Does a recession-resistant investment exist?
When it comes to affordable housing, it seems misinformed investors come up with excuses for NOT investing in this overlooked sector.
Additionally, there is one subsegment of affordable housing that particularly turns those investors off – mobile home or manufactured home communities (“MHCs”).
If investors analyzed their excuses for not investing in affordable housing and, in particular, MHCs they would discover that those very excuses that are preventing them from investing in MHCs are exactly the reasons why they should be investing in them.
Here are some reasons investors have for NOT investing in MHCs and our reasons for why you SHOULD be investing in this overlooked sector:
They are Not Shiny, New, or Cutting Edge
Investors are always looking to hit a home run with the next big thing. They’re looking for the next Facebook, Twitter or Amazon. The problem is, for every Amazon, there are a thousand failures.
For example, 2019 was the year of the IPO flop. The list of high-profile IPO flops in 2019 is a who’s who of “The Next Big Thing” – Uber, Lyft, WeWork, Endeavor, and Peloton share prices all tanked after their initial launch.
While you can invest in an Uber or Lyft or the latest sexy IPO that makes the headlines, the reality is, very few IPOs are ever profitable. Even successful IPO companies that eventually make a profit, they often face a long road towards consistent profitability to be able to pay dividends.
Amazon took more than four years to turn its first quarterly profit. Even then, it was a measly $5 million. And it’ll be many more years before it will be able to offer its investors dividends.
MHCs are not shiny, new or cutting edge, but therein lies their appeal. MHCs have been around forever and have consistently been profitable. You don’t have to wait 30 years for the likes of Amazon to pay dividends. Investors in MHCs can reap cash flow from day one.
Conversation Value
MHCs are not an investment some people often brag about if they are concerned about showing them off, but investors that are focused on the returns have something to boast about.
Affordable housing consistently boasts cap rates that consistently topmost commercial real estate segments. With above-average returns and consistent growth in a recession, some investors prefer to keep these investments a secret.
They Are Not Sexy
Affordable housing and MHCs aren’t your sexy 32-story high rise or shiny, new professional office building, but it will beat the ROI and deliver a return of your capital faster than any highrise or professional office building.
With cap rates consistently in the 3-4% range, high rises and professional office buildings often take longer than affordable housing to start cash flowing and to deliver a return of capital to its investors.
There’s an added benefit for affordable housing not being “pretty.” Affordable housing and MHCs offer investors value-add opportunities that new developments can’t.
By improving curb appeal, operating efficiencies, and infrastructure, operators of affordable housing and MHCs can drastically improve cash flow and long-term value by boosting income and reducing expenses.
They Are Not Where Investors Live
Affordable housing and MHCs not being in the best neighborhoods are why they are so appealing for investment.
First of all, there is less competition to acquire these types of properties because they don’t appeal to many individual and institutional investors looking to place capital in higher-end neighborhoods.
Because of the stigma of affordable housing and MHCs, most city councils and county commissioners are unwilling to zone for new MHCs because of concerns they’ll drive down overall property values. The result is less than ten new communities being developed a year, which means undersupply.
To illustrate our point of low MHC supply, when was the last time you saw two competing mobile home parks across the street from one another or even on the same city block? The answer is likely never because, like you, we have never seen this phenomenon.
The same can’t be said about self-storage facilities, apartment complexes, retail centers, restaurants, senior living centers, student housing, or professional offices. Those classes of commercial real estate are rife with competition.
Low competition and undersupply means higher cap rates and rates or return – all backed by data. This is all good for investors.
I’m Concerned About the Tenants
The stigma of affordable housing and MHCs unfairly paints their tenants in a negative light. The truth is, there is less turnover with MHCs than other classes of commercial real estate.
That’s because of the unique relationship between operators and tenants where the operator owns the land, and the tenants own the homes. This gives tenants pride of ownership to maintain their homes while freeing operators from upkeep expenses. And despite the name, mobile homes are not mobile – most requiring thousands of dollars to move.
Pride of ownership and immobility results in turnover rates that are lower than those of apartments and other multifamily properties.
One additional piece of truth. MHCs are now appealing to a broader pool of tenants than ever before. With Baby Boomers retiring in droves and looking to downsize and with Millenials looking to leave less of an environmental footprint, MHCs are appealing to these groups now more than ever before, resulting in high demand in an undersupplied segment.
Aren’t MHCs More Susceptible to Natural Disasters Like Tornadoes, Hurricanes, Earthquakes, and Floods?
It seems silly to even have to address but MHCs do carry the stigma of being susceptible to natural disasters.
The reality is MHC operators typically emerge in better shape in a natural disaster than owners of other classes of commercial real estate. That’s because MHC operators own only the land and common area facilities with tenants owning the structures. Individual tenants are responsible for their insurance on homes.
In a natural disaster, since there is typically little damage to the underlying land and with tenants carrying their insurance, operators are freed from having to deal with the rebuild or replacement of the individual homes.
It seems Like there would be a Significant Turnover in a Recession
Investors assume that the income profile of affordable housing and MHC tenants make their investment vulnerable to a recession since low-income tenants would be most affected in a downturn.
The truth is there is increased demand for affordable housing in an economic downturn. Since the Financial Crisis, the demand for affordable housing has only increased with demand outstripping supply, with the gap only expected to widen.
That’s why, in a recession, affordable housing is not only a safe bet but could thrive.
You may have reasons not to invest in affordable housing. Get informed.
If you dug a little deeper, the very reasons for not investing in affordable housing such as MHCs are the very reasons you should be investing in them.
Andrew