Editor’s note- this is part four of a ten-part series on the various asset types of DST offerings.
Part 4: Manufactured Housing (MHC) Asset Classification
By Al DiNicola, AIF®
May 20, 2022
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC
You may have driven by locations that have a combination of trailers, campers and other vehicles all sharing the same plot of land. The reference to the “trailer park” may have been the subject of many comedians including disparaging remarks over the years. There is a noticeable difference between the trailer park structure and the Manufacture Housing Communities. At one time the investment into manufactured housing may have been thought of as a marginal asset class. There has been an interesting chain of events leading to an increase popularity not only by the residents who call these locations home, but investors as well. The facts are that factory-built housing (as a segment of real estate) has become one of the asset classes that has been very stable. There is a tremendous amount of interest in this asset class. Many experts state there is a bright future for manufactured housing communities. Since 2000 the manufactured housing section (according to Green Street Advisors) has not experienced a decline in net operating income (NOI) when doing a year over year comparison. This was the only major commercial real estate asset class to return this type of result. Delaware Statutory Trust (DST) sponsors have added this asset class to their offerings over the past few years with exciting results.
What is important is to have an overall understanding of the asset class. The manufactured housing communities (MHCs) are different from many of the older Mobile
homes sitting in a variety of locations. Those older homes are now obsolete due to HUD policy changes in 1976. Fortunately, many of these older homes have been or will be replaced. The new MHC settings typically have more amenities as well as a sense of community than the old trailer parks. Typically, in a MHC, there is a clubhouse, swimming pool, and other social amenities included in the community.
Demographics are important.
- There is an estimated 22 million people living in manufactured or mobile homes in the U.S. Numbers are tracked by the Manufactured Housing Institute.
- Manufactured housing provides shelter for roughly 7% of the U.S. population.
- There are approximately 43,000 land-leased communities that contain 4.3 million rental sites.
- The new homes are manufactured in controlled facilities.
- On last count by the institute there were 136 production facilities in the US. These homes or production unit typically are about 1,500 square feet and the 2019 price was about $82,000.
MHC communities still provide the most affordable price point for housing, and they provide exceptionally affordable housing. In addition, MHC communities combine the best features of the rental model and ownership. Residents own their own home and have their own private yard, but only pay a modest lot rent and have use of substantial common areas and amenities.
The property owner (or DST sponsor through a master tenant agreement) rents plots of land to individuals who have a park model home built (delivered) to the property.
- This is a land lease to the tenant.
- The tenant (who owns the structure) pays the monthly rent for the land as well as other potential expenses such as a pass through on taxes in certain jurisdiction.
- The tenant insures the property thus eliminating the need for the landowner to insure all the structures.
- In the event of a catastrophic loss the tenant’s insurance would handle the repairs or replacement of the home.
- Insurance would be needed on any of the community wide facilities such as clubhouses and any other structures.
- The landowner is also responsible for the maintenance of the roads and other facilities.
- Occupancy tends to be higher than other multi family assets.
- Delinquencies are low and many states have laws on the books that favor the landlord.
Interest by investors for MHC asset remained high in 2021. There was a compression in cap rates but investors as well as Delaware Statutory Trust sponsors continued to seek acquisition in key locations. The steady growth was fueled by strong demand.
There are unique issues that the MHC sector is experiencing.
- Today’s factory-built homes increasingly resemble stick-built homes, with luxury finishes and architectural details that mimic conventional-home designs.
- The new supply of land for development is virtually nonexistent. With this scarcity of new supply, both in terms of new communities and new homes within existing properties creates pressure on acquisition prices.
- New production of homes or park models has been hampered by the discrepancies in supply chain issues. This may have prevented the replacement of older homes within the communities with newer ones where there were empty lots.
- Older residents living in dated home who pass away leave the structure to the heirs. While the older homes may be placed on the resale market, many times these much older homes have little residual value when compared to the newer built homes.
- There also are the continued image problems with the construction of new communities and the reluctance on the part of municipalities to accept this much needed housing stock. Municipalities, zoning boards and neighborhood associations often show great resistance to allowing new communities to be developed or expanded. Once again, this position may be as a result of old stereotypes.
Affordable Housing Solution.
A great solution for the affordable housing crisis could be manufactured housing. Local governments complain about the need for more affordable housing, but generally speaking they tend to hinder the development of manufactured home communities. That is a problem. There are locations where MHC is making inroads such as Albuquerque, N.M., Winston-Salem, N.C., and Florence, S.C.
With the housing crisis what is needed is quicker permitting that can create an increase in the numbers of homes for purchase or rent. Manufactured housing, in many US locations is the only truly affordable, nonsubsidized form of detached housing available.
Which U.S. manufactured housing markets performed the best and why? Four and five-star Florida locations in age-restricted communities performed the best. Rust bowl “trailer parks” populated by lower-income residents performed the worst. Many of the Florida facilities were owned for decades by mom-and-pop owners. Frequently this type of facility becomes the target for acquisition, repositioning, physical improvements and structured as a DST offering.
The residents in high-end, age-restricted communities in Florida are retired and are not as dependent on employment to pay their lot rent, and they have retirement income and savings. The pandemic was a year of “business as usual” for them.
Compare relatively well-to-do retired residents to working-class residents employed at the lower end of the service sector. The residents working in restaurants and factories that closed during the pandemic experienced difficulty paying rents if in apartments. The same situation may occur with working-class residents struggling to pay their lot rent, while wealthier retirees had no financial issues induced by the pandemic.
Even during the downturn caused by the COVID-19 pandemic strong consumer demand coupled with low supply is why MHCs have thrived regardless of economic trends. Manufactured-housing real estate investment trusts (REITs) have outperformed the broader REIT index over the past several years. This measure of the sector’s investment strength is another reason to include MHC as an addition to an investment portfolio.
Manufactured housing is also affordable, typically costing less money to develop versus site-built homes (according to National Real Estate Investor). This asset class addresses the nation’s housing affordability crisis.
The quality and reputation of MHCs have dramatically increased. As communities have improved in design and image, as well as proven to be a low-risk investment, real estate investment trusts, pension plans and other institutional investors have included them in their portfolios. (The Outlook: Manufactured Home Communities” Midyear 2021, Marcus & Millchap).
Significant barriers to entry exist in developing new MHCs, as zoning and entitlements are difficult to obtain. The number of MHCs continues declining, as old parks are converted to new uses, leading to very limited supply. This lack of inventory means vacancies continue to tighten. This is especially the case in age-restricted communities. More than 10,000 people turn 65 years old each day. In addition, households retiring to warmer climates or that are seeking out a second residence are also boosting demand, especially in the Sun Belt states. Demand is anticipated to continue for manufactured homes, meaning an increase in both rents and market value.
Content for this article was obtained through communications with DST sponsors of Manufactured Housing Communities. Not all MHC locations are the same and may have different results.
DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email email@example.com.
This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission).
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NAMCOA® – Naples Asset Management Company®, LLC