'08 Economic Crisis and MHC Tenant Turnover

I have been considering a park but there is a concern I have of buying too late into this economic cycle.

I dont mean to turn this into a rant on the economy or discussing the odds of a crisis but IF a crisis hits, i would assume a percentage of my tenants would then lose employment and I would have to refill my vacancies. This would be capital intensive to rehab these homes and lower my income due to loss of lot rent or park owned home rent. But what is a good percentage to estimate and set aside for this?

Lastly, what about the issue of losing good tenants to depressed stick build prices?

In a previous post Frank answered that the main problem of having to refinance during a crisis but i didnt notice anything about turnover or stick build competition.

Jefferson answered as shown below, but i was hoping for a larger sample of responses. Economy and Mobile Home Communities - #4 by frankrolfe

Can any grizzled veterans offer their experience during '08?

Thanks in advance!

Joel

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The scenario you are describing is exactly the position I was in back in 2007. I drank the Kool Aid and believed people would flock to mobile homes instead of renting. Didn’t happen then and it won’t happen now. The residents that were any good left their mobile homes to buy stick-built homes and I believe history will repeat itself. Now that I know better, I wish I had just bided my time and bought more SFRs.

Rolf- Thanks so much for your feedback. I saw that you had a post back in '08 (or maybe '09) where you said a lot renter moved out.

Point taken on lowering house prices drawing out some good tenants. Very valid.

The boom in MHC compared to other assets did not happen so I understand the disappointment.

Specifically, how many people moved out compared to how many total spots in your park?

Do you know how many lot renters left? How many Park Owned Homes vacated?

Trying to gauge how this could shake out.

Thanks!

Wow, I don’t think my rapidly aging brain can remember back that far:-) What I remember is how I was “taught” that the crumbling economy would push people into mobile homes as that was all they could own and then the exact opposite happened - people would rather rent a stick built home vs. live in a mobile. I truly do not believe the owner of a stick built home is ever going to willingly accept living in a mobile home and will do whatever he or she can to avoid such a fate. Others may disagree.

What I do remember from '08 was that I kicked out the scum hoping that would allow me to keep the good residents, but it didn’t work. They (the residents who had stable jobs) had a once-in-a-lifetime chance to buy a stick-built home and they jumped on it. I had neither the money nor the demand to justify buying their homes and several trailers were taken away. The loss of those home has hurt me to this day.

I have never had nor ever will have POHs. After seeing the quality of the renters in this area, just thinking about renting homes scares me.

I truly think SFRs, if bought and managed correctly, offer one of the easiest and safest ways to build wealth for the small investor. It is certainly a lot less hassle than owning a park and just because some on this forum have not been successful at it does not mean you wouldn’t be. Heck, even the big boys are getting into that act now and that should tell you something.

Enough ranting. This is my view of the industry and my little corner of it and others will surely disagree. Just keep in mind that a lot more people like to talk about their successes vs. their failures.

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Rolf SFM vs MHP? As a park owner Why are the single families better than the parks?

I may be on a different planet, but in the markets we serve there are virtually no single-family home rentals, and certainly few if any that our tenants could afford. The median home price in our markets is $110,000, and that’s going to equate to a monthly SFR rent of around $1,000 per month. Our average lot rent, on the other hand is $285 per month. Even if you throw in the mortgage on a new Clayton home, that’s around $650 per month. As a result, we lose no tenants to SF rentals, nor do they even enter into the equation. Our only competition is apartments, which again average over $1,000 per month on a 3-bedroom.

I think the problem here is that the parks you are discussing are in rural markets with low population and low home prices. Mobile home parks do not work in towns where affordable housing is abundant. They work where all other forms of housing are expensive. That contrast is what fuels demand. If you are competing with single-family homes then the moral is you should not have purchased that park. Not even mobile home parks can survive a poor location or lack of market dynamics. Test ads are critical, and so is making sure that you are the least expensive housing option in the market by far.

We might lose a couple tenants per year to a McMansion because they hit the lottery at the convenience store, but that’s about it. And that’s out of 23,000 lots. I personally have never heard the words “we’re moving out of our $285 per month mobile home because we got a sweet deal on that brick house up the street”.

Just wanted to clarify the other side of the story for those Forum readers who are reading this and thinking that this makes no sense. It doesn’t, if you buy a park that is based on location, location, location. If you buy a park, however, where there is no demand and SF median is $50,000 and apartments are $400 per month (as you will find in many markets on Bestplaces.net), then the park is now the most expensive housing in the market, and the whole business model is destroyed. And in that case, sure you’d lose customers to SF and apartments all day long and only be able to house those who don’t have enough gas in their car to move.

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I will also add that, statistically, mobile home park occupancy went up during and after 2008, as the meltdown in zero down/no income documentation mortgages ended SF as a viable option for even that fraction of affordable housing customers that wanted to give that a try.

The danger to the mobile home park business model has always been – and will always be – mass prosperity, not recession. That’s what killed the industry in the 1950s. Personally, we do not feel that there is any chance that the lower third of American income earners are going to become rich anytime soon. And let’s not pretend that the increase in minimum wage (even if that occurs) is “mass prosperity”. When I say “mass prosperity” I’m talking about what America experienced after World War II.

Would you please explain how you arrived at the numbers, $650, you are quoting?

I used a $25k loan (assuming $5k down on $30k MH- which I think is extremely low priced), 15yr mortgage, 4% interest (which I doubt that most MH buyers will get), personal property tax @ 1 1/2%, PMI @ 1/2%, and Insurance @ $1k. The MH payment would be $580.76 + your lot rent of $285.00 = $865.76

the numbers were from http://www.mortgagecalculator.org

A $30,000 mortgage at 8% for 15 years on a new home = $287 per month. The personal property tax is 1% in most states = $25 per month. The insurance is another $50 per month or so (totally depends on the state, deductible, etc.). That gives you a grand total of $362 per month. And that’s on a brand new home. We typically have a range of homes (older used, repo and new) with the lowest price point around $4,000. The customer can get financing through 21st Mortgage on a note of $10,000 and up, which makes that $287 into around $100 per month, or pay all cash which makes the mortgage -0-.

But even given your estimate of $865 per month, that’s still a great deal when SF medians are in excess of $100,000 and 3-bedroom apartments are $1,000+ per month. Again, what makes the MH business model work is high home prices and demand in the market. If you run your test ad and don’t get 30+ calls in 10 days, then it’s not a good market. We have parks in some markets that get 100+ calls per week. But they do that because the surrounding homes are $180,000 and the apartments $1,500 per month. Contrast between expensive and affordable is key, and without it you are doomed. There are mobile home parks in derelict parts of southern Illinois – where the coal mines have shut down – that compete with $40,000 median SF and $350 apartments and have no customers at all. They look like any other mobile home park (even the ones with 100+ calls a day) but they lack that one fundamental requirement: location. Those parks don’t have to worry about economic cycles, as the only direction is down every day.

But I don’t want to convince you of anything, just get the correct facts out there. If you prefer SF investing and hate the MH business model, then by all means invest in SF. At the end of the day, everyone has to invest in what they believe in. I believe in MH investing and have been doing it for 20+ years. But freedom of choice is what makes America great.

I will also add that I am no stranger to buying SF. I have bought many over the years for family members, the most recent 90 days ago. If you run the numbers on that house I just bought, you will see that it would be a lousy investment that returns virtually nothing after expenses. I always hear about SF investing as being great, but I’ve never actually seen it, except in cases where someone has purchased a home at a cyclical bottom (such as 2009 or so) and then held it until the market comes back. But even then, the gains are not that impressive if you look at the actual return over the period of time. I used to have a barber that raved about the farm he bought for $50,000 in 1950 and sold for $1 million a half-century later. It makes for a good story, except for the fact that the rate of return over 50 years was around 6%. Let’s look at the house I recently bought for a family member and see if there’s a way to make money with it:

Rent $500 per month

Purchase price $50,000 with $5,000 down
Mortgage on $45,000 for 30 years at 5% = $263
Insurance = $50 per month
Property Tax = $40 per month
Repair and maintenance = $50 per month

Total costs = $403 per month

Total profit = $97 per month

If you want to compare this to a $500,000 mobile home park, then just scale the numbers X 10.

Under that scenario, the SF portfolio makes $970 per month. Meanwhile the mobile home park can make this same amount in a simple rent increase of $40 per month x 25 lots (assuming the park is 25 lots at $20,000 per lot at purchase). So basically the mobile home park clobbers the SF right out of the gate. Then on top of that, the SF portfolio is worth $500,000, but the MH park is worth $620,000 after that first lot rent increase. And that does not even count the nightmare of trying to manage 10 houses spread out all over the place. The only way the SF can catch up is if home prices soar, not based on actual cap rates but the “pride of ownership” and stupid shopping of home buyers. But that’s a huge gamble, and the risk is compounded by fickle SF mortgage markets and consumer sentiment.

For me, I’ll take MH.

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Most people around the country didn’t buy homes after the 2008 crash - they rented and continue to do so. Home ownership rates are down and that trend will probably continue. Simply put, given a choice between renting an SFR and buying an mh, I believe most people would opt for the former, even if it makes more sense financially to buy the mh. Spin the numbers any way you like, but that reality holds.

Renting out mobiles vs. stick built? You can tenant-proof a stick built home but mobiles are not constructed anywhere near as well. Houses can hold their value whereas mobiles are guaranteed to depreciate from day 1. As soon as that reality changes, along with being at the whim of the park owner, the industry may truly come back.

Hey, whatever works. I have made money in SFRs for years as have friends of mine. Easy to buy, easy to own, easy to manage. We are, generally, happy with the structures as well as the residents to whom we have rented. If your experience is different, great.

BTW: My area is booming and set to expand like crazy when Shell starts work on it $3B cracker plant in 6 months. I’d be buying SFRs like crazy there were I not working in China.

I think the main point is that the total monthly payment on a SFH rental in any market you want to be buying parks ($100k+ median home, etc) should/will come at a significant premium to that of a mobile home in the same market.

Rolf

My question was as a park owner why sfm over MHP?

Advantages of mhp over sfm

MHP with no POH’s
Lot renters own their homes
Scale more units in a park
Barriers to entry
Less competition
Not fixing toilets, a/c’s etcétera
Less churn

…
More favorable accounting/tax treatment
Higher switching costs
More favorable cap rates
No customer concentration
And on…

Seems to me that the bad taste left in mouth was that 2008/09 was a once in a lifetime opportunity to buy ALL assets at insane valuations given it was crisis that was precipitated by housing itself and evolved into a liquidity crisis.

I looked at plenty of SFHs in strong Miami submarkets during the time that would’ve rented at incredibly attractive implied cap rates and I didn’t pull the trigger. Why not? Because you couldn’t get financing and would’ve had to come entirely out of pocket. There were far more attractive uses of capital in the public markets where you could make 100sX your money. Even some public REITs (assuming no near-term maturity cliffs) offered a far better alternative because of the scale and exposure provided, without the nightmare of someone calling you to fix their water heater or faucet.

The run in asset valuations across the board over the past 8 years (speculation) makes hindsight 20/20 of course. But the reality is, MHPs are one of the only places left today where one can still find attractive valuations on a relative basis, very compelling day 1 cash-on-cash returns, and asymmetric risk-reward that is almost incomparable.

I hate to say it, but if you do your work properly and “buy right”, it’s very hard to lose money in this industry, which is more important than anything else to me today. That can’t be said very often in an environment in which the SPX trades at 26x earnings (median is 15x over last 100 years) and multifamily in secondary and tertiary markets trade in the 5s and 6s. Almost anywhere else you look (including SFH today) the downside risk doesn’t compare and can even be difficult to quantify.

In general, I think most everyone here is sold on MHP vs SFR (or most every other form of RE) or else they would not be reading this.

Franks main point is well taken: Buy in a market where competitive forms of housing are more expensive to keep demand for your park high even during rough times.

This is the crux of my original question: in order to be sure we prepare for the next crisis (I assume there will be one and maybe sooner rather than later) how should we expect MHP to hold up?

While surprising, Franks statement that “statistically, mobile home park occupancy went up during and after 2008” is encouraging for continued demand in a crisis. (Frank is this your personal experience or do you remember seeing a study somewhere?)

In a crisis, some residents would lose their jobs, correct? This was the case in '08, correct? Why did occupancy not decline? Was it easy enough for them to find a replacement job, did they just have a household supporting family member move in, or did they sell their home to someone with a job for $500 so you never heard anything, or some combination?

Or was it that people would leave but would be replaced quickly?

Was there any difference between lot renters vs park owned homes

Did anyone else experience this?

Thanks for the great discussion!

Joel

The key reason that mobile home park residents have fared well despite the 2008 Great Recession (and I believe any other recession going forward) is that they are in the “sweet spot” of employment – basically minimum wage to $10 per hour. 50% of all jobs created since 2008 have been $10 per hour or under, with fast food being the fastest growing industry in the U.S. since 2008 [here’s one of many articles on this change in employment demand http://www.nytimes.com/2012/08/31/business/majority-of-new-jobs-pay-low-wages-study-finds.html ]. Since low-paying jobs are the new heart of U.S. employment, it’s not hard to find work at this level. Even in my small town in Missouri, the local paper always has at least ten $10 per hour or less jobs in the employment section. While $10 per hour will not allow you to keep your house if you were earning $20 per hour on your manufacturing job, it covers the mobile home park tab just fine. So while industries often changed post-2008, our residents jumped from one job to another at the same pay scale. This shift in employment from middle income to lower income wages has been a huge driver to mobile home park demand, while at the same time bolstering the solidity of the tenant base. And, of course, the level of pay is backstopped by minimum wage laws, so there’s no chance of decline (in fact, minimum wage is likely to rise in the years ahead).

On the occupancy stats, there are a number of studies on the topic from such companies as JLT but you can’t reproduce their findings without written consent. I believe Marcus and Millichap has a report on occupancy over the past decade which is free and can be reproduced, but I don’t have it laying around or I’d put up the link to it. These reports, however, are extremely macro and typically only include the REITs and largest owners and, therefore, are not perfect by any means. I wish that I could tell you that MHI has such a report, but they sadly did not track any mobile home park data back then (and I’m not even sure that they’re doing it now). But if you talk to any owner of a decent park who has owned it since 2007, you’ll hear the same general findings.