How the US Government Created the Investment Opportunity of a Lifetime

A paradigm shift is taking place all over the US due to a combination of societal, economic, demographic, and regulatory factors. This shift is a result of the slow, unfortunate realization that it is all but impossible for a substantial portion of the population to own a home, something that was previously a staple of the American dream.

As with any major economic change, a variety of causes led to this phenomenon, but in order to fully understand the topic, it is necessary to consider a little-known fact about the post-World War II era.

Returning Veterans Come Home to Housing Crisis

After World War II, millions of veterans found themselves coming home to several challenges, one of the most prominent of which was having access to affordable housing. The combination of the Great Depression’s effect on the economy and the fact that millions of potential homebuilders were shipped overseas created a significant shortage of housing upon the war’s end and the troops’ return. Because of this shortage, Congress enacted the Veteran Emergency Housing Act of 1946, which called for the building of 850,000 prefabricated houses (mobile homes) in less than two years.

This was the first time mobile homes were built in the US at scale, and their popularity grew quickly. Originally, mobile homes were positioned in parks located in the suburbs, which were thought of as upscale communities, so moving away from the cities wasn’t a hard sell.

However, the government’s action of both sending millions of able-bodied men away from productive jobs as well as its decision to direct funding towards tasks which the market may or may not have provided on its own has created a series of unforeseen outcomes

Social Security and Demographics

More than 10,000 baby boomers are entering the age of retirement each year, and a significant number of them have little or no little savings, leaving them primarily reliant on Social Security as a source of income. Even in its current form, this is not a financially sustainable solution, as the average Social Security check is about $1,300 per month and the average two bedroom apartment rents for about $1,250 per month.

Furthermore, the Social Security system is facing significant solvency problems as the ratio of workers to retirees decreased from 40-to-1 in 1970 to 3-1 in 1980. Additionally, there is a complete lack of transparency as to the amount of funds available for the program, which, based on the government’s track record, means the funds have been depleted.

The mathematical reality is that the Social Security system is in for a massive default, which will be effectuated by reducing benefits, increasing the age at which recipients can receive benefits, raising taxes on Social Security distributions, and inflation. All of these outcomes will continue to increase demand for affordable housing in the US.

Supply, Demand, and Regulatory Burden

The demographic challenges mentioned above are playing an important role, but the truth is, there is already a considerable demand for affordable housing in the US. In fact, there are more than 20,000,000 people living in mobile homes as of 2018. Additionally, income data shows that more than 51% of the wage earners in the US are making less than $30,000 per year and 38% are making less than $20,000 per year. This income data and the demographic shifts that are taking place will both further increase demand for affordable housing in the US.

Unfortunately for those seeking low-cost housing, the positive connotations associated with mobile home parks (MHPs) have changed significantly. Since the 1980s, cities and municipal governments have implemented zoning restrictions and regulatory hurdles that have completely eliminated the construction of new MHPs. In fact, the number of mobile home parks actually decreases each year because municipalities consistently rezone, redevelop, or condemn poorly operated mobile home parks across the US.

This phenomenon is incredibly favorable for investors. The combination of the demographics and the income figures with the regulatory burdens for mobile home park development has resulted an ever-increasing demand and an ever-decreasing supply. This is a perfect situation for those who are interested in considering an alterative investment vehicle to provide them with lucrative returns.

Pride of Ownership & Stability of Tenant Base

One of the keys to owning investment real estate is to get the tenants to treat the property like they own it; with mobile home parks, they actually do. The most lucrative and reliable strategy for investing in MHPs is to purchase the park itself and then rent the lots of the park to tenants who own their mobile homes. Tenants pay “lot rent” for the space in the park, but the home itself belongs  to the tenants.

This strategy comes with several benefits to investors. Tenants who own their own home are much more likely to have pride of ownership, keep the property in good standing, and have a longer duration of stay. For example, the typical tenant duration in an apartment complex is usually less than 2 years, while most mobile home parks tenant duration averages more than 5 years. This lack of turnover significantly decreases downtime for rental income as well as advertising costs associated with marketing to new tenants.

It is worth mentioning that almost all of the horror stories associated with MHP investing are related to parks that rentthe mobile homes to tenants, rather than have the tenants own the home.

Mobile Homes Are Not Mobile

Not only are the MHP tenants much more likely to have longer stays because they have a “home-owner” mentality, but also moving a mobile home doesn’t make sense economically. The value of most mobile homes is between $3,000-$5,000 and the cost to move one is approximately $3,000. Because of this, tenants are far less likely to move out of the park, further increasing their tenant duration. Additionally, they are much less likely to move during rental increases, which can further improve returns for investors.

Fragmented Business Filled with Inexperienced Mom-and-Pop Owners

Because major institutional firms have stayed away from the asset class, the mobile home park business is still considerably fragmented, with inexperienced mom-and-pop owners owning the vast majority of the MHPs in the US. Many of these inexperienced managers are single-asset owners and therefore do not have the systems in place to optimally run the property. It is quite common to find parks that are undercharging for rent by more than 20% , overpaying the manager, failing to charge late fees, and so on. Experienced owners can easily identify these opportunities and, because MHPs operate on monthly leases, implement changes quite quickly compared to other commercial real estate assets.

The Perfect Storm

The government’s efforts to solve the affordable housing crisis have created catastrophic results, as well as an interesting investment opportunity.

Here is a quick review…

  1. The government displaces millions of able-bodied men, resulting in a housing shortage.
  2. In an attempt to solve the housing shortage, the government directs the creation of almost one million mobile homes.
  3. The government creates the Social Security system which millions rely on as a source of income, then proceeds to deplete it to insolvency, further increasing demand for mobile home parks.
  4. The government bans the development of additional mobile home parks, worsening the shortage of affordable housing.

These factors, as well as the many unique benefits of investing in mobile home parks, have created the perfect storm from an investor’s perspective.

Are you positioned to take advantage of the investment opportunity of a lifetime?

Create an account with Cash Flow Connections to learn more.

Hunter Thompson is the Founder of Cash Flow Connections, a private equity firm that helps accredited investors achieve diversification through recession resistant real estate. Hunter will be speaking at FreedomFest at the Paris Resort Las Vegas, July 11-14. For tickets and information, go to www.freedomfest.com or call 1-855-850-3733 ext. 202.

 

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