Why should mobile home parks trade at higher caps than multifamily?

[Chris Reeves]

Hi folks - first post here on Biggerpockets. Glad to be here!

I and my family have been in the multifamily industry for many years, owning and operating apartment complexes ranging in size from approximately 30 - 130 units, in California and Oklahoma.

We are considering dipping our toes in the mobile home park business to diversify the portfolio and add some yield (anybody half awake has noticed that multifamily caps are at historic lows) - we'll be at the bootcamp in Seattle this week.

But one question has been gnawing away at me - there is no free lunch in this world. While I am a believer in the tenets of behavioral finance and of going against the herd to find deep value, I still struggle with the idea that there is a whole asset class out there that is mis-priced and a goldmine waiting to be claimed.

In addition it does not make sense that parks are claimed to be both very stable compared to multifamily, easier to run than multifamily, AND trade at yields well above multifamily.

We live in a world where information is instantaneous, and investors are flush with dollars coming out their ears driving yields down on every type of asset class - why should mobile home parks be any different?

So I have a hypothesis - that the high mobile home park cap rates are an illusion - that in the long run (ie holding periods of 20-40 years) these cash cows are giving you a return OF your capital, not a return ON your capital - i.e. a gradual liquidation.

The reasoning is simple - if your customer base is stable because they are so poor they cannot afford to rent an apartment, how in the world can they afford to maintain the mobile home they own in a habitable condition over a very long period of time? You can't have it both ways.

And if you are dead broke and can't maintain your home - eventually you may simply stop paying lot rent and abandon your now-trashed "home" - leaving it for the park owner to fix up and attempt to sell to the next person who also cannot afford to maintain it.

With multifamily the caps are lower but as the owner as long as I maintain my property and make the necessary cap-x investments when needed (roofs, fencing, interior upgrades, siding, etc.) the property's life is indefinite.

In any case - somebody please tell me where I'm wrong. I would very much love to be able to gobble up a portfolio of 10 cap parks, put a regional manager in place, and be sitting in cash cow city while I wait for the multifamily industry to crash and burn from its current low cap rates until acquisitions are attractive again in that sector.

[Chris Reeves]

Thanks for the feedback and great discussion guys - getting ready to head to the airport now - gonna spend the next several days listening to Frank Rolfe in Seattle at his bootcamp.