An Investor’s Guide to Manufactured Housing Communities
Demand for more affordable living options is rising, making manufactured homes — also known as mobile homes — a hot commodity in many markets. There are around 43,000 manufactured housing communities (MHCs) in the United States, and rents and occupancy rates maintained an upward trajectory in the fourth quarter of 2023. As a result, investors could have potential opportunities to generate healthy returns, although it’s critical to understand both the benefits and challenges of investing in MHCs.
But first, let’s explore the characteristics of these communities and how they differ from more traditional housing options.
Understanding MHCs
A manufactured housing community is a residential area where tenants typically own their homes but lease the land or site on which the home is situated from the community owner. These communities can offer a variety of amenities and services, including shared common areas, recreational facilities, maintenance services, community events, or utilities included in the rent. Land-lease communities can range from budget to high-end, and the number of sites can differ as well, with some communities featuring hundreds of homes.
The nature of MHCs often creates a deep sense of community among its residents, and retirement communities with age restrictions in place have grown in popularity. The affordability and flexibility of this model makes it an attractive alternative for individuals seeking housing options with a lower financial commitment compared to renting or purchasing apartments, condos, or single-family homes.
Why Invest in MHCs?
The growing demand for affordable and alternative housing options has created a significant opportunity for investors. The benefits of investing in MHCs include increased consumer demand coupled with lower risk and fewer operational responsibilities than many other commercial real estate (CRE) subtypes.
High Demand
Recently, the manufactured housing sector has benefited from a shortage of affordable housing options, leading to increased demand for this property type. That's compared to other real estate segments that experience lagging demand or heightened supply growth.
Higher occupancy rates in MHCs over the last few years also suggest growing demand for manufactured homes. Occupancies rose further in the fourth quarter of 2023 to 94.7%, while the national occupancy rate increased by 30 basis points in 2023.
Low Risk
Investing in MHCs might be less risky than other property types. That's because manufactured homes are often less expensive and easier for residents to maintain than conventional houses. They are also quick to build, allowing investors to establish new communities or expand existing ones to meet demand.
That said, manufactured homes can be more vulnerable to extreme weather, which might be more troublesome in certain markets. They can also be at greater risk of a fire than site-built properties, although the U.S. Department of Housing and Urban Development (HUD) sets strict guidelines for fabrication and overall quality.
Fewer Responsibilities
According to recent estimates, 71% of manufactured homes are owner-occupied. As a result, most residents are responsible for managing and maintaining their properties, reducing investors’ responsibilities.
What You Should Know Before Investing in MHCs
Every real estate investment, including MHCs, carries an element of risk. Here are some of the challenges of investing in this asset type:
Zoning Problems
Some local governments use zoning laws and other land use regulations to restrict or delay the construction of new manufactured homes or the establishment of a new community. A misconception exists that MHCs reduce property prices in the surrounding area.
As an investor, you must understand zoning regulations in your desired market to avoid violations and apply for the correct permits. While this isn’t an insurmountable challenge, some investors may wish to seek MHC investments in areas with business-friendly land use regulations.
Economic Changes
MHCs are just as vulnerable to economic changes as other CRE property types. For example, job losses in a community might make it difficult for tenants to meet rental responsibilities, impacting the revenue generated from your property. Other economic factors that influence earning potential include interest rate changes, inflation, and supply and demand for manufactured homes.
Cap Rates
Capitalization or "cap" rates refer to the return rate on a real estate investment based on the amount of income the asset will generate in the future. Understanding this metric is one way to evaluate an MHC investment's profitability and return potential.
MHC cap rates have been less volatile than traditional multifamily assets recently. However, according to our market insights, rates increased in the third quarter of 2023 compared to the previous year. Generally, the higher the cap rate, the higher the risk and return.
How to Find the Best MHC Opportunities
Consider the following when searching for your next MHC investment:
- MHCs in Areas with Large Populations: Heavily populated areas offer a wider pool of tenants who might be interested in living in a manufactured housing community, boosting your occupancy rate.
- MHCs With Homes in a Good State of Repair: Communities with well-maintained homes reduce the number of repairs you need to complete, increasing the profitability of your investment.
- Value-Add Communities: Identifying value-add MHCs can also increase your investment's profitability. For example, you might be able to increase property appreciation and charge higher rents by making renovations to a mobile home park.
- Room for Expansion: Seeking MHC opportunities with available land for expansion can provide future growth potential and increased revenue streams.
- Communities Close to Transportation Links: MHCs near main roads and public transportation stops can attract more tenants, increasing occupancy.
Working closely with a full-service capital resource like Northmarq can help you identify the best MHC investment opportunities in your desired market, reducing risk and increasing earning potential. You can also work with our debt and equity experts to understand what financing options are available and secure the best terms.
Start the Search for Your Next Investment
Manufactured housing communities, just like all multifamily property types, are vulnerable to changing economic conditions and other challenges. However, this commercial real estate asset type often has a lower upfront cost and might be less risky than other property types. MHCs also often carry fewer responsibilities than other kinds of real estate and are in high demand in many markets across the U.S. Start building your MHC portfolio today and find your next investment here.