Issue link: https://read.dmtmag.com/i/743328
NOVEMBER 2016 18 THE JOURNAL There is a huge number of individuals crossing over from apartment investing into the manufac- tured housing community sector. They carry with them many of the assumptions of what makes for a successful multi-family property, without realiz- ing that the two industries, while having many similarities, also have certain differences. Chief among these is the significant difference between what makes for a successful market to invest in. Focus on population growth due to lack of supply controls Most apartment complex investors believe that the most important factor of any market is popu- lation growth. This is probably true with multi- family, as there are no restrictions on building new developments. As a result, they are racing the clock to try and fill up their complex before two or three more or built across the street. It's like try- ing to fill up a swimming pool with a giant hole in the bottom. Without constant population influx, there's no way that you can fill the new apartments being built, not to mention the existing ones. But this is not true of the manufactured home com- munity sector. We have virtually zero new con- struction based on zoning and city sentiment. As a result, markets that have negligible or even neg- ative population growth still perform just fine. The demand for affordable housing is vast and there's no need for high population growth to prop up the supply and demand function. Focus on fast-growing industry bubbles that foster fast population growth The problem with chasing high population growth is that it typically involves betting on eco- nomic bubbles. How many markets can you name that were an overnight sensation on hiring (think Williston, North Dakota, for example) and then later popped and fell to pieces? That's a reason that many fast-growing markets are subject to huge real estate cycles, as they go from feast to famine. We much prefer what we call "recession- resistant" markets – areas of America that are built on a foundation of healthcare, education, gov- ernment employment, agriculture and a diverse blend of service and manufacturing employment. These areas of the U.S. have done consistently well since the Great Recession began in 2008, and continue to outperform. As an example, while U.S. unemployment neared 10%, Iowa markets were often under 4%. Assumption that all markets have the same potential for rent increases – and limitations The multi-family industry is very efficient on rents. They are predominantly owned by profes- sionals and the rents are kept at the top of the market. As a result, many apartment investors assume that the only way they can raise rents is to be in markets with an increasing supply of popula- tion to drive demand up. But the manufactured housing business does not have its rent increases predicated on these forces. Instead, most all of the communities one can find today are still mas- sively under market in rents. This is because man- ufactured home communities are owned mostly by moms and pops who have failed to keep rents in- line with the inflation for decades. Someone noted to me that if you simply took the lot rent in most communities when they were built, and then ad- justed for inflation, you would end up with a lot rent that is nearly twice what it currently is. Take the test. If a community had a lot rent in 1960 of $50 per month, that would equate to a 2016 lot rent of $402.25. Yet that same property currently has a lot rent of $225. What this means is that virtually all markets in the U.S. have gigantic po- tential for higher lot rents, regardless of growth. All owners are doing is trying to restore lot rent to its correct price point. In many markets, such as Austin, Texas, the differential between manufac- tured home community lot rents and average apartment rents is around $1,000 per month. That's ridiculous. The need for much greater contrast with single-family home prices Most apartment investors believe that their only chance for survival is to be in markets with ex- tremely high home prices. That may be true. If you are renting an apartment for $1,200 per month, that equates to a home mortgage of nearly $200,000. That's why they flock to markets like California, where home prices are often three or four times that amount. But the manufactured home community sector works well in markets where single-family homes are roughly around $100,000. When your lot rent is $300 per month, and your combination of home and lot rent for those few who don't already own their home outright is around $700 per month, there is no need to have giant home prices to remain highly competitive. Focus on higher income – and often higher failure – markets One area that reflects the biggest different be- tween successful apartment and manufacture home community markets is the reliance on high incomes. It's well known that American incomes have been declining over the past decade. Over 50% of Americans are on some type of social sub- sidy. So it comes as no shock that apartment own- ers have to jump into high-income markets to find anybody who can write a giant rent check every month. Look at San Francisco where an average one-bedroom apartment has a rent of $3,550 per month. It's becoming more and more difficult to find tenants who can meet these income levels. Manufactured home communities cater to afford- able housing, which is the nation's sweet spot from coast to coast. We can prosper in markets where the average employee is earning around $15 per hour and less. Conclusion Apartment investing had a great run as a result of the Great Recession, where displaced home- owners, and those who could not qualify for mort- gages, were thrown into a giant demand rush for rentals. However, its run is over. Smart investors are transferring into the manufactured home com- munity business. These folks are bringing with them some terrific skills that are pushing the in- dustry into a more profitable and successful space than ever before. But one concept that most have wrong is what makes for a successful market. That's one area where the skill set does not trans- fer well. But these investors are smart enough to figure this out rapidly on their own. I'm just try- ing to save everyone a little time. Frank Rolfe has been a manufactured home community owner for almost two decades, and currently ranks as part of the 5th largest community owner in the United States, with more than 21,000 lots in 25 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top-selling ones in the industry. To learn more about Frank's views on the manu- factured home community industry visit www.MobileHomeUniver- sity.com. Top Manufactured Home Markets And Multi-Family Markets Have Little In Common BY FRANK ROLFE COMMUNITY CONSULTANT T J