A few good reasons:
- High cash flow
- Tax benefits
- Recession resilience
- Operational flexibility
Traditionally, Mobile Home Park’s have some of the highest cap rates (7-10% National Average) across all of the asset classes. Only a few select niches such as self-storage (8.5-9%) and assisted-living facilities (7-10%) can compete, in contrast to the more popular apartment building (5.6%).
This higher cap rate provides a few major benefits:
- Major cash flow
- Cushion for debt servicing caused by high cash flow
For many owners, higher cash flow alone is enough to combat the fears of mobile home park investing.
In addition to high cash flow, mobile home parks also offer attractive tax benefits.
Mobile home parks benefit from accelerated depreciation schedules when compared to other asset classes. Most commercial real estate owners enjoy the fact that multifamily buildings can be depreciated on a 27.5-year schedule when compared to commercial’s 39-year schedule. However, many don’t know that many elements of mobile home parks can be depreciated on a 15 -year schedule.
This is because, unlike multifamily and commercial, a majority of mobile home park value comes from land improvements. These land improvements include things such as roads, utility infrastructure, and park design.
Mobile home parks benefit from a process similar to Trickle Down Theory. The idea is that during tough economic times, people may downgrade their homes. For instance, a person in a $1MM home goes to a $500k one, or a person in a $500k home goes to a $250k one, and so on.
Because of this process, mobile home parks create a solution for consumers looking to find affordable housing during tough economic times. Mobile homes provide those consumers with the opportunity to have access to affordable housing, and possibly even the privilege homeownership above all.
As we’ve seen in recent times, even during bullish markets, consumers are in a constant search for affordable housing. This may even contribute lower occupancy volatility during a variety of market climates down the road.
Of the many benefits to mobile home park investing, one of the most prominent is operational flexibility. Mobile home parks provide a unique array of revenue streams.
With most multifamily projects, a majority of the operating income comes from the tenant rental income. However, mobile home parks’ income can come from a variety of sources.
- Lot rent
- Financing payments (achieved when selling homes to the tenants)
- Master leases
- Additional storage and garage leases
- In some cases, even billboard ground rent
Being flexible with factors such as the traditional rent and lot rent allows owners to tailor the property to work for their personal needs, rather than against them. Instead of being responsible for the home, and everything inside, you are now only responsible for the land underneath, financing note, and general park maintenance.
When doing this, you:
- Lower tenant turnover rates
- Tenants are less likely to move out if they own their homes.
- Mobile home parks typically incur less than 20% of the annual tenant turnover that an apartment complex experiences.
- Reduce your management responsibilities
- You are also no longer responsible for the interior capital expenditure liabilities (broken toilets).
- More predictable financials
The tenant-owned-homes (with their lower risk of vacancies, lower CapEx liability, and steady financing income) create a more predictable outlook of both cash incoming and outgoing.