric meter issues, as well as private utility-plant condition and compliance, all are valid issues. Private utilities can be an economical advantage to the experienced operator or a nightmare to the novice without the resources to maintain them properly. Consider submetering, which forces residents to be accountable for personal usage and also helps identify abuse and limit utility failures.
How dense are the home sites? Average density should be no more than six rental home sites to the acre for a spacious manufactured-home community. Can home sites accommodate today’s homes? The ability to market comfortable living space for homeowners and their homes is important. Investors often can redesign or combine smaller sites in older communities, but investors should consider this issue and make plans before acquisition.
Features and Amenities.
Ask yourself why a homeowner would want to live in this rental community as opposed to another or even opt for placement on private land. Are features in place to provide a quality neighborhood environment, such as mandatory guidelines for community living; an attractive clubhouse; cable TV; cluster mailboxes; professional property management staff; and secure storage alternatives, gated entry, a swimming pool, and a playground?
Consider the property in relation to local community advantages. How close are police, fire, and emergency assistance? Are local manufactured-housing retailers located nearby? How favorable are local tax, licensing, and planning authorities to manufactured housing and to the subject property in particular? What is the reputation of the local school system?
When evaluating a potential acquisition’s income and expense statements, note certain key issues. Evaluate and identify all income sources and whether they will continue: site rent (Is it low, mid, or high for the local market?); late and nonsufficient fund charges and related collection policies; home rental (What are the related maintenance expenses if leasing manufactured homes as apartments?); utility income (Is it offset by corresponding operational expense?); and storage fees. Other miscellaneous income can include new and/or resale home sales, parts sales, service income, insurance commissions, and home appraisal and brokerage fees.
Under expenses, pay close attention to annual real estate taxes, insurance premiums, payroll and related taxes and benefits, maintenance and repair costs, utilities, and a variety of administrative costs. Compare operational expense ratios to the national average for the asset type.
Many private owners carry a large overhead of personal expenditures on the property’s financial statement. Discuss expense items line by line to get a true picture of actual community-related expenditures. Also be aware that most owners do not include professional management (5 percent of gross income) or capital reserve (1 percent of gross income) considerations on financial statements, but these become important considerations when seeking institutional financing. A helpful rule of thumb: for a manufactured-home community operating at 95 percent or higher occupancy with minimal or no home rentals, the average operating expense ratio should be 30 percent to 38 percent of gross collectable income.
A property with adjacent land included in the sale transaction may have great potential for redevelopment or expansion, greatly increasing ROI. When evaluating the land, consider the following key points.
Is the land flat with steep elevation or low with drainage problems? Do trees or rolling hills interfere with home site placement?
If the land currently is not zoned for manufactured housing or if no zoning regulations exist, this could be an obstacle to overcome before expansion is feasible.
Are approved utility or development plot plans already in place for expansion? If not, identify what the process is and determine the level of community resistance or support.
Is the land in a flood plain, environmentally protected, or environmentally distressed due to prior use?
Is expansion of a manufactured-home community feasible? Consider alternate land uses prior to the sale.
Financing new manufactured-home community development remains a significant barrier to entry. Local bank financing, joint venturing with local manufactured-housing retailers and/or landowners, and, most recently, joint venturing with a REIT are the three most common avenues open to would-be developers today.
However, a REIT joint venture may not be attractive to some developers. REITs often are willing to advance a portion of the development financing and assist with management, but generally want to buy out developers when a certain level of physical occupancy is attained. This could prevent developers from enjoying a full net return.
Over the next few years, owners and passive investors of older manufactured-home communities will encourage their residents and on-site staff to upgrade to the higher living (such as the purchase of new homes on site) and operational standards of contemporary manufactured-home communities. As demand increases, more such communities will be constructed and this unique investment will increase in popularity.