Advantages of Manufactured Housing Communities
Here are several key advantages that Manufactured Housing Communities (MHCs) have over other asset classes:
MHCs in which the residents can own their homes are as affordable as housing can get. In both good and bad economic times, there is ALWAYS a need for affordable housing. Currently, around 20% of families in the U.S. have a household income of $20,000 per year or less. This allows less than $500 per month in total housing costs. Only MHCs and low-income apartments fit this budget. And between the two, mobile homes are the preferred option, as they allow greater privacy, a small yard, and a safer “community” feeling.
When you compare MHCs to apartments, duplexes, and other multi-family investment properties, the maintenance costs are much lower. With manufactured housing communities, you are renting a lot and utility connections. The residents are responsible for maintaining their own homes and lots. The owner is not fixing toilets, replacing carpet, repairing holes in the wall, etc. Additionally, there are no major renovation costs needed to upgrade facilities and continue to attract customers over time. The MHC operator is only responsible for maintaining the land, not the mobile homes on that land.
In a typical MHC, the resident base is usually made up of residents living on social security checks or with low paying jobs that tend to be more secure and replaceable, and other types of blue collar jobs. While most MHC residents are not great at budgeting, they can usually come up with the $200 or so for lot rent in order to keep their home. Even with a minimum wage job, the lot rent is affordable. In addition, since most residents own their own manufactured home, they are more likely to exhibit a pride of ownership. This is not a quality often found with tenants in rental properties.
Low Resident Turnover:
Unlike other types of residential investment property, residents in MHCs (at least their homes) are effectively trapped and inhibited in their ability to move. Since it costs a minimum of $3,000 for a manufactured home owner to unhook, move, and reset their home back up in another park, it happens infrequently. Compare that to an apartment dweller who can load everything in the middle of the night into the back of a pickup and move to the next apartment and skip out on the rent. In most cases, once a manufactured home has been moved into a MHC, that home will stay there forever and when the owners are ready to move they will either just resell the home in the community to a new homeowner or leave it for the community owners, who can often reclaim it and sell it themselves.
When residents own their homes in a MHC, it is much easier to raise the rent or pass through increased utility costs (as long as you don’t take it to an extreme) and still retain them as residents. For example, an effective rental increase of $20 per month would cost a resident an additional $240 per year. It would take over 10 years for such a resident to recoup the $3,000.00 cost of moving their home, even to the MHC next door, and the community next door will likely follow suit with their own rent increase.
Lower Operating Expenses:
One of the biggest advantages of MHC ownership is lower operating expenses; and the fundamental reasoning behind it (see Lower Maintenance section above). The average operating expenses for a MHC is around 40% of the gross income as compared to apartments, which typically have a 50-60% expense ratio.
Higher Cap Rates:
MHCs tend to sell at a capitalization rate of one to two points higher than most other types of investment real estate. Today’s investors generally prefer immediate cash flow versus hopes of eventual appreciation. While most other types of real estate have recently declined in value, MHCs are holding their value better for the reasons described above and the resulting availability of cash flow to their investors.
Tax Benefits – Accelerated Depreciation:
When comparing depreciation of MHCs to other investment properties, apartments have a large value attributable to the building itself and the building portion can generally be depreciated over 27.5 years However, for MHCs, the depreciable costs are typically the roads, water lines, sewer lines, electric poles and so forth. Since these are considered land improvements, they are typically depreciated over a much shorter period of 15 years. This increased depreciation over the first 15 years of ownership is a major tax benefit for many MHC investors.
Another advantage of MHCs is the barrier to entry for competition (i.e, new MHCs). In most areas of the country, it is difficult to obtain the proper zoning, meet all the requirements to build a new community, and still actually make a profit. Once all of the permits and licenses have been obtained, and the curbs, roads, driveways, utilities, pads and everything else has been built out, the owner still has to cover the carrying costs until enough homes have been brought into the park to break even, let alone start making a profit. MHCs are in limited supply and the barriers to entry due to high entry costs, adverse regulations, extensive government restrictions, and limited access to water and sewer connections, all of which make developing new communities unfeasible in most areas of the U.S. Additionally, MHCs do not make an attractive neighbor, and there is normally extreme resistance by nearby homeowners and business owners to allowing a new MHC to be built in a municipality.
Equity Creation with Home Resales:
Another benefit of owning MHCs is that the MHC owner is generally in a good position to buy and sell new and used manufactured homes. They can often buy homes for sale in their community or nearby communities, including owner resales, repos, or even new homes from manufacturers. These new and used manufactured homes can be placed in the park and sold at a profit. Depending on the situation, MHC owners may be able to sell individual manufactured homes for cash, on terms, or with new financing. As the MHC owner, every time a home is sold and fills a vacant lot in the community, the MHC has increased its monthly lot rental income as well as the overall value of the community. If each occupied lot is worth an additional $30,000 in MHC value, then, in addition to the profit from the home sale itself, the MHC owner has just made an extra $30,000 in equity.
A new manufactured home dealer usually makes money on the spread between the purchase and sale price and thus needs to have a good profit margin to stay in business. A MHC owner can survive on a much smaller margin or even break-even on manufactured home sales as the true value for the MHC owner is in the continuing rental income from its occupied lots, allowing their manufactured home buyers to save thousands of dollars.