Around the country, housing costs have skyrocketed, putting homeownership out of reach for many. In my area of Los Angeles, the median home value is $692,800, with prices increasing 2.2% last year and predicted to rise another 0.7% this year. If homebuyers want to be in a more desirable area of Los Angeles, such as South Pasadena, home prices are even higher and rising quickly. In 2017, the median household income in Los Angeles County was $61,015 and the owner-occupied housing rate was 45.9%. Most people can’t afford to own a home, let alone rent one.
I believe that ample opportunity for investors who are looking for steady, asset-backed cash flows and yields generated from the rental income exists in the form of manufactured housing communities — at least, if we as a society can get past the “trailer park” stigma. My firm owns over 20 of these communities around the country, and I’ve seen the benefits to local homebuyers and investors firsthand. In particular, retiring baby boomers — who are losing their steady income streams — may find that ownership or participation in manufactured housing communities is an attractive income replacement tool.
As we know from the first rule of economics, supply and demand govern everything, and since there is a massive shortage of housing supply, prices are rising, which leaves space for investors to benefit from investing in this asset type.
A Response To The Labor Shortage
With the housing demand so high, combined with a shortage of labor, builders are bidding up prices. The number of available residential construction workers has dropped 23% from what it was back in 2006, and specialty trade workers in industries such as plumbing and electrical work are down around 17%.
When you combine the labor shortage with the increasing construction prices — up 5% each year for the past three years, and even as high as 30% in the Bay Area — it creates a huge problem. Honestly, it’s no wonder we can’t keep up with the housing demand.
Many off-site construction operations are seeing the opportunity and are building manufactured homes more efficiently at a much lower cost. This is the type of innovation I see really gaining momentum as a mitigator to the lack of affordable homes, and due to labor shortages and the rising cost of traditional building, it makes economic sense. These homes can be manufactured in a plant, much like how a car is built, without costs associated with acquisition and movement of goods, drastically reducing construction costs — savings much like a car built on a factory assembly line versus a handmade, custom car.
This shift in the production of housing supply can afford investors an opportunity to arbitrage the differences between housing made by people in stick-built situations or through manufactured automation.
In the past, a hurdle to putting buyers in manufactured homes was financing: Many lenders required larger down payments and charged higher rates and fees for nontraditional properties. That is changing, with Fannie Mae reducing the down payment requirement to 3%, along with lower fees for manufactured home mortgages. This alone is going to make these homes an option for people who otherwise wouldn’t have qualified with the previous higher rates and down payment requirements.
More financing options should ideally result in more manufactured home communities being constructed, presenting more opportunities for investors. But before this can be fully realized, local communities will need to adjust zoning laws to encourage and allow for new communities to be developed.
How Investors Can Find Success In Manufactured Housing
Investors temped by this asset class should be looking for:
• Communities that have strong demand (again, it’s economics 101).
• Communities that are on land that will have price stability and appreciation (these communities will hold the most promise for growth).
• Communities with strong tenant profiles.
• Regions with good utility and power hookups that are run and maintained by a city or municipality.
• Municipalities that are growing, have strong credit ratings and are creating jobs.
While this may seem like a lot of vetting to do, there are some ways of getting indirect exposure to ownership of manufactured housing communities as well. There are publicly listed companies that own manufactured housing communities investors can access as a starting point. Private equity funds, my firm’s included, are increasingly paying attention to this sector as well. Various real estate crowdfunding platforms also offer opportunities for investors to participate directly in manufactured housing syndications.
In a world of investors looking for strong and stable yields where interest rates remain historically low, the returns from manufactured housing communities remain as lucrative as any I’ve seen in the asset-backed space. I believe this is the covered land play investors should be exploring — and it does good for the housing stock at the same time.
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