Buying Manufactured homes + building foundations = ROI?

Question

Before people start parroting "manufactured homes lose value, traditional homes appreciate" hear me out.

1.) Modular homes are becoming more and more popular. These are "manufactured" if you will. However as of now they do not "depreciate".

2.) Economies of scale and automation will make construction of modular homes/manufactured homes/housing construction costs less expensive in the future. This has happened in literally every other industry in the entire world. Thus eventually your normal "stick frame built on site house" will lose value in the long run because people will be able to buy the exact same quality structure from a factory for a fraction of the cost.

3.) Really we should be talking about "construction quality" in general rather than caring about whether the house is built in a factory by robots in Mexico, on site by highly paid American tradesmen. All that matters is the final quality and cost. Period.

4.) All buildings should depreciate over time, other than perhaps keeping up with inflation and rising labor costs. If I buy a modular home for 200k and install it on a piece of land. There is no way that in 10 years the house will be worth 200k + appreciation of 7% a year when I can go out and buy the exact same modular home for 200k myself in 10 years. The land appreciates but the structures should not. Right now in 2020 we live in a bizarro world where the structure DOES appreciate up until the point that someone says "this needs to be demolished", in which case the structure is worth negative dollars.

5.) Traditional homes appreciate because the buyers are always buying with crazy leverage using the bank/govts money (0 down FHA etc). When someone has to pay cash for something (a car, manufactured house, boat, etc.) the value goes down with usage aside from antiques and collectibles.

Now with that out of the way my question is this:

"Manufactured homes" can be built to pretty high standards. Given that they tend to depreciate when the buyer has to pay cash, while they appreciate when the buyer uses a mortgage, can I basically arbitrage this opportunity by:

1.) Buy a vacant piece of property, build a foundation on it.

2.) Buy a manufactured home, but one that is not eligible for traditional mortgage financing because it is on footers or trailer or whatever.

3.) Take the home to my property, place it on the foundation. Sell it as a "normal house" that qualifies for traditional financing to someone who subscribes to philosophy of (sure put 0% down it's a normal house it will only go up in value who cares about the price!).

Thoughts?

David Edwards · Answer

Stephen,

You want "modular" housing not manufactured.

Per many commentators and reality of the market you will find that manufactured housing, what used to be known as "Mobile Homes" do indeed depreciate. This is because manufactured housing is not what is known as "real property" meaning they can be moved and are not tied to the land. Additionally despite increasing quality of "manufactured" housing it is still manufactured to HUD standards and not necessarily local building codes. "Manufactured" homes for this reason are appraised differently than other housing and are also subject to various deed restrictions regardless of the idea to put a "manufactured" home on a foundation.

"Modular" housing is a different ball game. Modular homes are built at or higher than local building codes for the area you will be establishing the home. "Modular" housing is classified as real property and is appraised the same as any stick build.

"Modular" homes do have many of the value points that you state in you post in that you can generally have you modular built faster and cheaper than stick built.

I am in the middle stages of vetting modular companies here in Texas and will be working to build out several modular duplexes on a piece of land I have identified, jut working with the county engineering team to verify infrastructure. I've identified a bank that LOVES modular homes as they appreciate the short build times and resulting equity.

I also have 1 rental unit that is a HUD manufactured home, it rents out ok but anybody that buys from me eventually will need to be all cash or find a specialist lender, it's annoying. Still it was my first foray into the game and worked out well, I should make a post on it.

@Eric Teran may be along shortly to discuss the benefits/value of design and you really couldn't go wrong picking up a book called "The Modular Home" by Andrew Gianino. It's on audible as well as print, i'd get both the audio so you can get through it quickly and the book so you have all of the design plans and checklists.

I have a few other posts on this topic out there if you want to look and if you'd like to speak more directly do feel free to connect and we can private chat or have a call.

-Dave

Sadie Wilborn · Answer

I’m new to REI and was thinking of buying a manufactured home to live in and once I move renting it out. If I choose not to sell it, would you say it’s a smart investment?

Rachel H. · Answer

@Stephen Mattison If you're going to go this route, you may want to start networking with mobile home dealerships in the area. In the past, I've found many to be good sources of information for market research and offer opportunities for referrals down the road. Also, many times this is exactly what they do: sell manufactured homes on land. They may also have a few contacts regarding lenders who may be able to lend on the deal. Hope that helps!

Eric Teran · Answer

@Stephen Mattison, I agree with everything that @David Edwards said. Manufactured is never on a solid foundation. Modular or prefab is on foundations. I wrote a blog a few years ago titled, "I love Modular Construction and so should you!" I believe there are more advantages than disadvantages.

The majority of Modular companies will make you use one of their certified GC to install the home on the foundation so you can definitely find a GC with the knowledge and process of modular construction. The house also has to be a certain size, easy to get to, and designed with modular construction methods in mind to make it make sense financially. A custom home designed without the requirements (mainly width of boxes and structure) can't just say it wants to be a modular home. There will likely be too many modifications. Additionally, the design wants to limit the number of boxes that will be used. For example, a crew can set up four boxes in a day but if the house is 8 boxes they have to be out there for two days and a crane company will charge around $10k per day.

So Modular can save money if done correctly. What it will save every time is time. No question about it. Time is money.

I designed and built my own modular house. After calling around 30 modular companies I settled with Excel Homes as they were the ones that were most comfortable working with a custom design and Architect. I also used Superior Walls which is a prefabricated system for basements. That was also amazing. If you have a big lot then you can probably choose a predesigned plan which makes life much easier.

In regards to banks, you just have to find a local bank that has experience doing modular. Typically a bank has 6 or 7 withdraws and they are more or less the same amount. Each draw is a few weeks apart as construction progresses slowly. With modular you will do 3-4 draws and they all happen within 3-4 months. The first draw is for site work and foundation, the second is for the modular installation, and the third is finishes and so on. The big one is the second withdraw. It will be around 50% to 70% of the loan. It also has to be coordinated so that on the day the trucks are on site ready to install the first box the bank has to wire the funds. It is kind of a catch 22 because the bank doesn't want to wire the fund until the first box is installed and the modular company wants the wire before the first one is installed. It is a very tense morning.

Finally, appreciation. Modular homes appreciate the same as stick build. There is no requirement to say that it was built modular and no one kind tell. If you PM me I can send you my blog that I kept everyday during construction. BP doesn't let me link to it because it goes to my Architecture Website.

Just like traditional buildings you have to be careful. Anything can go wrong if you don't have a good team behind you.

Good Luck.

Stephen Mattison · Answer

Thanks for the great replies. In general I'm wondering about the long term prospect leveraging most of someone's net worth to build a stick frame house (most people). At some point Ford or GM or Tesla should take their knowledge of automation and manufacturing and apply it to houses. Once this happens our investments will be severely impacted. Overall this is a good thing for the economy/human well-being/financial independence but for myself I don't see buying a 800k SFH stick built dwelling anytime soon.

Am I wrong in my estimation? If so, how?

Buying Manufactured homes + building foundations = ROI?

Buying Manufactured homes + building foundations = ROI?

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