Updated: Nov 11, 2021
Let’s start by painting a familiar picture. Two colleagues are at work juggling one task after the other and keeping their eyes glued on their screens and clocks. We know the drill - work from nine to five, head out for a quick hang with friends and head home tired and ready to hit the sack. Feeling tired from the day’s work, the first employee asks the other “what do you do other than work here?” We all know what this means - what is the second employee’s other source of income? It goes by many names - a side hustle, second job, moonlighting, you name it. Many of us have had a secondary income to support what we get from employment and our businesses.
Today, we look at side hustles from another perspective: the alternative investment. It might seem complicated, but it is quite simple once you get into it. Instead of investing in cash, stocks and bonds (you know, the traditional assets) you move towards tangible assets. And in this case, we look at one tangible asset that has been on the rise - mobile home communities. It falls under the property asset class and has some promising features for passive investors across the board.
So, whether you are trying to add to what you are getting from your 9-5 job, diversifying your portfolio or simply looking for an alternative investment, here are some interesting facts about this asset:
What are Mobile Home Communities?
These are temporary or permanent sites on which people put up mobile, manufactured or modular homes. As an investor, you would buy a lot and welcome tenants who own such homes to come set up their homes on your land. You would need to provide general infrastructure on the grounds such as walkways and utilities for your tenants' comfort. And while these communities may seem quite similar to trailer parks, there are several differences to consider, though they offer many of the same benefits.
Why Invest in a Mobile Home Communities?
Once you start investing in real estate, you begin to understand the market dynamics and why you must pay attention to market cycles. If you are unprepared, recession can be challenging, and you can find yourself disposing of properties at values well below what you paid for them. Sound familiar? Well, a recession is not the only market phase you need to worry about. If anything, investors have to keep watching economic indicators to know when to hold onto or sell their properties.
What makes mobile home communities a good investment? Well, this alternative investment affords investors the assurance of steady market values even in economic downturns. You can still get as much as or even more value from the investment. This stability would hold even when the unemployment rates are on the rise and foreclosures seem to be the order of the day. Yes, we are talking about stability even in a recession. Who would have thought?
Supply & Demand Dynamics
One of the most interesting phases in real estate cycles is the expansion stage where supply and demand are almost on a level playing field. The beauty of this is the ability to command the accurate market value for your property. But we know that this ideal state is short-lived.
Let’s get back to mobile home communities. Let’s be realistic about the current times. First, many people are losing jobs left, right and center and those who can find jobs often have to make do with low-paying positions. Many businesses are also not doing well. And with the COVID-19 pandemic, most projections show a downward trend in the economy. We all know this will result in fewer jobs and lower salaries (again). Secondly, production of mobile home communities has also been on the decline. With city planners and developers taking on the reins and putting up high-end developments (which most people cannot afford), affordable housing has only become less accessible. Fewer people are investing in constructing these communities.
What does this mean? It will only be a matter of time before mobile home communities have way more demand than the supply can meet, which will only drive up the prices. This alternative investment could soon be highly unattainable, even for investors. No rush, but you get the gist.
You might think that mobile home communities tenants move around a lot. And it’s understandable why you would think this. After all, they can move their mobile homes as much as they please and look for fair rates elsewhere if the landlord (you) gets too pushy. But that is hardly the case.
First, there is the issue of rent. Compared to conventional homes, people living in mobile home communities generally pay a lower rent (referred to as lot rent) compared to traditional homes. For most, an increase in the rent costs would probably not drive them away. Think about it. Someone living in a conventional home probably pays $1,000 per month and a 5% increase to their rent might have them packing and moving to save the $50 a month. But a mobile home communities likely costs about $500 in rent. Will your tenant move out over the added $25?
You might nod at this and think that it would be a substantial saving. But not so much. You see, unlike the conventional tenant who only has items to move, your tenant must also move their house, and this takes a lot of effort. The cost of transportation and installation is enough to keep them grounded (literally).
So, if you’re looking for a more permanent setup, this alternative investment might be the best option for you. That’s not to say that you should introduce strict terms.
Not only do mobile communities homeowners enjoy predictability in their capital expenditure, but they also spend a minimal amount on maintenance needs. Are you wondering how this is the case? Let’s assume you have a multi-family home investment, and your friend has a mobile home communities. Every month, you need to make sure the house is well-maintained, the utilities are kept up, the compound is clean, the rent is collected, and the list goes on. If you have a property manager working for you, you will likely spend almost 20% of your rental income on maintenance. It bites into your net operating income quite a bit.
Now, let’s look at your friend who has invested in this alternative investment. Their work mainly revolves around maintaining the grounds. How hard can that be? The tenants will take care of their homes, while your friend handles the infrastructure on the grounds. On average, this will be up to a third or a quarter of what you spend maintaining a home.
Does that sound almost hassle-free to you?
Not many people are willing to invest in mobile home communities thanks to the bad reputation they have faced over the years. The stigma is real with people looking down on people in such settings, labeling them as trailer communities. Even now, that stigma exists. But that should not be as much of an issue in the future because more people realize what a gem this alternative investment is and more investors are looking into owning this asset class. Even you have read this article this far! It says something.
You may have heard that real estate is home to a range of tax benefits - 1031 exchanges, depreciation deduction from tax payments, capital gains avoidance and many more. In this case, we will focus on depreciation in real estate. You can deduct it from your taxes but by how much?
Well, mobile home communities open up another realm by enabling you to break down the mobile home communities into land, infrastructure and goodwill as 30%, 35% and 35%, respectively. The last two options are depreciable over 15 years on a straight-line basis, but it gets even better with goodwill. You can perform the depreciation over one year instead of waiting for the 15.
And yes, you can also cash in on other tax incentives such as 1031 exchanges. The deal keeps getting sweeter.
Taking the Plunge
You have two options with mobile home communities investing. You can go at it yourself and find good deals on the market or join a syndicate/partnership where you take on a passive role. The latter option works best for passive investors as it opens up their access to better deals and reduces capital outlays in the beginning. You also get to enjoy a lower risk coupled with steady returns over a long period. And with extra time on your hands, you will have the opportunity to seek other possible investments.
Interested in mobile home communities as your alternative investment? Talk to us today, and we’ll guide you through these and more options.