Are Manufactured Homes a Good Investment?
Manufactured home park investing in 2022 can certainly be a good asset for the right investor circumstances, especially when investors understand their investment needs, have taken the time to do due diligence about their target areas, and have chosen the manufactured investment homes with care.
Despite being a new concept to many investors, rented manufactured homes in quality manufactured home parks can be an excellent way to invest in the real estate market in a profitable way without large capital requirements. Manufactured homes typically generate higher near-term returns on investment than a comparable rented residential home rental investment does.
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What is a Manufactured Home?
A manufactured home is home built in a factory and then transported (often in several pieces) to the final home site, where it is typically quickly and easily assembled. Once they are assembled at their home site, manufactured homes are often indistinguishable from traditional site-built homes (those built from the ground up on the home site).
The factory built process allows for much greater consistency, quality control and accuracy than is seen with individually site-built homes, which often are plagued with delays and disruptions. All manufactured homes in the United States are required to be built according to federal construction codes laid out by Housing and Urban Development (HUD).
What is a Manufactured Home?
A manufactured home is home built in a factory and then transported (often in several pieces) to the final home site, where it is typically quickly and easily assembled. Once they are assembled at their home site, manufactured homes are often indistinguishable from traditional site-built homes (those built from the ground up on the home site).
The factory built process allows for much greater consistency, quality control and accuracy than is seen with individually site-built homes, which often are plagued with delays and disruptions. All manufactured homes in the United States are required to be built according to federal construction codes laid out by Housing and Urban Development (HUD).
Mobile Homes vs. Manufactured Homes
Mobile home park investing is essentially just investing in manufactured homes that were built before June 15, 1976. Anything built before is considered a mobile home. HUD changed their policies that year which rendered this old-fashioned version of manufactured homes to be obsolete. Ultimately, the two phrases refer to different iterations of the same concept and in many cases they are used interchangeably.
What are Modular Homes?
Modular homes are a sub-type of manufactured homes, which are also built in factories but are constructed on either temporary or permanent chassis and are governed by state local building codes as opposed to federal codes.
The State of Manufactured Home Park Investing in 2022
Demand for affordable housing options that are within close proximity to major metro areas has been on the rise for years, which makes manufactured home park investing a useful and viable option that not only helps to alleviate the affordable housing crisis but can also be a profitable asset for investors.
A 2018 report compiled by Harvard’s Joint Center for Housing Studies found that the number of renters who spend 30% or more of their income on housing each month (those deemed cost-burdened) is rising year after year. Since manufactured homes can be built for a fraction of the cost of site-built homes, they are a desirable affordable housing option for tenants.
In fact, the Urban Institute in Washington D.C. recently reported that the home price index for manufactured homes shows an average annual growth rate of 3.4% as opposed to 3.8% for site-built homes.
All of this to say, manufactured homes can offer excellent investment opportunities in major metro areas since they can be purchased for relatively cheap and will generate cash flow in the form of rent, financing, land resale, or all of the above.
Key Criteria for Manufactured Home Park Investing
The first critical point is that your Manufactured home be located in a well-managed, well-maintained Park with an experienced operator. The second critical point is that your specific home be managed by a responsible party who will keep it well-maintained, rented to quality tenants, collect rents, pay bills and deposit your net income into your bank account.
Benefits of Investing in Manufactured Home Parks
We’ve established that manufactured homes represent a viable investment opportunity, but what are the benefits of investing in an actual manufactured home park? Let’s look at some specifics.
Occupancy Rates Are Usually Higher
Manufactured housing parks boast consistently higher tenant occupancy rates than multifamily investment properties like apartment buildings. Essentially, tenants are benefiting from small single family homes at very affordable prices, and often in close proximity to their workplaces in metro areas.
Less Risky
Additionally, if you invest in a manufactured home park, you will be managing many units and therefore spreading the risk across your entire portfolio. That way, if you have one problem tenant and/or unoccupied unit, the loss is offset by the rest of the occupied units in your park, which makes the entire investment less risky.
You May Depreciate Your Investment
This may sound counterintuitive, but while depreciation is a negative for single family homeowners, it’s actually a positive for real estate investors. That’s because depreciation allows the investor to deduct a portion of the real estate asset’s value from the operating profits each year, while your more or less fixed income from the property remains steady.
Depreciation expense is purely a tax deduction that does not affect cash flow. It should be noted, however, that if you depreciate your manufactured home, upon the sale of the property, you may be required to pay tax at ordinary income rates (rather than capital gains rates) on the previous depreciation taken.
Lower Price Per Unit
Manufactured homes are relatively affordable to buy since they cost so much less to build than traditional homes. As a result, commercial real estate investors can build larger manufactured homes while still keeping costs low, making them a great option for first-time investors especially. Additionally, due to the low cost, sellers are sometimes able to provide direct financing to investors.
For investors, the low per-unit price means that it’s more feasible to purchase several units at once, thereby spreading the risk between multiple units and tenants. As a matter of fact, manufactured homes have the lowest cost per unit of any real estate asset class.
Higher Capitalization Rates
Manufactured homes, when rented and located in a quality park, often generate high capitalization or cap rates – on average between 7-12%. This cap rate refers to the rate of expected return on a real estate investment property which is calculated by dividing the net expected income by the property value to find a percentage.Â
The cap rate can also help indicate how long it will take to recover your investment. For example, a 10% cap rate would indicate a 10-year investment recovery period while a 12% cap rate would indicate a recovery period of 8.3 years.
Fast, Low-Risk Construction
Manufactured homes do not face the same risks that site-built homes do, such as delivery delays, theft, vandalism, weather damage and delays, misuse of materials, and so forth. This helps keep the build costs low and helps speed up the process – a manufactured home can be built and installed in three months or less while site-built homes often take six months or more.
Efficient Construction
Manufactured homes are built using high-quality insulation, which helps with both heating and cooling the space efficiently as well as minimizing sound transference. Energy-efficient windows and doors, on-demand water heaters, water-saving fixtures, and energy-saving appliances also contribute to keeping the operating costs low for these types of home, which is an added benefit that helps keep occupancy rates high and tenants satisfied.
4 Risks of Investing Manufactured Home Parks
However, despite all the benefits, there are also some risks associated with manufactured home park investing. Let’s investigate a few potential cons.
1) Expensive and Scarce Land
In many metro areas where manufactured homes would be most desirable, the land is hard to come by and/or prohibitively expensive. In some areas, local or state laws only allow for site-built homes, and manufactured homes are prohibited.
2) Tougher Mortgage Requirements
Mortgage lenders will often only offer loans to buyers of ‘real property,’ which generally refers to land with a permanent structure built on it. These rules vary state to state, but manufactured homes are generally only considered eligible for a mortgage if the axles are removed and the structure is permanently installed on a foundation or basement (which is the case with the manufactured homes that TFS Properties deals with).
With respect to the ‘real property’ classification, this is a very important distinction for investors who frequently use like-kind exchanges under IRC §1031 to defer income tax recognition on the sale of investment property. Due to the Tax Cuts and Jobs Act of 2017, only ‘real property’ is eligible for a §1031 exchange. Please see these Proposed Regulations for the Internal Revenue Service’s definition of ‘real property’. If you are engaged in the investing of manufactured homes, consideration should be given to these rules. Please consult your tax advisor as that discussion is beyond the scope of this article.
3) Poor Long-Term Value
As Manufactured homes are located on long-term rented spaces in quality parks, they lack underlying land ownership as well as the potential of future land ownership appreciation. They also may suffer from deep-rooted stigmas surrounding mobile homes and trailer parks.
4) Limited Design Options
In order to keep manufacturing efficient and therefore costs low, there are very few customizable design options when it comes to manufactured home layouts, so from the outside they all appear similar. Any exterior additions to the homes must be approved by the local building authority and/or the mobile home park operator.
How Much Are Manufactured Homes?
Manufactured homes can range in price from $15,000 to over $100,000 depending on the size, built-in amenities, finishes, and so forth. Additionally, you’ll need to factor in other costs such as land, property taxes, insurance, the cost of moving the home into place, utilities, and maintenance.
Keep in mind that you can purchase new or used manufactured homes. Buying a new home allows you to select the exact layout and size you desire, as well as any extra features like fireplaces, custom cabinetry, walk-in closets, and so forth.
The exterior appearance of the home can also be customized with awnings, decks, upgraded siding, and more. Choosing more luxurious manufactured homes is obviously more expensive up front, but it allows you as the investor to charge a higher rent and the units will be more desirable for renters.
Buying used manufactured homes can dramatically reduce the cost of the initial investment. If you are considering purchasing used homes, be sure to inspect them thoroughly for damage, leaks, and so forth.
Financing Your Manufactured Home Park Investment Instead of Renting
Invest in the manufactured home real estate niche by purchasing a manufactured home park investing, where you own the property that the homes will sit on, but not the homes themselves.
Rather, tenants own their own manufactured homes and pay rent for a place to park the home and for utility connections. This has a lower barrier to entry than many other types of real estate investing since you are only buying the land and any common areas as opposed to the land and the building in traditional real estate investing.
Additionally, it’s a less hands-on investment because many manufactured home park tenants do not move on a regular basis, with 98% of mobile homes remaining in the same location after the second year. On the other hand, apartment tenant turnover can be as high as 60%, which means that investors have to spend money and time finding new tenants on a regular basis, cleaning and repairing apartment units in between tenants, and so forth.
In a manufactured home park, tenants will maintain their own units rather than calling the landlord for maintenance needs, which cuts down capital expenditures and demands on the landowner’s time.
Finally, it’s easier to finance the purchase of a mobile home park than it is to finance the purchase of mobile homes themselves. But, there are still some common requirements that your mobile home park must meet in order to obtain financing.
For example, there may be a pad minimum – commonly 15 pads or more are required to be eligible for financing. There may also be road requirements (such as paved roads as opposed to gravel), tenant home ownership minimum percentages, aesthetic requirements (homes often have to be skirted with no trailer tongues or hitches visible), HUD code adherence requirements, home density requirements, and amenity requirements.
The exact requirements vary by location and lender, and some lenders will only consider financing your park if you have detailed financial reports for past years, which can sometimes be hard to acquire if past owners were not diligent.
These considerations are all things to look into before you purchase a manufactured home park, in order to ensure a successful and profitable investment.
How To Start Manufactured Home Park Investing
Much like any other type of investment, research is critical for investing in manufactured homes and/or parks. Take your time, do your research, and don’t be pressured into making a purchase before you are ready.
Need some expert advice on how to get started? Our commercial real estate agents at TFS Properties are here to help. Our top priority is to help our clients make sound investments by offering professional advice and expert investment strategy guidance.Â
We specialize in high-income rental properties such as manufactured home investments with high cap rates as well as 1031 exchanges – which can be an excellent way to acquire manufactured home parks.
Frequently Asked Questions
Here are the top three questions and answers we get about investing into manufactured homes.. To view an even larger list, please visit our FAQ page.
What Is A Manufactured Home?
Manufactured homes are prefabricated homes built after 1976. These homes are built to HUD standards and are often near indistinguishable from site-built homes, once they have been transported to the site of the home.
Do Manufactured Homes Appreciate?
A 1031 Exchange stems from IRS Code Section 1031 and allows for an investor to defer his capital gains tax during the sale of an investment property through an exchange of sale proceeds of an existing property being used in the purchase of a new property.
How To Finance A Manufactured Home In A Park?
By utilizing a 1031 Exchange an investor is able to defer that capital gains taxes owned by utilizing the funds from the sale of their existing investment property to exchange into the purchase of a new one. There are guidelines that an investor must adhere to, but a 1031 Exchange is one way to defer capital gains tax.
Over 30 Years of Industry Experience
Our team has over 30 years of experience and we have built industry connections over the years that allow us to offer our clients access to properties that are not even listed on the market. These off-market properties are often much more reasonably priced than on-market properties are in the current seller’s market.
If you’re interested to learn more about manufactured home park investing, whether that’s in the homes themselves or in a manufactured home park, we are here to help. Contact our team today for an initial client consultation or to grow your investment portfolio.
