Manufactured-home—or landlease—communities and destination recreational-vehicle (RV) parks are two income-producing property types currently enjoying generally stable, if not healthy, business climates.
In housing markets where homesite rents are in sync with those of other types of multifamily rental properties—such as conventional apartment communities—and prices for new and resale manufactured homes are affordable and in accord with the area median income or annual gross income of prospective homebuyer households, business is good. In addition, seasonal and nonseasonal destination traffic is being supplemented by people who have lost their homes to foreclosure and are opting to live full time in park-model RVs—400-square-foot (37-sq-m) structures that work as efficiency apartments on wheels—and other similar inexpensive accommodations. During the 1950s and 1960s, trailer camps emerged as an affordable housing choice, followed in the 1970s by mobile home parks, and in the 1980s by mobile home communities.
During the real estate investment trust era of the 1990s, manufactured-home communities emerged. Today, no fewer than six types of housing exist in what are now known as land-lease communities—developments where homeowners lease the property under their homes. The housing types are mobile homes built before U.S. Housing and Urban Development (HUD) code was established in 1976, post-HUD-code manufactured homes, modular units, park model RVs, “RVs for a season” (those moved to the Sunbelt for the winter and used elsewhere in spring and summer), and even stick-built homes constructed on site to imitate manufactured homes.
There is a near perennial seller’s market for income-producing land-lease community properties. This is true for several reasons:
- scarcity—it is difficult to get new communities zoned and developed because of NIMBY attitudes toward this type of housing, and affordable housing in general;
- low annual turnover—5 percent for homes and 10 percent for homeowners/site lessees;
- a low operating expense ratio—a national average of 40 cents per $100 income for operating expenses versus 55 cents per $100 for apartment properties, dropping to 20 cents per $100 for properties with more than 200 rental homesites;
- more alternative income opportunities than are available with any other investment property type, such as aftermarket supplies and service, including set-up, teardown upon relocation, and replacement of doors and windows, etc.; and
- the ability to add value by bringing new and reconditioned homes on site to be used as rental units or sold on contract.
Land-lease properties long have been considered recession-proof because of low site rents—usually one-third the amount charged for a two-bedroom, two-bath conventional apartment unit in the same housing market—plus low-priced homes or rental units. The rule of thumb for community owners is to keep combined site rent and home payments (principle and interest) at least $50 per month cheaper than the cost to rent an apartment.
The subprime bubble burst for the manufactured housing production/distribution industry eight years earlier than it did for conventional site-built housing. Ill-advised attempts by home manufacturers to keep housing production lines humming along at the 1998 pace of 372,843 homes shipped led to strident abuse of third-party, personal-property—or chattel—lending via up-selling (selling more than the buyer could afford), teaser mortgage rates, offers of free site rent, and more. By the time most chattel financing faded out before 2005, only five lenders serving manufactured housing remained: 21st Mortgage Corporation, CU Factory-Built Housing, Triad Financial Services, U.S. Bank-Manufactured Housing Finance, and Vanderbilt Mortgage and Finance Inc., the internal lending source of Warren Buffet–owned Clayton Homes. This left the current market underserved, and the term “added value” returned to the land-lease community vernacular, meaning property owners had to sell and self-finance new and resale home transactions on site in order to survive, and, in many cases, become more profitable.
The property owner–assisted sale of manufactured homes in these communities is either in the form of captive finance—loans are originated on site, but serviced off site by a third-party firm—or buy here/pay here finance, in which the community owner is often the on-site lender, but makes the loan through a separate business entity also controlled by the property owner.
When engaging in property owner–assisted finance, the community owner sees additional streams of income materialize almost immediately, such as unit rental income, downpayments on unit sales, and weekly or monthly principle, interest, taxes, and insurance payments, in addition to the site rent already received. However, these income streams often involve additional maintenance-related expenses, loan compliance issues, and management stress. Furthermore, taking on the financing of homes on site can interfere with the property owner’s future disposition plans if forced to sell during the “added value” period, because buyers will attempt to discount values of rental homesites encumbered with owner-financed homes and rental units.
Since 1999, the presumed several million dollars in property owner–carried paper has mushroomed to an estimate of more than $3.5 billion just among the 500-plus known portfolio players owning/managing a minimum of five properties—and/or 500 rental homesites—apiece. These top players overall control about 25 percent of the national inventory of approximately 50,000 landlease communities.
This ground lease and home contract sale scenario likely will continue until third-party chattel financing returns, with favorable terms and conditions; mortgage licensing regulations make it too onerous to continue along this rarified but often profitable route; and/or, the traditional dual market of the “newly wed and nearly dead”—that is, 20-year-olds and retirees—returns in force to this type of affordable housing. At present, many of the younger homebuyers enticed by expensive housing forms are now returning to low-cost manufactured housing, often with bruised credit.
The national advocacy needs of this asset class are administered by the National Communities Council (NCC) division of the Manufactured Housing Institute (MHI), based in Alexandria, Virginia. The Manufactured Housing Communities Council (MHCC) of the Urban Land Institute has addressed strategic planning needs since its inception five years ago and today functions as the manufactured housing industry’s de facto think tank. This spring, the two bodies convened at the Manufactured Housing Congress in Las Vegas for three days of education and networking.
The Institute of Real Estate Management (IREM) continues to supply professional property management expertise via about 250 Certified Property Manager (CPM) members. MHI’s Manufactured Housing Education Institute provides on-site management training and certification through its Accredited Community Manager (ACM) program; today, there are nearly 1,000 certified Manufactured Housing Managers (MHM) in place throughout the United States and Canada.
Two years ago, land-lease community owners/operators convened a National State of the Asset Class (NSAC) caucus in Tampa, Florida, and articulated five areas where action was needed to ensure continued good health for the property type. A year later, many of these same executives caucused in Elkhart, Indiana, to meet—for the first time in decades—with their HUD-code manufactured-housing counterparts. From that meeting came a new job description and title, the Business Development Manager, whose role has been to increase the market share of their respective manufacturing firms through sale and delivery of new HUD-code homes into land-lease communities.
A few months later, with new home designs in hand and product on display at the International Networking Roundtable in Chicago, it was determined by assembled community owners/operators that the new single-section and smaller multisection homes would be marketed and sited as “community series homes.” Probably the most helpful marketing vehicle to date has been the growth and efficacy of “super symposiums” and showcases of homes, held in several states, to teach land-lease community owners/operators how to sell and self-finance new and resale homes on site while keeping captive finance and buy here/pay here loans in compliance with federal and state regulations.
Today’s land-lease communities are nothing like the mobile home parks of the past. Given the unique characteristics and capabilities of the business model, these communities continue to enjoy a near-universal sellers’ market, even in the current recession. In today’s market, no other investment realty opportunity offers as many self-help measures by which one can increase cash flow and value.
