MHP investment questions

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I've been reading up on mobile home park investing. I have 3 main questions that I'm hoping some of the pro's here can help me out with. 1. Does mobile home park investing have a cycle, similar to other niches? For example, it's obvious we are near the top of the current apartment market cycle. Where are we in the mobile home park cycle? Is there one? 2. Financing options -- Are there any non recourse options? I've read Fannie has a product for parks over $1 million. Any other options or are loans typically recourse bank loans? 3. What are the biggest challenges / downsides to the industry? Everything I read is so positive and that can't be true otherwise more investors would be on it

[Jack Martin]

I ran across this older thread, but thought some perspective would be good to share here.  I have added the questions from the original thread in italics below:

I've been reading up on mobile home park investing. I have 3 main questions that I'm hoping some of the pro's here can help me out with.

1. Does mobile home park investing have a cycle, similar to other niches? For example, it's obvious we are near the top of the current apartment market cycle. Where are we in the mobile home park cycle? Is there one?

To address the first question, all real estate will experience cycles.  Although the timing tends to be similar for the real estate market in general, the timing for each asset class will be different.  When the market began to crash in 2008, demand for some assets disappeared immediately while demand for others continued at a strong pace almost 2 years.  So, the answer is yes, demand for all real estate will weaken during a market correction, including mobile home parks.  However, the reason why MHPs are considered the favorite asset class to weather a market correction is because they have the ability to continue to perform through tough economic conditions.  It's all about cash flow. When looking at performance of an asset class through market cycles, you will want to focus on two separate components; cash flow and asset value.  During a market correction, most asset classes will experience a loss of both, while mobile home parks will not, because of the strong cash flow. That is the significant reason why you will see a high degree of capital flowing into MHPs toward the top of the cycle; it is seeking a place to weather the coming storm and avoid loss of capital. 

Interesting to note that the poster of this thread said "it's obvious we are near the top" and that was 5 years ago.  It is not uncommon for investors to think we are at the top of a cycle, well in advance of the top.  It is also not uncommon for investors to think the market is still strong, even after a correction has begun.  If you haven't taken the time to learn about real estate market cycles, one of the best books on subject is called "The secret lives of real estate and banking" by Phillip J Anderson. It's about $35 on Amazon and is a book every serious investor should read. 

2. Financing options -- Are there any non recourse options? I've read Fannie has a product for parks over $1 million. Any other options or are loans typically recourse bank loans?

There will tend to be more and more options for every asset class as we approach the top of the cycle and that is no different for MHPs.  The options available depend on the size of the park, the location of the park, the value of the park, and the experience of the operator. 

When you've built a strong track record and are buying larger parks with higher values, agency debt will likely be the best non-recourse debt from a term perspective. (CMBS would be the other option)

Generally, the best options for smaller parks in smaller markets will be local and regional banks, and these will usually include recourse. Every bank will not have an appetite for MHPs so you'll have to find the ones who do, but when you find the ones that do, usually they will have a STRONG appetite to lend on them because they tend to be the most recession resistant part of their portfolio.  Just as an example, one regional bank we work with has been lending on MH and RV parks for almost 30 years and they have never experienced a single default, even through two market corrections.

3. What are the biggest challenges / downsides to the industry? Everything I read is so positive and that can't be true otherwise more investors would be on it

The same challenges you will experience in any asset class will be present in MHPs as it relates to finding good deals, crafting the right capital stack, and operating the deal.  However, with mobile home parks, those challenges will show up differently.  

When seeking to acquire parks, you'll find the trading velocity substantially lower than other asset classes.  For the same reasons why you'd like to buy a park, owners would like to keep them, so they simply don't become available as often.  Also, in primary markets, you will find a high degree of institutional demand for parks, so when a deal comes on the market you will have a difficult time competing with that institutional buyer.  This will lead you to secondary and tertiary markets to find deals, which lead to additional operational challenges if you don't have an appropriate asset management strategy designed for smaller markets.  

Operationally, parks are a lot different than other asset classes because of the fact that the residents have ownership of the mobile homes.  This is what creates the stability of the asset class, but it also brings challenges most operators are not familiar with.  Things like moving homes into the park to fill up vacant spaces, renovating vacant park owned homes (which is radically different than the renovation of site built construction), selling homes (along with licensing requirements), carrying paper in the correct fashion, crafting the correct leases and notices with respect to the landlord tenant regulations for MHPs, etc.  

Along with those unique challenges, parks tend to take longer to turn around and take advantage of all the upside.  If you are seeking a value-add deal to acquire, renovate, lease to market, and sell, in a period of 12-24 months you may want to look elsewhere.  While that can be a common time frame for apartments, you will find MHP's to take 3-5 years, especially if you are filling up vacant spaces.  However, the significant difference is that if the market crashes while you are in the middle of an apartment value-add project, you will likely experience a lot of difficulty and even a loss of the project, whereas with MHPs the project will likely continue as planned and can even get better due to increased demand for a more affordable living solution.  

What is important to take away from all of this is one main point:  You invest in mobile home parks for recession resistant cash flow.   

Because of that main point, you don't need to worry about when the market will correct, and you become willing to deal with the work required and the unique operational challenges.  As you can tell, I am committed to the park business.  Although it has not always been an easy road, the end goal of having a portfolio of recession resistant real estate is what causes me to stay committed.  It brings me great peace of mind to know that when the market crashes, what I am building will not go down the drain. 

All the best, 

Jack