‘A Small Community Doesn’t Mean A Small Workload’
Full bonus depreciation is back, which will likely fuel an uptick in demand for manufactured housing communities. Despite high interest rates and a softening of almost every major real estate asset class, communities remain a highly sought-after investment.
With inherently less competition than multifamily, it would seem from the outside that a manufactured housing community would be easy to source and acquire. However, as anyone reading this article understands, this is not always the case. The market seems saturated with smaller communities in secondary and tertiary markets.”
There are operators who have been successful in purchasing small communities, but as a management company with an operation of about 15,000 home sites, we see some recurring trends we would like potential owners and investors to understand.
Challenge #1 — Infrastructure
The core of a land-lease community is land. Sounds obvious, but it is surprising the number of people who purchase a community and pay little to no attention to the infrastructure beneath the ground. Small communities, some of which were built in the 1950s by mom-and-pop operators, were often built with water, sewer, and sometimes electric infrastructure that was not intended to last 75 years. When purchasing a community, it is standard practice to hire a plumber and have them scope the sewer lines to determine their condition. The most common sewer main material at that time was clay tile; if clay tile is properly maintained, it can remain useful for a long time, but once it begins to have root intrusion or sections that collapse, that trend will continue. Do not underestimate how much sewer main repairs will cost.
Water mains are trickier to understand in due diligence, as you cannot scope them with a camera. If there are leaks, they are rarely visible to the naked eye. The first step is to understand the size and material of the main. Some older communities have 1.5 to 2-inch diameter mains, and small mains typically mean low water pressure for residents. Next, look at a master water bill and note the total usage of the community. If usage is over 125 gallons per resident, per day, the community likely has leaks. Do not fall into the trap of thinking that installing submeters will fix your water problem. Submeters are great and will accurately track how much water each resident is using, and allow you to recapture it. If there are leaks before the meter, that water is still lost — unable to be recaptured — leading to consistently higher expenses and lower recapture percentages.
Challenge #2 — Market and Business Model
When did location, location, location stop being the core of a real estate investment? Do not fool yourself into purchasing a community that does not meet the fundamentals of a good investment. We see people purchasing communities in tertiary markets with no tangible value proposition. If a resident can purchase a single-family home for under $150,000 or rent a 2-bedroom apartment for under $800 per month, a large majority will choose that over a new manufactured home in a community. Attainability is the cornerstone of our business; the market requires less expensive housing, and a manufactured home should sell for around a third of the price of the average single-family home.
Let’s look at another scenario, where the community is full and there is no need to infill homes. When looking at a property to buy, take into careful consideration the quality of the houses, even if they are owned by residents. Because… residents move out, no matter what your favorite podcast may say. When a resident moves out, what is the physical quality of that home? Will it need to be demolished, or can it be renovated and resold? In either case, vacancy loss and home attrition costs need to be built into the business model.
Challenge #3 — Staffing and Management
Manufactured housing communities are easy to manage. Pay a resident $500 a month and they will mow the grass and collect the rent! That may have been the business model years ago, but it is not the case anymore. Even if the community does have a sweetheart deal in place with a resident, make sure that when purchasing the community, you adequately buffer expenses in the event they leave. If they do, your operational costs for the community will likely increase significantly. Finding part-time labor for a small community is difficult and landscaping/maintenance costs have increased exponentially in recent years. MHC management is a labor-intensive process. Having a small community doesn’t mean a small workload. Often, a 50-site community will need the same workforce as a 100-site community, with half the revenue to support it.
Purchasing a small community can and should be a successful venture. There are many operators nationwide that do it efficiently and profitably. To be successful, please ensure that the community has viable infrastructure, a clear value proposition to the market, and can operate efficiently over time.
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