Did you know that 22 million people in the U.S. live in manufactured homes?
Manufactured housing ranks among the country’s largest sources of unsubsidized affordable housing.
For many investors, like yourself, this raises the question: Are manufactured homes a good investment?
Boasting lower costs per unit, less tenant turnover, and decreased competition among investors, manufactured housing can offer you a viable investment opportunity. As you seek avenues for diversifying your portfolios, manufactured housing is one often overlooked opportunity for achieving this objective.
What are Manufactured Homes?
Manufactured housing, also sometimes known as mobile homes, is a type of prefabricated housing that is largely assembled in factories and then transported to specific sites for use. The intended use behind the original idea was that it allowed people that required mobility to live flexibly.
In the 1950s, manufactured housing began to be marketed primarily as an inexpensive form of housing that could be created and left in one place for a long time, or even permanently.
In the beginning, manufactured homes used to be eight feet or less in width. In the mid-1950’s however, a 10-foot model was introduced. Over time, the mobility of the units has decreased considerably due to larger models being created.
History of Manufactured Homes:
According to MobileHomeLiving.org, the United States Department of Housing and Urban Development (HUD) created the federal standards regulating the construction of mobile homes on June 15, 1976.
So, if you purchase a prefabricated home before June 15, 1976, it is considered a mobile home. If you purchase a prefabricated home after that date, it is considered a manufactured home.
Mobile homes first came to light in the early 1900’s when people needed to move frequently to find different forms of employment. The structural design of the mobile homes resembles a modern-day camper. The mobile homes were built on steel beams which ran from one end to another and were set up on concrete/wooden blocks, metal stands, or concrete foundations at the desired spot.
Manufactured homes used to have a negative connotation to them because of their lower cost and tendency to depreciate more quickly than site-built homes.
These homes tend to house lower-income families, which has led to zoning restrictions.
Some of the restrictions are:
- The number and density of homes permitted at a specific location
- Regulated size requirements
- Limitations on exterior designs
- Foundation mandates
Even though manufactured homes are considered to fall into the affordable housing category, older models can be super expensive due to energy inefficiency.
If you’re interested in learning more about affordable housing, read our recent blog: Investing in Affordable Housing: Everything You Need to Know
1. Manufactured Homes Since the Great Recession:
The Great Recession, which ran from the end of 2007 to mid-2009 was a very tough financial time for many people and their families because it showed that people had no control over economic disruption.
The recession caused homebuyers to understand that site-built homes were expensive and possibly a risky decision. According to Census data, since 2009, manufactured home shipments in the United States have increased from 49,800 to 94,600 in 2019.
Manufactured homes are on pace to more than double production since the end of the latest recession. “While that is certainly cause for investors, manufacturers, and dealers to celebrate, the defining fact that this sector could outpace numerous others in terms of real estate growth resides in the historical numbers.” –Homes Direct.
According to Homes Direct, here is the uptick in the shipments of manufactured homes since the recovery from the 1980s and 1990 recessions:
- 1999:348,100 manufactured home shipments
- 1998:373,100 manufactured home shipments
- 1997:353,700 manufactured home shipments
- 1996:363,300 manufactured home shipments
- 1995:339,900 manufactured home shipments
- 1994:303,900 manufactured home shipments
- 1993:254,300 manufactured home shipments
- 1992:210,500 manufactured home shipments
- 1991:170,900 manufactured home shipments
When asking yourself if manufactured homes are a good investment, it is crucial to analyze the cost difference between a traditional site-built home and a manufactured home. Why are manufactured homes so cheap?
“The median home value in the United States is $245,193. United States home values have gone up 3.8 percent over the past year, and Zillow predicts they will rise 4.1 percent within the next year. The median list price per square foot in the United States is $153. The median price of homes currently listed in the United States is $282,000, while the median price of homes that sold is $244,900. The median rent price in the United States is $1,650,” according to real estate resource Zillow.
Couple that information with the fact that new site-built construction averages approximately $150 per square foot — putting the 2,000-square-foot home at $300,000 — and the reduced price of an equivalent manufactured home delivers far better bang for the buck. By comparison, single-wide manufactured homes remained under $64,000, and larger double-wide models stayed below $120,000 in 2019, according to Homes Direct data.
“This industry is already having a tremendous impact on serving those communities who are most in need. Today, more than 20 million Americans* live in manufactured housing, which makes up approximately 10 percent of single-family residences. As a result, manufactured housing has become the largest source of unsubsidized affordable homes in the nation – which saves taxpayer dollars. While lives are helped through new homes, livelihoods are helped through new jobs. More than 40,000 citizens are employed in this sector, from all walks of life. And the Administration is especially impressed by the use of American suppliers in American manufacturing plants. That is how innovation turns into opportunity.” –Dr. Ben Carson, Secretary of Housing and Urban Development (*)
As you can see between the cost to build a manufactured home and the demand for them, this is becoming a preferred way to live and to save money.
3. Deciding, Are Manufactured Homes a Good Investment Opportunity for you?
Here are the Pros and Cons:
It is always important to understand the positives and negatives of any situation, especially a financial one. So, when you ask yourself, are manufactured homes a good investment opportunity, make sure you understand how it applies to your specific situation.
Cons of Manufactured Homes:
- Availability and cost of land
- Tougher mortgage requirements for manufactured home communities
- Extra costs created when building a new manufactured home community
- Fewer options for adding revenue generating amenities
- Negative stigma hovering over mobile homes
Pros of Manufactured Homes:
- Construction delays are not an issue
- Select your desired look and design for maximum occupancy
- Lower Price Per Unit
- High occupancy rates
4. Depreciation, Occupancy rates and Additional Upside for Investors
Investors often express concern over risk, including asset depreciation and occupancy rates. However, depreciation is an upside for investors – despite being a downside for single-family homeowners. Depreciation allows the investor of a real estate asset to deduct a portion of the building’s value each year against operating profits.
In terms of occupancy rates, manufactured housing consistently maintains higher tenant retention rates than multifamily assets.
It is important to remember that when you purchase a manufactured housing park you are often acquiring a high number of units, which allows you to spread risk across the entire portfolio. Simply put, dealing with one problem tenant and a potential short-term vacancy is easier when it’s offset by a high number of occupied units.
Lower per-unit pricing, fewer maintenance costs, and high cap rates all make investing in manufactured housing attractive for investors. Manufactured housing has the lowest cost-per-unit of any real estate asset class while also boasting high cap rates (On average 7-12 percent).
The lower per-unit price of manufactured housing also offers a unique financing option, as sellers may be able to provide financing; to manufactured home parks buyers.
Sellers may benefit from receiving a higher interest rate than they would if the money were in a low-risk investment such as a money market. This type of arrangement also gives the seller opportunity to generate consistent cash flow from their investment.
Lastly, since many manufactured home complexes (trailer parks) lay in the outskirts of urban communities, as cities grow, investors often have the opportunity to sell the assets for redevelopment and reap further returns on their investment.
High Performance Manufactured Homes
If you’re including utilities in your rental, the newer models of high-performance manufactured homes are significantly more efficient than the older original models. These newer models use less energy which increases the life-cycle affordability by decreasing the operating costs significantly.
These homes are:
Resilient to wind and moisture penetration,
Have healthy indoor environmental qualities.
These newer models also usually include energy-efficient appliances, keeping your operating cost down while generating more income for you.
So, are manufactured homes a good investment? Data and history show that manufactured homes are quickly becoming the preferred choice over site-built homes. Rising sales, low costs, and the freedom to have a home with equivalent amenities as a site-built home are selling points for the people that rent them, making this asset an investment winner.