Why Invest in Mobile Home Communities? - Episode 8
Carl Moore:
Brant, inflation is out of control, what are we going to do with our investments?
Brant Greathouse:
Carl, it's all right, we're investing in mobile home communities.
Carl Moore:
That's right.
Brant Greathouse:
No big deal.
Brant Greathouse:
Guys, I'm really excited about today's episode, we've got several nuggets to give you today. This is Carl Moore, I'm Brant Greathouse and this is Meaningful Capitalism. So, Carl, to talk about inflation, why don't you kick us off and tell everybody what does is it actually help to invest in cash flow real estate assets, and how does that impact inflation?
Carl Moore:
Yeah, so cash flow real estate assets. I mean, really anything you're investing in, any place that your money is sitting, if you can't adjust for inflation along the way, this is a bad investment, and some people say, "well, there's no bad investment", well, those people can lose a lot of money because there are bad investments, and so, one of the things that we have the ability to do in the mobile home community industry is, oftentimes when people move their home in and we start renting the land to them, we'll sign a one year contract, but at the end of that one year, those go month to month.
Carl Moore:
And so, as inflation creeps up and we get our taxes from the city and we end up having to adjust for insurance rates that continually just creep up and our expenses rise, we're able to make slight adjustments back to our residents to make sure that our profit margins are just staying the same, we don't have to kick the guy that's at the bottom, but we can pass those costs on as inflation continues to rise, and so I really like the fact that, as we are invested in this, we can pass those costs on to the next guy.
Brant Greathouse:
It's not that our profit margins are growing and growing, it's that they're keeping up with expenses as they're increasing in the world around us, that's just the nature of it. And so, when you have inflationary things going on, a gallon of milk is going to cost more, well, it's not like technology got worse, and now it's more expensive to produce that gallon of milk, it's that the purchase power of the dollar decreased, and so now it takes more dollars to buy the same gallon of milk.
Carl Moore:
Right.
Brant Greathouse:
If anything, technology is getting better and better to where it's cheaper.
Carl Moore:
Yeah. We keep cutting people out of the industry, and so we have less overhead to pay because we're letting machines do more of the work yet the prices continue to rise.
Brant Greathouse:
Well, exactly. And so, as the purchase power of the dollar goes down and as inflation continues to rise, and it takes more dollars to pay for things, that cost can be a leech on your wealth, it's stealthy, it's something to where it literally is taking wealth out of your pocket without you even noticing it, but if you invest in certain types of investments like, for example, cash flow, real estate or mobile home parks, which is a type of cash flow real estate, you're actually hedging against that leeching out of your wealth and you're protected, your wealth is protected, your wealth is continuing to grow and produce returns.
Carl Moore:
And when we jumped into this business, I remember, we really wanted to get into real estate, real estate was something that we really understood, and so we even went back and we looked at high-rise buildings and apartment complexes, self storage units, we looked at even single family houses, you can buy a ton of single family houses and create a level of stability, but the thing that really stood out to us about mobile home communities is, ever since those things have been popping up in the sixties, seventies, eighties, nineties, we can look back at these historical events, we can look at what happened in the mobile home industry in the eighties, we actually are not old enough to remember what happened in the eighties, but we can remember what happened in 2008, and because people couldn't get mortgages, because the entire economy across the nation was suffering, the mobile home community industry had such a demand on it that rents rates were actually increasing...
Brant Greathouse:
During that time
Carl Moore:
All through 08, and that made this a really attractive thing, which really boils it down to like, "Hey, we thought we measured every metric we could think of, but what was the metric we forgot to measure?" A global pandemic, which I can't say we forgot to measure, that wasn't even on my radar.
Brant Greathouse:
No, I don't think it was on anybody's radar.
Carl Moore:
And even if you would've told me to put it on my radar, I would've never pictured these massive lockdowns that we went through in 2000, but in 2000 and I have some numbers here, apartment collection rates dropped...
Brant Greathouse:
We're talking about 2020
Carl Moore:
Yeah. Through 2020, during the lockdown, apartment rates dropped to 93%, office space dropped to 92%, retail space plummeted to 70% collections
Brant Greathouse:
And that was the collections.
Carl Moore:
Yeah, the collections. Now mobile home communities sit constantly at 98% collections, and they dropped to 97% collections.
Brant Greathouse:
Stable [inaudible 00:05:51].
Carl Moore:
And within four months they were actually back at the normal 98% collections mark, but what makes it so different than all of these other asset classes, I think that's the barrier to exit. You want to talk about that?
Brant Greathouse:
Yeah. So, I mean, like you said, the 2008, back in the eighties, the 2020 pandemic, all these different things that have had major impacts on the economy, investors during those times are like, "oh man, where do I put my money? What do I do? What's not burning down, because everything's burning down", and then the whole goal is to find something that's going to be protected in that time, and so I like what you said there. So to your question, there is a barrier to exit, one of the things that makes mobile home communities such a stable asset type is that it doesn't have very high turnover, your average resident in a mobile home community is there for seven years.
Carl Moore:
What about how long the home is averaged there?
Brant Greathouse:
The home, once a mobile home is set in place, it doesn't move for another 26 years on average, now that's the industry average, sometimes it's more, sometimes it's less. Mobile homes just are not quite as mobile as the name suggests.
Carl Moore:
That's true.
Brant Greathouse:
And so it actually costs five to $10,000 to move it because you got to move it, you got to level it, you got to put some skirting around the bottom, you got to hook it up to the utilities with professional licensed people, and you have to install stairs and decks that go up to the doors, and so there's a lot of costs in every single part of that, five to 10 grand, not to mention you have to pay a person that's licensed to move something that large down the highways. And so typically our residents don't want to move their home, if they want to move, they'll usually sell their home to somebody or sometimes they'll sell it to the owner of the community.
Brant Greathouse:
And we've gotten some great deals on that from time to time, but the point being, if the home stays, that lot's going to continue to produce revenues, and so for the community owners, the investors, that just creates a lot of stability. Now, compared to apartments, you got turnover of people moving usually every one year, two years, one to two years people are moving from apartment to apartment, to apartment, and that's just a lot of turnover. Well, every time there's a turnover, you have to completely clean up the home, you have to fix and patch and it's expenses, and then it's also downtime, downtime where that unit is not producing any revenues, and so all those things factored, the less turnover you have, the more revenues and the more profits, the less turnover you have, the more longevity you've got with every tenant, the more consistently that paycheck's going to be coming in.
Carl Moore:
That's right. And so that barrier to exit, we talked about, I want to be very clear here, that is not exit of the asset class, these things sell like hot cakes at a premium, but actually the barrier of exit to the resident living in the home. I mean, they really have only a few options, they can move, which we already discussed was expensive, they can sell it to somebody else, they can sell it to the community or they can do this baffling thing to me, which still continually blows my mind, they can just disappear, and then as the community owner, you have an abandoned home, it takes you about 90 days and a little bit of paperwork with the state, and now you own this home, you might have to pay off a lien or whatever's back on it, but essentially you can own these homes for free, then you fix them up, sell them off and you continue to make your lot rent, because that's the industry, we're really just renting dirt.
Brant Greathouse:
That is an anomaly that does not happen in any other... That doesn't happen in storage [inaudible 00:10:24]
Carl Moore:
Well, people do just up and leave apartments, but they already owned these apartments
Brant Greathouse:
Yeah. They already own [inaudible 00:10:28]
Carl Moore:
People just up and leave these homes [inaudible 00:10:29]
Brant Greathouse:
So somebody literally, they owned this home and we inherited it, more or less, with nominal minimal cost, and now we selling it and keeping that lot producing revenues.
Carl Moore:
So, finally, why to invest in mobile home communities, let's just talk about the demand compared to the supply.
Brant Greathouse:
Yeah.
Carl Moore:
What does it look like as far as mobile homes? I mean, how many communities are there that are for sale? How many are being torn down? What does it look like to get into these?
Brant Greathouse:
So, you've probably heard people saying on news or reports or something, of various types, that the wealth gap is getting greater, the rich are getting richer, and the poor are getting poorer, what we are seeing right now is more than 20% of Americans, which is one fifth, more than a fifth, one out of every five people are considered in that low income bracket that is making between 20 and $30,000 a year, and when that's your income, when that's your household income, there's a limitation to what you can afford for your housing, for your cost of housing.
Brant Greathouse:
Well, that bracket is growing. The number of people that are considered in that percentile are growing and the demand, which is increasing demand for housing in that price range, but the supply for that housing is not growing proportionate to it, the demand is growing so rapidly that supply cannot keep up. And so what you're seeing is, you mentioned tearing down mobile home parks, when you ask me about, would you ever tear down a mobile home park? I'd be like, "heck no, that thing's a cash cow, I would never do that", but there are lots of people who would buy the property for the use of the land, scrape all the home infrastructure off and build a hotel or something, let's say, maybe they're going to make a great profit or whatever, that's great, but more mobile home parks are torn down each year than there are mobile home parks being built, and that has large to do with municipalities and the desire for cities to be able to approve permits.
Carl Moore:
Yeah. So one of the things that you spoke around there was the fact that they keep tearing these communities down.
Brant Greathouse:
Yeah.
Carl Moore:
Well I think if we would go back in history and look there just a little bit, these communities, a lot of times were built on the outskirts of town, but what has happened is, town has grown past them, and so you can't buy land that's virtually scrapable in an afternoon like you can a mobile home community. So, people don't realize the upside of what these assets have, they only have their asset class in mind, and they're only out purchasing land to build that asset class, so they're completely overlooking what could be done with that same property. So these things are now in the middle of town, instead of on the outskirts, they get scraped, get repurposed.
Carl Moore:
We were actually doing a little bit of title work on a home that's in one of our communities, and so it showed this address, and so the state said, "well, we keep mailing stuff there, but it keeps not coming back to us", and I said, "well, what's going on with it?" Because it shows it's at lot 107, so I go look it up, and the address is right in the middle of an apartment complex, and so it's like, "well, that's never going to come back the way that they need it to", then you have to work with the state to let them know, "Hey that community was torn down."
Carl Moore:
Anyway, there's so many different other reasons why you should invest in a mobile home community outside of just these four, but Brant, I'm really glad that inflation's not going to kill us, that our investments are going to keep growing and that we're going to be able to continue to give our investors the best optimal returns as we go. That said, we are going to be opening up another fund, if you're interested in talking to us about that, reach out to us, let me know, I'd love to meet with you, and we can talk about what those opportunities are. I'm Carl Moore, this is Brant Greathouse and this is Meaningful Capitalism.
Brant Greathouse:
Thanks for joining us.
