The pursuit of yield has pushed private equity firms and professional investors into new segments of the real estate market.
In recent years, sophisticated investors have purchased apartment buildings and single-family homes. Now, corporate landlords are targeting the most affordable segment of the real estate market: mobile home parks.
The most affordable housing available
Manufactured homes or mobile homes are considered the most affordable unsubsidized housing option in America. This is because the owners only own the prefabricated unit and not the land under the house. The land is usually leased from the owner of a trailer park.
The average monthly rent for a mobile home in 2021 was $593. That’s significantly lower than the average one-bedroom rental price of $1,450. Renting a mobile home also often includes utilities and insurance.
Rents typically increase 4% to 6% per year, and tenants have the flexibility to move their housing unit to another park. These factors make the manufactured home particularly attractive to low-income households.
As of 2020, nearly 22 million Americans lived in mobile homes. This is 6.7% of the total population or about one in 15 people across the country. However, the financial inefficiencies that make these manufactured homes affordable also make them attractive to professional investors.
Investment in caravan parks
Factors such as below-market rents and poor repair make mobile home parks attractive to investors looking to add value. The typical mobile home parking lot costs $10,000, which means 80 lots would be worth $800,000 on average.
Simply put, the price of admission for these parks is much lower than condos and apartment buildings across the country.
Professional investors can also raise rents significantly to improve the property’s valuation. Attracting higher-income tenants or improving park amenities and infrastructure are other value-added strategies that make this asset class attractive.
The fact that moving a typical RV costs anywhere from $3,000 to $10,000 also means that most renters can’t afford the move. This gives owners enormous pricing power.
Meanwhile, the yield is much higher. The capitalization rate (the ratio of net operating income to market price) could be as high as 9%, according to real estate partners Dave Reynolds and Frank Rolfe, who together are the fifth-largest owner of mobile home parks in the US.
The largest mobile home owner is real estate veteran Sam Zell. Zell’s Equity LifeStyle Properties (ELS) owns 165,000 units across the country, and the asset is a key component of his $5.4 billion fortune.
In recent years, larger investors such as Singapore’s sovereign wealth fund GIC and private equity firms such as Carlyle Group, Brookfield, Blackstone and Apollo have also added exposure to this asset class.
Even Warren Buffett is involved. His company’s subsidiary, Clayton Homes, is the largest mobile home builder in the US, and also operates two of the largest mobile home lenders, 21st Mortgage Corp. and Vanderbilt Mortgage.
You can invest too
Small investors looking for exposure to mobile home parks have many options. Acquiring a park is perhaps the simplest way to access this asset class. However, listed stocks and real estate investment trusts also offer exposure.
Sam Zell’s Equity LifeStyle Properties is listed on the New York Stock Exchange under the ticker ELS. Sun Communities Inc. (SUI) owns 146,000 units in the U.S. and some in Canada, while Legacy Housing Corp. (LEGH) builds, sells and finances manufactured homes.
Retail and institutional investors could see more upside from this segment as the financial inefficiencies clear up.
What to read next
This article provides information only and should not be construed as advice. Provided without warranty of any kind.