Sunday, October 9, 2016

Why are trailer parks such good investments?



Franke Rolfe, a Stanford graduate who teaches people how to profit in the mobile home industry, buys dilapidated trailer parks, cleans them up, and rents mobile homes to the working poor. A 2014 New York Times Magazine article reported that he and a partner earned a 25% return on their investment. 
Trailer parks’ appeal to these investors is simple. Millions of Americans struggle with rent payments, but still want a lawn. For them, mobile homes are the cheapest form of housing available. At the same time, it’s rare for someone to build a new mobile home park, because no homeowner wants a trailer park nearby. An industry with healthy demand but a fixed supply attracts the country’s capitalists. 
HT:  MarginalRevolution.com

11 comments:

  1. In an article from “Market Urbanism,” called “Reclaiming “Redneck” Urbanism: What Urban Planners Can Learn From Trailer Parks,” it also discusses the pros of trailer parks.

    The article describes what happened in the 1920s with a ban of low income housing by urban policymakers and planners. Even on the outer edges of cities, the poor were forced to evacuate. Several types of low-income housing were demolished and establishment of new ones were banned. The Housing Act of 1937 “formalized” this war on low-income housing at the federal level. It was of surprise by the author that trailer parks have survived. He went on to explain the benefits of trailer parks such as “remarkable” low rents and how they are more energy efficient. The average manufactured house costs $64,000 and the average site built single-family house costs $324,000 – quite a significant difference. But with that comes the stereotypes of trailer parks (and the people who live in them) and as mentioned above, not many people want to live near a trailer park due to those stereotypes.

    However, what people may not know is that there is park management within a trailer park. It’s in place to uphold cleanliness and maintenance, while keeping out “troublemakers”. The author says that urban planners should take a more “permissive” approach in regards to low-quality, affordable housing options, such as trailer parks. There are many restrictions of them near cities. He said “When we stop treating low-income communities as objects of scorn, to be subjected to top-down, paternalistic planning, we might find that we have a lot to learn from them.”

    I think with this kind of governance, trailer parks could provide better opportunities for low-income families, while offering a financial opportunity for investment – a win-win in my opinion. I do however, worry about where they are located because you don’t want to jeopardize city centers where you are trying to attract consumers with money. I am not in favor of building them within cities, but rather outside them and in rural areas.

    Reference(s):
    Gray, N. (2016, April 21). Reclaiming “Redneck” Urbanism: What Urban Planners Can Learn From Trailer Parks. Retrieved from http://marketurbanism.com/2016/04/21/reclaiming-redneck-urbanism-what-urban-planners-can-learn-from-trailer-parks/

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  2. There are multiple different types of mobile homes parks. You get the traditional anyone can come to, seasonal in warm weather/snowbird locations, and the retirement 55 years old and up group.
    Pricing is very difficult when it comes to each park. You need to take into consideration the lot size and does the person own their own mobile home or are they renting? Also, are the property taxes on the renter so they would receive the STAR program rebate? What is a break-even price point for lot rent? If you decide to raise up the lot rent, then you need to run a stay-even analysis so you don’t bite the hand that feeds you. In The article by Gary Rivlin (2014) he quotes Frank Rolfe by saying, “And think long and hard, he warned the class, before crossing the $500 threshold. The industry “sweet spot” is a lot rent of $495, he explained, but raising it by another $5 “could mean death.” On the other hand, you can always have your tenants pay for water, which is a trailer-park owner’s largest expense.”
    Joel Cone (2016) quotes Frank Rolfe,”
    • They have the highest capitalization rate of any real estate niche, he says, roughly 7 to 12 percent, much higher than apartment buildings.
    • There are very few, if any, new parks being built while the demand for them remains high – so parks continue to go up in value.”
    Owning a mobile home community can be a nice investment opportunity depending on the state and the opportunity that the park has. My in-laws have owned a park for over 30+ in NY and they have said that they like the ownership part but it is very difficult in NY because of the tenants’ rights are so stringent. My father-in-law has said the best part of owning a mobile home park vs a rental home is what is the most that can get destroyed my grass and dirt?


    Cone, J. (2016, July 20). Mobile Home Parks Are a Viable Investment. Retrieved October 12, 2016, from http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/articles/2016-07-20/mobile-home-parks-are-a-viable-investment

    Rivlin, G. (2014, March 13). The Cold, Hard Lessons of Mobile Home U. NY Times. Retrieved October 12, 2016, from http://www.nytimes.com/2014/03/16/magazine/the-cold-hard-lessons-of-mobile-home-u.html?_r=0

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    Replies
    1. Jer, you make a lot of valid points. Especially when referring to the residents of the trailer parks. I know for some trailer parks are the best option. Lot rent is usually cheap and trailers are inexpensive compared to a house. As far as I have always been aware, since the tenant only owns the trailer and not the land they will not pay taxes. The taxes would be billed to the owner of the land, also STAR exemptions are only for primary owned residences, so I do not think the trailer park would qualify as that is essentially a business (I do not know how it would work if the owner of the park also lived on the land). But yes I agree, trying to find the "sweet spot" when coming up with the rent can be tricky.

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  3. 8% of Americans or 20 million people live in mobile homes. While some mobile homes are located on private property, almost all can be found in mobile home communities.
    20% of the 50,000 mobile home parks are professionally owned. The other 40,000 mobile home parks are owned by individuals and small groups of investors.

    Investing in a mobile home community is investing in land ownership. In most cases, tenants own the living space and responsible for repairs and upkeep of the mobile homes. Many mobile park owners carry an inventory of mobile homes which can either be purchased or rented.

    Mobile home communities provide a viable option as the middle class continues to shrink and many baby-boomers find themselves unprepared for a long retirement. Mobile parks are affordable housing units in areas where real estate is at a premium. Long Island is a perfect example. When I moved back from college, I opted to live in a mobile home until I got re-established.

    As long Island has become home to more and more multi-family dwellings such as apartment buildings, condominiums, and town homes. Mobile parks are still far and few between. The start-up costs for developing a new mobile park and the process of acquiring the proper zoning permits, licensing and regulatory approval shuns most investors away. Consequently, existing mobile home communities face little or no new competition.

    Reference:
    Cone, J. (2016, July 20). U.S. News Investing. Retrieved from Mobile Home Parks Are a Viable Investment : http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/articles/2016-07-20/mobile-home-parks-are-a-viable-investment

    Investing in Mobile Home Parks. (2013, August 1).Retrieved from Reality Mogul.Com: https://www.realtymogul.com/resource-center/articles/introduction-to-mobile-home-investing

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  4. The lower income population according to US Census Bureau 2016, is a family of four earning $24,3000 or less… totaling 14.8% of the nation’s official poverty rate (46.7 million people). Cone, 2016. Mobile homes whether rented or owned provide an affordable and attainable living option for these lower income population. Due to the housing crisis, affordable housing options are becoming increasingly difficult for those in need to secure. Government regulations, permits, and deficiency of space in preexisting park locations make it difficult for mobile home expansion. New entrants wishing to create mobile parks on new territory are in many cases prohibited. So investors find themselves pursuing older outdated mobile homes and revamping them (satisfying some of the growing demand vs fixed supply). The rising demand for affordable housing, shifts some perceptions and stereotypes made against those who reside in mobile homes. Biases are detrimental to the unjustified negative beliefs of what goes on in mobile parks and how those who reside there “are”. Where in all fairness there is not only a lot to learn but a huge opportunity for a positive sustainable return on investment. “Rolfe estimates that of the roughly 50,000 mobile home parks in the country only about 10,000 are professionally owned, leaving the remainder of the market up for grabs by small investors looking to either diversify their portfolio or change direction with a whole new investment strategy.” Cone, 2016. The estimated 8% of US population residing in mobile homes already, and the need for affordable housing increasing this would create a wise investment opportunity for someone well calculated such as Rofle. Being below current market rate creates a higher demand (and in some cases buyer surplus), lack of new entrants increases value with growing demand and fixed supply, probability of relocation of tenants is low so likelihood of reoccurring renters is high and financing opportunities outside of loans transpire.


    References:
    Cone, Joel. Mobile home parks are a viable investment. US News & World Report, 20 July 2016. Web. 16 Oct. 2016.
    http://www.nytimes.com/2014/03/16/magazine/the-cold-hard-lessons-of-mobile-home-u.html


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  5. In the current economy, many families are renting their home space rather than purchasing due to various reasons to include poor credit, lower housing payment, and keeping the ability to pick and up move as an option. Additionally, millennials are not buying homes right now; they are strictly renting (https://www.theguardian.com/money/us-money-blog/2016/may/27/housing-market-real-estate-millennials-living-at-home-with-parents). As someone who works with many millennials, I can tell you that one of the biggest reasons they do not wish to purchase a home is because they view it as too permanent and their generation likes to have the option of being able to pick and up and move on a moment’s notice in order to follow a job across the country or experience a different city. For people with this millennial mindset, it’s ideal for trailer park home owners to capitalize on. “Mobile home parks provide a viable form of affordable housing – especially for the nation’s low wage earners and people living at or below the national poverty level (http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/articles/2016-07-20/mobile-home-parks-are-a-viable-investment).” In today’s economy, mobile homes are becoming more popular amongst the lower class and lower middle class because it provides various advantages. Families are able to pick up their home and move as they need to in order to keep their jobs or chase new ones, payments are low, and overall, the parks provide a sense of community for all of those who reside in them. In regards to mobile home parks and investing in them, mobile home parks are easy to take care of and provide a good rate of return. My grandfather owns a mobile home park and as soon as someone moves out, the opening is filled within a week. For someone who is retired and on a fixed income, this additional income with little upkeep is extremely helpful for him and my grandmother.

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  6. Trailer parks might be a good investment in areas where supply for housing is very low and the demand is high, such as San Francisco. However, one must be very cautious when purchasing one of these properties because they may not yield the desire return upon putting back in the market for sale. I have observed that many realtors are adapting more frequently than ever the manufacturing market rather than the conventional housing structures, the rationale for this is that traditional houses are very low in supply, particularly those that are considering a house of $500<.

    Certainly there are many options for those that can afford the $1M> price range, but for many low to mid-level Americans who work hard to survive the booming housing market in San Francisco go thru a very difficult time finding a place to live. As a result of the high demand and the limited supplies, realtors have opted to attract the notion of manufacturing or trailer homes to rural areas, off course this has an effect in the way people live but to some this approach is the only path they have to afford a place to live. While I do support the notion of trailers for good investments, it adversely affects the return that individual get when they try selling the property as those properties are less feasible to be off loaded to the market than the traditional houses we know. My questions for this forum is: Is the San Francisco market diving into a bubble that soon with burst just like the last housing collapse ?

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  7. Why are trailer parks such good investments? "Franke Rolfe, a Stanford graduate who teaches people how to profit in the mobile home industry, buys dilapidated trailer parks, cleans them up, and rents mobile homes to the working poor. A 2014 New York Times." Most people want own their own space, yard and a place to call home. Trailers are a wonderful for low income people who are working and trying to better themselves. Rent can be expensive and your paying to live somewhere that you do not own. A rental agreement may not allow tenants to paint walls, install new fixtures or make other improvements. On the other hand, a mobile home owner has complete control over making improvements and decorating the home to express a personal style.
    For investors its a great because they are inexpensive to fix up. Investors rent the land to customers. "Mobile home parks sell for capitalization rates of 7% to 10%. As a result, the average park owner has no pressure to dramatically increase rents. And when rents are raised, it is in affordable increments of $10 to $20 per month." http://nreionline.com/finance-amp-investment/why-investors-warren-buffett-are-bullish-mobile-home-parks The cost to move the mobile how can be expensive so staying in the trailer park is better for customers.
    Everyone can enjoy living the American dream investors(make money) and the working poor (have a place to call home at an affordable price). This gives poor people a feeling of accomplishment and pride.
    There is investors who own trail parks and rent out space for vacations or a summer home. Offering people a nice place to escape on the weekends can also be profitable for the investors.

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  8. It is important to realize what is the cornerstone for the growing demand of mobile homes for consumers throughout the United States. The 2008 Financial Crisis and the record numbers of bank foreclosures was driving many lower income home owners out of their homes and sending them looking for alternative living space. Foreclosure filings surpassed 3 million in 2008 alone. Banks repossessed more than 850,000 properties in 2008 compared with about 404,000 in 2007. Houses in some stage of foreclosure totaled 303,410 in December, up 17% from the previous month and up nearly 41% from December 2007 (Armour, 2009).

    With many of these foreclosures happening in the more rural and lower per capita income states 7.3% of foreclosures were in Nevada, 4.5% in Arizona, 4.5% Florida. When looking at the 2014 per capita income by state all three of these states are in the lower 50% of the country. Nevada #35, Arizona #36, and Florida #31 (American Community Survey). These leads to a need for lower income housing for the working poor. Generally speaking, there are not large apartment complexes available for residential rentals in rural geographies. This leads to the high demand for low cost mobile home parks to supplement the housing needs.

    The is another advantage to the mobile home park owners, in many cases they are not in ownership of the mobile home. Therefore, they have very little overhead as far as fixed costs and maintenance. The only obligations to the park owner is general maintenance (snow plowing, road maintenance, mowing common areas etc) and land taxes. The structures are owned by the mobile home tenant.

    In a time of a down economy these types of investments can become very fruitful, but as the U.S. economy gains traction again, Americans start getting back to work for higher paying jobs, will we see this turn? I guess only time will tell..

    References:

    Armour, Stephanie. USA Today. 2008 Foreclosures Set Record. February 3, 2009. http://usatoday30.usatoday.com/money/economy/housing/2009-01-14-foreclosure-record-filings_N.htm

    American Community Survey 2010 – 2014. List of U.S. States by Income. https://en.wikipedia.org/wiki/List_of_U.S._states_by_income

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  9. My first glance of the article I thought why, invest capital in dilapidated trailer parks. Further, analysis I see why. The Federal Housing Administration is not providing lenders insurance protections against losses on defaults, in residential development with six stories or less. In some cases depending on the program a minimum of 17 stories are required (Froeb, 1970). As indicated this is an uncontrollable factor for those looking to invest in residential property (Froeb, 2016).
    The FDH rule would indicate that newly built residential building will be geared to higher end users for a better return on the investment. The consequence of this is it will have a shift in the demand curve, in that as the rent increases then housing demand will increase (Froeb, 2016). I can see why Rolfe started investing in trailer parks he seen the change in the industry. In residential areas home owners don’t want to see new trailer parks in their areas. Another factor is that those that struggle with rent payments, which is not uncommon in the U.S., reveals that demand for low housing is not temporary (Froeb, 1970).
    Another indication of Rolfe success is that since, the upheaval of foreclosures after the 2008 crisis; renters of all age groups have steadily increased. In the decades to come two broad demographic trends are predicted, the aging population and the increasing importance of minorities will significantly give rise in rental demand (MacArthur & MacArthur, 2013). This would indicate that the housing market will not reach equilibrium, thus wealth creating transaction will result (Froeb, 2016).

    References
    Froeb, L. (1970, January 01). Did the government cause the affordable housing crisis? Retrieved from https://managerialecon.blogspot.com/2016/10/did-government-cause-affordable-housing.html
    Froeb, L. (1970, January 01). Why are trailer parks such good investments? Retrieved from https://managerialecon.blogspot.com/2016/10/why-are-trailer-parks-such-good.html#comment-form
    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial economics: A problem solving approach. Boston, MA: Cengage Learning.
    MacArthur, J. D., & MacArthur, C. T. (2013). Joint Center for Housing Studies of Harvard University. AMERICA’S RENTAL HOUSING. Retrieved February 22, 2017, from http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/jchs_americas_rental_housing_2013_1_0.pdf

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  10. Despite the apparent lack of appeal of the mobile home segment, investing in trailer parks can be a good financial decision due to the basic laws of supply and demand as outlined in the Froeb, et al, text. The fixed supply nature of mobile home parks in rare in the housing industry. Builders continuously build new single family homes and apartment buildings but the supply of mobile home parks remains relatively fixed. This fixed supply helps drive rental prices up if the market experiences an increase in demand.
    But is demand rising? According to All Property Management, the improved economy shows improvement in the rental market. Millennials leaving their parent's basement, Gen X'ers gaining more financial stability and the downsizing of baby boomers are all opportunities for the rental market. They're also opportunity for the home buyer market and rental property owners need to market the advantages of renting compared to owing. Also, structural trends are at play that can improve the rental market with the emerging sharing economy that deemphasizes property ownership.
    If the rental market remains healthy, the fixed supply in mobile home inventory coupled with an increase in demand from renters would result in a shift in the demand curve will result in a new market equilibrium and increased rental price. A good investment decision indeed.

    References:
    Froeb, L., McCann, B., Shor, M., Ward, M. (2016). Managerial Economics: A Problem Solving Approach. Cengage Learning: Boston, MA.

    http://www.allpropertymanagement.com/blog/2017/02/10/2017-rental-market-trends/

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