The discussion of housing affordability is at the forefront of many community meetings. Three things stand in the way of affordable housing.
1) High cost of land
2) High cost of construction
3) Cost of servicing the land with the infrastructure
Unless you can dramatically reduce the cost of these three items, the cost of housing will continue to be high for those who are on fixed incomes and those who are lower on the income ladder.
It doesn’t matter who builds the house. It’s not the fault of the builder. If materials and labor dictate that new construction costs $130 per SF in many areas of the US, and if land contributes another $50 per SF of finished floor area, someone buying a 1500 SF house is going to need an income of $36,000 minimum in order to afford such a really small house. If a household is close to that income level, housing affordability is going to be a challenge. Two people in a household earning minimum wage will roughly afford to live in a mobile home and not much else. At $10 an hour, you’re looking at $18,000 a year in income per person. Very hard to make ends meet at such a low income level. We’re not talking about a teenager living at home, working at McDonalds part-time for a bit of pocket change. When you have independent adults in minimum wage jobs, they will quickly become the working poor.
On today’s show we’re taking a look a mobile home parks. Today about 10% of US households live in mobile home parks. They represent about 20 million home sites.
Most of these parks started out as mom and pop owned projects. Today, they’re a corporate affair with big business and family offices investing in them.
Mobile homes provide the largest inventory of unsubsidized, affordable housing in the nation, but many began as RV parks in the 1960s and 1970s and are now old, with rundown water and electric systems and trailers that have been long past “mobile” for decades.
As a park owner, the profit is in the lot rent, not the structures. Their prevalence varies widely by state.
Some states like Colorado have a lot of them. More than 100,000 people live in more than 900 parks across Colorado.
Many started as RV parks and then were converted to mobile home parks. But the infrastructure requirements for RV’s and mobile homes are different. Rv’s require 30A and 50A electrical service. But the building code treats a mobile home the same as a detached home and requires 200A service. The reality is that a mobile home will draw almost the same amount of electricity as an RV. The biggest demand for electricity comes from heating or air conditioning. Lights and kitchen appliances are insignificant consumers of energy by comparison. Nevertheless you will need to completely redesign the electrical system for a park in order to handle mobile homes if the park was not designed for it.
The next major areas that can be costly to upgrade for the long term are the water and sewer infrastructure. Most of these parks are outside the dense urban environment and rely on well water and septic systems rather than municipal services.
So why are these types of assets attractive to institutional investors?
The largest cost of operating a park like this is the staff. If the park is small at say 50 units, there is not enough income from the park to pay for the staff required to operate it. These only work as owner operated parks.
The cap rates for a well run, large sized park can be easily 14-15%, provided they are purchased at a good price. The specialists in operating these parks have developed strong systems for owning and operating them.