Investing in Mobile Home Communities: History, Evolution and Opportunities
In this two-part series, LoopNet is providing an overview of the mobile, or manufactured, home community sector — one of the least understood and most intriguing real estate asset classes. Part one, which is presented below, focuses on the history and evolution of the asset class and considers the abundant opportunities that exist for small private investors, while part two will center around key investment criteria, relative strengths and challenges and approaches to responsible ownership.
Most people are familiar with the stereotypes associated with mobile home communities; and that’s part of the problem, as well as the opportunity.
“It’s a tragedy because if there was just one HGTV show out there that showed what the industry really is, it wouldn’t get very good ratings, because people would be bored, but at least it would help educate people,” says Frank Rolfe. Rolfe is a private investor who, depending on the day, is either the fifth- or sixth-largest owner (with his partner Dave Reynolds) of mobile home communities in the United States. He is also the co-founder (again with Reynolds) of Mobile Home University, an online forum and compendium of mobile home-related resources that conducts the Mobile Home Park Investors Boot Camp — a three-day immersion event that is hosted approximately eight times per year (it has gone virtual in the wake of COVID-19) and endeavors to provide potential investors with a clarion view of this often misunderstood asset class.
“The macro thesis is that it’s housing — people rely on that, that’s where they live — and it’s probably among the lowest-cost housing alternatives of everything in the market, including apartments,” said Michael Nissley, executive managing director and national director of the Manufactured Housing & RV Group at Colliers International. Nissley has completed nearly $3.4 billion in aggregate sales of mobile home communities and similar product types over the course of his career and is widely considered one of the preeminent brokerage professionals focused on the sector.
“The demand for affordable housing is through the roof,” said Michael Conlon, CEO and majority owner of Affordable Communities Group, LLC, a relatively recent entrant into the sector that currently owns approximately 43 mobile home communities comprising more than 6,100 lots. “There just isn’t any more [affordable housing development]; the local communities have not invested in it, the land has gotten super expensive … prior to [2008-2009], I would say about 25% of the country was a candidate to live in a manufactured home community. Since the Great Recession, that number has gone up to 40%. It’s bad for the country; it’s good for our business.”
While a comment like Conlon’s could come off as mercenary, it could also be viewed as a solution to a growing problem. Economists, real estate experts and government leaders all agree that there is an affordable housing crisis in the United States. That makes mobile home communities a potential resource for Americans seeking cheaper housing, as well as a compelling sector for investors pursuing an alternative to the overheated multifamily market.
But we’ll get back to all that. First, let’s start with some naming conventions and a bit of history, as we attempt to demystify this evolving real estate sector.
What Is a Mobile Home Community?
A mobile home community is a large tract of land on which a number of mobile homes —anywhere from as little as 10 to more than 1,000 — reside. There are two significant segments to the mobile home community market:
- Senior communities, where residents are required to be 55 years old and over. Senior communities are often located in classic snowbird states, such as Florida and Arizona.
- Family parks, which have no age restrictions and tend to be oriented towards affordable housing. Family parks are situated throughout the country, with a concentration in the Midwest and South.
Within those two groups exist a vast array of mobile home communities. Some communities feature abundant and luxury-centric amenities, including adjacent golf courses, resort-style pools and upscale club houses; other communities don’t even offer paved roads. This breadth of communities is similar to what is found in apartment developments. Generally speaking, though, the posher amenities are more commonly located in the senior communities, while the family parks typically offer more limited communal perks.
It’s also important to acknowledge that “mobile home community” is not necessarily the preferred nomenclature, but based on LoopNet’s research and reporting, it’s still the terminology that the majority of people, both inside and outside the industry, tend to use.
There has been a push for decades — in part by the largest trade organization for the industry, the Manufactured Housing Institute — to rebrand mobile homes as “manufactured homes” and to reclassify the communities in which these homes reside as “land-lease communities,” but the revised terminology hasn’t gained much traction. “The industry at some point might want to acknowledge to the world that they’re wasting their time; you can’t rebrand the product,” said Rolfe.
This rebranding failure is in spite of the fact that mobile homes are, for the most part, not really mobile at all. As Rolfe puts it, “The customers can’t move the homes. They can’t move the homes simply because it will cost about $5,000 to move one, there’s hurdle one. And if it’s pre-HUD [i.e., the Manufactured Home Construction and Safety Standards Act, or HUD Code], which means built before 1976, you can’t move it, because you’re not allowed to reinstall it, so there’s hurdle two. And then hurdle three, even if it was built after ’76, there’s no guarantee it will make it from point a to point b.”
To paint a more vivid picture of the complications that can arise from attempting to move a mobile home, Conlon said that it isn’t uncommon for pieces of the structure, even the entire roof or exterior wall, to become separated from the home during transit. Because of these issues, LoopNet’s sources indicated that it is quite rare for a tenant in a mobile home community to take their home with them if they vacate the community, even if they own it outright. Typically, the homes are either sold to the owner of the community, or simply abandoned.
That said, it’s important to understand that, if you choose to invest in a mobile home community, what you’re most likely buying is the land under which the mobile homes are installed, not the homes themselves. The actual homes are typically owned by the residents; this arrangement has evolved somewhat over the past few decades, and we’ll discuss that change in more detail momentarily. It’s also worth noting that the homes themselves are not actually considered real property, but instead are classified as personal property.
The land under each home is referred to as a lot or site, and the cash flow that an investor derives from ownership of the community comes primarily from “lot rent,” i.e., the monthly rent that each user pays to “park” their home on one of the lots. As Nissley put it, “You’re providing infrastructure for tenants … the original business model was they park here, and you provide water, sewer and electric hook-ups.”
The History and Evolution of the Mobile Home Industry
Numerous facets of the mobile home industry have significantly changed over the past 20-30 years, including the types of owners and investors involved in the sector, as well as the availability of financing for both mobile home communities and the mobile homes themselves.
The Family Business. Michael Nissley may be one of the most prominent brokerage professionals in the mobile home industry today, but he actually began his career in the industry as an operator. Nissley’s grandfather started buying mobile home communities in the early 1980s. “It was one of those asset classes that the banks didn’t want anything to do with back then,” Nissley remarked.
After his grandfather passed away, Nissley was recruited by his family to run its mobile home community business. In 2001, he left the family business and decided to approach the industry from another angle, joining commercial real estate services firm Grubb & Ellis (now part of Newmark Knight Frank) as a broker. The first 18 months were challenging, but by the end of his second year he was doing well; in his third year he was the top-producing sales broker for the firm in Florida and by his fourth year he was in the top producing sales brokers nationally for Grubb & Ellis.
“Guys doing all kinds of fancy office buildings, they laughed at me,” Nissley said, recalling early responses to his seemingly quixotic efforts to find brokerage success in the mobile home community sector. “Year number three, all those guys are below me, and now they’re asking me to lunch to talk to me about what to do.”
While less than 20 years ago, Nissley’s ambitions resulted in ridicule, now almost every major commercial brokerage firm has a dedicated manufactured housing practice. Nissley would go on to join CBRE, where he helped found the firm’s Manufactured Housing Group, and he eventually landed at Colliers, where he also established a dedicated manufactured housing team.
Prominent Influencers. Nissley’s success, and commercial brokerage firms’ accelerating interest, has been highly informed by the expanding presence of institutional investors in the mobile home sector. Nissley credits early pioneers, like Sam Zell who founded Equity LifeStyle Properties, with bringing attention and credibility to the mobile home industry. According to Nissley, Zell entered the market like most small private investors: with a single distressed asset. Today, per its website, “Equity LifeStyle Properties owns or has controlling interest in more than 400 communities and resorts in 33 states and British Columbia with more than 156,000 sites.”
“Sam Zell, and some of the other very significant investors today, started off buying a small, unattractive single asset [with fewer than] 50 sites,” said Nissley. “So, when it comes to small investors, I think that should be a very encouraging notion. Because all those [investors] didn’t start with 10,000 sites, they didn’t start with a 1,000-site community, they started off just like a beginning investor would.”
Berkshire Hathaway also had a significant influence on the development of this sector, with its purchase of Clayton Homes in 2003 for $1.7 billion. At the time, Clayton Homes was the only vertically integrated mobile home company. It owned approximately 100 mobile home communities, and was also the largest retailer, manufacturer and financing company for mobile homes. Eventually, under Berkshire Hathaway, Clayton Homes would dispose of the mobile home communities, but it has retained the manufacturing, retail and financing operations.
More Financing Options for Investors. The growth in financing options for investors of mobile home communities has, arguably, been the most impactful change in the industry. Nissley, who has witnessed this development firsthand, compares financing options today to his grandfather’s initial investment in the industry. “You fast-forward to today and everyone in the world will lend on a mobile home park … they love the profile.” Nissley said. Fannie Mae and Freddie Mac are involved in the sector and have become two of the more prominent financing options for mobile home community investors. Additionally, numerous private bank financing options are readily available, and, according to Rolfe, smaller parks are still often financed by the seller.
Changes in How Homes are Bought and Financed. Another significant area of change in the mobile home industry is how the homes themselves are bought and financed. In a prior era, the owners of mobile home communities had little to no involvement in the actual homes. Eventually, as homes became larger and more expensive, it proved challenging for the target audience to afford to purchase the homes without financing. “Today, in this industry, if you have a vacant site you probably have to go buy the home yourself, move it on, set it up and then sell it [to the occupier],” said Nissley.
Conlon concurred that bringing in new homes is usually something that the purchaser of a mobile home community will have to contend with, but that’s not necessarily a bad thing. “Whenever you buy a mobile home park, usually there’s some empty lots there already. And we like that from an owner’s standpoint, because that leads to more upside.” In fact, Conlon told LoopNet that when a resident vacates one of his communities, if their home is from 1999 or prior, he will tear it down and replace it, rather than undertake renovations.
Rolfe explained that Clayton Homes has significantly impacted how new homes are brought into communities through its 21st Mortgage subsidiary, which offers the innovative CASH (Communities Affordable Spec Home) Program. Under CASH, a community owner selects a home from any manufacturer, and 21st Mortgage will pay all the costs — the home, the lot preparation, the deck, the stairs, the skirting, etc. The owner of the community is responsible for advertising and showing the home. Once a prospective purchaser is interested, they apply for a mortgage through 21st Mortgage. If the resident defaults on their mortgage, the lot owner assumes responsibility for the mortgage payments, as well as any necessary repairs and renovations to the home, until a new tenant can be procured. “The beauty of the program is it gave [mobile home community owners] … the ability to fill vast numbers of vacant lots with no out-of-pocket costs,” said Rolfe.
Can Small Investors Compete in the Mobile Home Market? Today, companies like The Blackstone Group, Apollo Global Management and The Carlyle Group, as well as many prominent pension funds and dedicated REITs, are invested in mobile home communities. So, with all this institutional involvement, is there still room for a nascent individual investor in the mobile home sector? According to every source LoopNet spoke with, the answer is a resounding, if sometimes qualified, yes. Rolfe said that of the approximately 44,000 mobile home parks in the United States, only 4,000, or less than 10%, are controlled by institutional entities. As Nissley said, “It’s not consolidated relative to every other asset class; it’s still very fragmented.”
Where Are the Opportunities for Small Investors in Mobile Home Communities?
The primary areas of opportunity for smaller private investors are in family parks totaling 100 lots or less. Because they exist “at the crossroads of … senior and affordable,” as Nissley put it, senior communities have become quite popular with the institutional crowd, and often now trade at cap rates between 2.5% and 3.5%, putting them out of the reach of most independent investors, who are typically seeking a higher yield. Similarly, larger parks can be difficult for smaller investors to access, simply because they require too much capital. Fortunately, that still leaves many options available for small investors. In fact, Conlon estimated that only 15% of mobile home communities in the United States have more than 100 lots.
Norm Sangalang, a Senior Vice President with the CBRE National Manufactured Housing & RV Resorts (MHRV) Specialty Practice, told LoopNet that, “Unless a private investor is targeting large institutional-quality assets there is usually little to no crossover. Conversely, institutional entities do not target noninstitutional properties unless that asset is accretive to an existing asset in the area.”
Sangalang also commented that, “[Mobile home] communities have some parallel aspects found in NNN properties, but within the context of the multi-housing use versus retail or other commercial uses,” which makes them particularly suited to attention from smaller individual investors, as they potentially represent comparatively minimal maintenance and management responsibilities.
Conlon cautioned that while noninstitutional transactions are still approachable for new investors, there has been notable cap rate compression on the smaller community transactions as well. “It used to be, prior to say, four years ago, that mobile home parks had higher cap rates and they were easier to buy because they were more affordable. That’s changed in the last four years and cap rates are now very similar to those of apartments,” he said. Conlon estimated that the cap rate range for smaller parks was now hovering between 5% and 6.5%, compared to a cap rate range of 10% to 12% a decade ago.
Rolfe, however, said it’s important to take into account how mobile home community pricing can be uniquely elastic. In talking about purchasing communities from individual, “mom and pop” sellers, he said, “They have either no debt or almost no debt. So, when you talk to them and they say, ‘I want $2 million for this mobile home park,’ and you say, ‘that doesn’t really work for me, but how about $1.4 million?’ they still get the whole $1.4 million.”
Rolfe encourages prospective purchasers to take an active approach and engage directly with a potential seller. “Everyone will ask a big price, as big a price as they can ask, under the fundamental rule that people like to get as much as they can for their asset. And … they often build in sometimes a 20%-plus margin in there, [assuming] that you will counter.”
He went on to say that, “All your deals are basically made by being active, not passive.”
Rolfe, who with his partner now owns approximately 200 parks totaling more than 20,000 lots, said that he bought his first mobile home community in Texas in 1996 for $400,000, with a down payment of only $10,000. While that may seem like an excellent deal, Rolfe said, “I learned that basically everything I didn’t want in a mobile home park, that first park had.” But he learned from the experience and used it to develop a list of five key items that he always considers before he purchases a new mobile home community: infrastructure, density, location, home age and economics.
In the second part of this series, we’ll review Rolfe’s investment criteria, as well as the noteworthy strengths and challenges of investing in mobile home communities compared to other real estate asset types; the key tenets of responsible mobile home community ownership; and other considerations that a prospective investor needs to bear in mind.