Did you know that 22 million people in the U.S. live in manufactured homes? Manufactured housing ranks among the country’s largest sources of unsubsidized affordable housing. Boasting lower costs per unit, less tenant turnover and decreased competition among investors, manufactured housing can offer investors viable investment opportunities. As multifamily investors seek avenues for diversifying their portfolios, manufactured housing (otherwise referred to as trailer parks) is one often overlooked opportunity for achieving this objective.
When evaluating manufactured housing as an investment opportunity, investors often express concern over risk, including asset depreciation and occupancy rates. However, depreciation is actually an upside for investors – despite being a downside for single family homeowners. Depreciation allows the investor of a real estate asset to deduct a portion of the building’s value each year against operating profits. In terms of occupancy rates, manufactured housing consistently maintains higher tenant retention rates than multifamily assets. It is important to remember that when you purchase a manufactured housing park you are often acquiring a high number of units, which allows you to spread risk across the entire portfolio. Simply put, dealing with one problem tenant and a potential short-term vacancy is easier when it’s offset by a high number of occupied units.
Additional Upside for Investors
Lower per unit pricing, fewer maintenance costs and high cap rates all make investing in manufactured housing attractive for investors. In fact, manufactured housing has the lowest cost per unit of any real estate asset class while also boasting high cap rates (on average 7-12 percent).
The lower per unit price of manufactured housing also offers a unique financing option, as sellers may be in a position to directly provide financing to buyers. Sellers may benefit from receiving a higher interest rate than they would if the money were in a low-risk investment such as a money market. This also gives the seller opportunity to generate consistent cash flow from their investment. Lastly, since many manufactured home complexes (trailer parks) lay in the outskirts or urban communities, as cities grow investors often have the opportunity to sell the assets for redevelopment and reap further returns on their investment.
The 2018 Annual Report released by the Joint Center for Housing Studies at Harvard University found the number of renters who spend more than 30-percent of their income on housing – defining them as cost-burdened – is climbing. As the demand for affordable housing units in close proximity to major metro markets continues to rise, manufactured housing, which encompasses mobile homes built after 1976 (when HUD established a nationwide building code for manufactured housing), becomes an increasingly desirable housing option among potential tenants.
Despite the historic challenges of financing manufactured housing purchases – due to a high volume of loan defaults in the 1990s – in January 2018 Fannie Mae and Freddie Mac committed to purchasing more manufactured housing loans in the next three years. Further, the Federal Housing Finance Authority’s (FHFA) index for manufactured homes notes a 120-percent increase in selling prices since 1995. And, according to Curbed, manufactured homes can costs as little as $45,000 – a fraction of the median single-family home price of $323,000 – which could make them a potential solution for the affordable housing crisis. A new report from the Washington D.C. think tank the Urban Institute also shows that the home price index for manufactured homes (also known as mobile homes) featured an average annual growth rate of 3.4%, versus 3.8% for traditional, site-built homes according to Federal Housing Finance Agency data.
In the New York metro area, Northeast PCG recently co-brokered the sale of Hudson Home Park in New Paltz with Sunstone Real Estate Advisors. The team currently has an exclusive listing for Violet Avenue Park in Hyde Park, NY, a 35-unit property conveniently located in Dutchess County which is being offered at a 9.1-percent cap rate.
For investors seeking opportunities in major metro markets where demand outpaces supply and prices continue to climb, manufactured housing may offer a viable investment opportunity. The ability to purchase at a relatively low per-unit price and generate returns through rent, financing, selling land for redevelopment, or a combination of the above, all offer investors upside on these assets.