While reading
It’s really hard to pinpoint when one opportunity is ending and another beginning. One option is to start up what you consider to be the next big thing on the side as a hobby, just to watch for trends in demand. The other is to never be “married” to any one industry or niche. Many people hang on to businesses as they go down because they thought they were going to be in that business forever. One thing I’ve noticed recently is that there are more permanent “shifts” in the U.S. than “cycles”. For example, the post office is never going to come back as emails have replaced letters. And TV is never going to come back due to the internet, nextflix, etc. So holding onto business models is not as smart as it was 50 years ago, when industries tended to cycle from boom to bust to boom again, rather than just permanently die. I was at the Borders going out of business sale yesterday, and I heard someone say “I bet in a few years, bookstores are popular again”. That’s the kind of logic that kept people trying to sell buggy equipment after the Model T came out.
Shawn,
First it sounds like you got out of your businesses relatively unscathed. You may have ‘wasted’ time as you said. However, that time is now experience which is much more than I have. I think you did just fine just by the fact that you did get out several times. As Frank says, its really hard to time things. Its like people trying to time the stock market…yeah right. Your example of Erich Hartman. He was never brought down but was hit. Sounds like you…pretty good IMO.
In terms of when its time to start looking for other opportunities. I say most of the time, but not always with the same sense of priority and urgency. Always be aware of trends even if you decide not to act. More importantly, when your current business seems to be doing really well you should pay attention most carefully. This is when most business owners relax, during the maturity cycle of their business. This would be a good time to be on the lookout.
But this does bring up on good question. In our business what are the leading indicators we should pay attention to. Monitoring these data and metrics are important. In your example, you noticed MH supply dwindling in 2004. You probably also recognized there was no chattel financing. While you intuitively knew this, if you reviewed this data point like a key business indicator, might you have tried to get out sooner than 2006? Or least started looking at other business opportunities while you let the current one sunset.
Really good topic btw.
Shawn,
This is a wonderful post. It’s gotten me to think about the next “attack”.
Frank,
Very insightful response. However, I’d like to challenge you a bit. The industries you mention (post office, TV, bookstores, and buggy equipment) are becoming or were all REPLACED by something new and more efficient/desirable. If the mobile home industry is in decline (which I believe it is) what is its replacement?
Perhaps one could argue there is no current replacement so either there will be a resurgence of the industry, or there is an opportunity not yet created.
Steve
I don’t see mobile homes being replaced (I don’t think there is a HUD-approved method to buiild a cheaper detached dwelling). An old metal-on-metal singlewide in a park will still be in the exact same spot 50 years from now, just as the 1960 singlewide has already been there for 50 years. I don’t think that old homes have a “shelf-life” as long as they are maintained.
That being said, I am very pessimistic on the manufacturing and retail part of the industry. There seems to be very little effort at producing a more compelling product for buyers, and I have not seen one uptick in chattel lending in a decade. Let’s face it, the few mobile homes sold in the U.S. go out on land, and are not heading to parks any more.
So in answer to your question, I don’t even see a cycle on the existing affordable housing stock (we have had no vacancy or rent declines on any existing homes – not counting repos from the 2000 to 2005 era) as I think the demand has been uniform throughout. However I don’t see a resurgence of new manufacturing and dealer sales like 1999 ever again. There are roughly 50,000 units shipped per year right now, yet 400,000 in 1999. Without aggressive chattel lending, it’s never coming back.
Steve,
Back when I stopped doing the seminars and training in 2008, I decided to join our State’s Manufactured Housing Association and see what the “real players” were up to. By the way, they called our group, “stealth investors” since we didn’t belong to the dues paying institutes and associations.
Here’s what I’ve learned from the “institutional” side of the business in the past three years. This insight not only comes from the general meetings but also from the behind the scenes planning since I became a board member of the Georgia Manufactured Housing Association last year.
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For at least the last 20 years, park owners were considered the stepchildren of these associations. The manufacturers and retailers were the important cogs on the wheel since they generated the most revenue industry wide.
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Manufacturers are getting beat up by federal requirements imposed by a bunch of morons in Washington who would love to see this industry go away. Their costs are going up every week and the “affordable” home is just about a thing of the past. Most of the plants are required to pay for a full-time federal inspector making as much as the plant manager just to keep their manufacturer’s license.
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Just about all of the independent retailers are gone. I believe we have four or five left in the state of Georgia, most of the stores are corporate owned.
Overall, things look very dim for this industry in the future. A few years ago there was a big push to come up with a nationwide marketing campaign to help change the general public’s opionion about our “trailers”, but it died because the manufacturers couldn’t agree on how it was to be funded. Their model was the RV industry who has done a fantastic job with their “Go RVing” campaign.
Is it time to get out of the industry? It all depends on your long term goals and the properties themselves. I have three distinct and different properties in vastly different local economies. One is a large infil park that has all the ammenities and is a good candidate for a REIT acquisition down the road when it reaches 85% or so occupancy. One property is jointly owned and operated by a sharp couple who plan on making it a retirement cash flow machine. The other property is 65% occupied, not growing, but cash flowing enough to allow us to pay down the debt. I would sell the last property in a flash if there was a buyer, but haven’t seen too many of those the past year or so.
Here’s the ultimate situation: Own a park and a bunch of homes that are completely paid for. If I had a few of those, I’d spend about 3 days on the golf course, 2 days fishing and the rest eating lobster.
Shawn, I don’t think it’s time to get out but I would definitely think about diversifying. In my short 12 years of real estate investing, I’ve always owned more than one type of asset whether that be MHP, self storage, apartments or SFR’s.
Steve
To me there seems to be stages we have moved through. We started with single family homes - moved into apartments for 10 years then into MHPs after getting burnt out on Apts. The next stage for us seems to be pointing to sell the MHPs and take the accumulated cash and start our own Private Bank. No more being the landlord - we would now just be the middle person holding all the hoops and special dances applicants need to get through in order to be approved for financing.
Dale
Dale,
That is also part of my diversity program, my private bank has several 1st mortgages on SFR and liens on mobile homes. Unfortunately, in some cases these paper assets have become active investments evolving from the passive state they were intended to be. As a matter of fact, I’m in the process of foreclosing on several mortgages originated over 5 years ago to a single investor…looks like I’ll be back in the SFR rental business again.
Just be prepared to take over and manage any asset in which you place a loan on. I know several investors that weren’t prepared for this outcome and either are in denial about the non-payment or even worse let the asset deteriorate by not dealing with its vacant status.
Wow, I just realized that last statement characterizes many of the nation’s financial institutions.
Steve
I really wasn
Frank and Steve,
Thanks for responding to my challenge.
Frank,
I also don’t see a cheap alternative to mobile homes at this time.
I completely agree that a well-maintained, or even better, updated, mobile home can last 50 yrs+. BUT, how many low-income families have actually done this! In the parks I’ve done Lonnie deals in for the past 8 yrs. (1907 spaces), no more than 20% of the 1960s & 70s homes have been well maintained over the 30-50 years since they were built . When the water leaks start they don’t fix them, leading to larger repairs they don’t have the money to fix. This covers a range of 2-5 star parks in and surrounding a major metropolitan area. On top of this, 1970s 12 X 60s floor plans ARE obsolete. Tiny hallways leading to tiny 5’4" X 7’6" bedrooms, minuscule kitchens with no room for a dishwasher, etc, etc. Such homes are no longer desirable in 2011. Thus replacement or major rehab is required.
The number of manufactured homes peaked in 1973 at 579.9K homes. By 1976 (HUD code homes) demand was down to less than half, 246.1K. It has hovered around 200K+/- 50K until its recent peak of 373.1K in 1998 followed by the drastic fall in year 2000 and continuing below its low of 90.2K in 1961. (http://www.census.gov/const/mhs/shiphist.pdf)
I have a colleague park owner who owned 7 of his father’s 14 parks (brother got the other 7). He had been in the industry starting with his father for 30 yrs. In about 2004 he met with me and said he was selling all his parks. For many many years 4/10 applicants to his parks were approved to live in the parks. Without changing criteria, it had dropped to 1/10 in the prior 5 yrs. He said “Its either going the way of the drive-in movie, or it will come back up.” “I’ll put my money elsewhere for now, if it comes back up, I’ll buy back in then, if not, I’m done.”
Clayton had the setup: Manufacturing, Dealers, Financing, and 90 communities to put them in. In 2008, they sold 65 of their remaining 66 parks and stated in their annual report they will be focusing on “development model” homes of $125 to $150K on owner-owned property. (http://www.builderonline.com/business/clayton-homes-turns-a-page.aspx)
Chattel lending on mobile homes is OVER, NEVER COMING BACK. Read why here: http://www.mhmarketingsalesmanagement.com/blogs/industryvoices/the-train-to-oblivion/
So with these issues in the industry where does that leave land lease communities (LLCs)?
Without a chattel lending industry, that leaves, Lonnie Dealers (LD) and park owners (POs) to finance homes. Lonnie dealers need access to a lot of cash for smaller and smaller returns. Lot rents have increased dramatically while incomes in the same sector have not. Thus a squeeze on the amount of $$/month available to buy a mobile home. So Lonnie dealers get less and less/home/month. Not a good future for Lonnie Dealers. So that forces the PO to buy new, used, or rehab old. The main advantage of owning a LLC just got snatched away.
So the new model is workable for POs if they are willing and able (access to cash) to take on the homes themselves. Many, of course, have already done this by buying new, used, or rehabbing old then lease optioning, renting, selling for break-even (to get the lot rent again), or selling Lonnie style for low monthly because POs still get the lot rent too. So the question now becomes: Would you rather own apartments or MHPs? Ben Braband says definitely MHPs. But as everyone on this board knows, you’ve got to buy them right AND be willing to take on all the issues with the mobile homes that weren’t part of park ownership in yesteryear.
Steve
Steve,
Fantastic post. You explained my thoughts better than I could have myself.
I will add, the problem with the park ownership and Lonnie dealing, at least in my market, is that lot rents are far too high for the economic viability of the model as it currently exists.
High lot rents ($450+ avg) as a component of the total cost, relative to alternative low-cost housing options, has devalued the homes to a point where there is little money to be made by anyone but the park owner. Retailers for new homes certainly can’t offer a decent value proposition to their customers, and the Lonnie dealer also gets squeezed to the point it’s not always worth the effort. And in such a situation, how could a chattel lender possibly consider loaning big $$ on new homes when the value of their collateral plummets on day 1? This, in my opinion, is where the problem lies.
Will lot rents come down? I doubt it, not unless a bunch more parks go REO and new owners, buying at a discount, can afford to drop rents to beat their competition. Maybe a rental price war could have that affect…