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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
At the risk of sounding like a broken record, the news on the economy pretty much sucks across the board so far this year.
In addition to the stuff I mentioned a couple of weeks ago such as earnings reports predicting an economic slowdown, Walmart is closing 269 stores and letting go over 10,000 employees. Oil is falling below $30/barrel, industrial production is falling, business inventories are rising due to poor sales, the Chinese economy is collapsing and there’s a real fear now of a financial market meltdown.
I read an article, though, recently on one sector of the real estate market that’s bucking these downward trends. It’s not my cup of tea, but the author was right on point as to why it makes sense to consider it when things are looking bad.
It was written by a guy named Frank Rolfe, and his take is that the one sector that is actually growing in value and strength is mobile home parks. Because, he says, they offer the ultimate contrarian hedge on a falling American economy.
He presented a pretty compelling case to consider them.
Reason #1: They are contrarian
Frank says that they’re contrarian because they focus on the lower third of American wage earners. This is a group that has consistent earnings that are mandated by the Federal Government in the form of minimum wage.
He says that by relying on folks who can’t get any worse off, mobile home parks have a steady customer base. In addition, the U.S. economy has plenty of jobs for this lower income segment. And this gives mobile home park tenants a steady supply of employment opportunities.
Reason #2: They maintain their strength when everything else is in panic mode
Frank goes on to say that it only costs $5,000 to move a mobile home from point A to point B. This keeps customers in their lots and revenues extremely stable. It is not uncommon for the rent roll in a mobile home park to remain constant for years on end.
In addition, virtually no city in the U.S. allows for new mobile home park development, so there is no danger of future over-supply or even mild additional competition. While every other sector of real estate is subject to over-building, mobile home parks have no risk of new building, period.
Essentially, mobile home parks stand strong when everything else is in a death spiral. Case in point, the recent sale of two Sunnyvale, California mobile home parks for a little under $200 million. Can you name any other industry that is setting records in sales prices at this moment?
Reason #3: The only thing that could go wrong is good news in the economy
This is the crazy thing: He makes the point that the greatest threat to mobile home parks is prosperity! That hit the industry hard in the 1950s.
When Americans are earning more, they can afford more in the way of housing. To invest in mobile home parks is to bet on a declining America, or at least an America that does not show higher performance.
He argues that at this point, with the basic facts that 10,000 Baby Boomers are retiring each day and we have massive consumer debt, it’s unlikely that we’ll see prosperity again in the next few decades.
Reason #4: A built-in advantage over its peers that is astounding
Frank goes on to say that mobile home parks are a close relative to apartments. They compete for the same customers. But they have a huge advantage, with average rents that are around $1,000 per month less.
Something else… most mobile home park owners can fill every unit they have with a simple direct mail piece to the closest apartment complex. And it’s more than just a pricing advantage. Mobile home parks offer no neighbors knocking on walls and ceilings, your own yard, the ability to park by your front door and a sense of community. On top of that, mobile homes allow you to own your own house, something that apartments never allow.
He concludes his argument for mobile homes by stating that we are pretty much at a crossroads in the economy and we have to make a choice. He says that we’re facing historic challenges in the American economy, and therefore, if you’re comfortable betting that things will be fine or even improve, then the stock market is for you. If you instead believe that the economy is poised for decline, and that conventional investments will be crushed accordingly, then mobile home parks are the ultimate contrarian hedge.
I have never thought of mobile homes as a contrarian choice. But he certainly made the point in spades.
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Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.