Trailer Park Treasure
In valuation theory, value is equal to income divided by the required rate of return:
Value = Income/Rate
One of the greatest value creation secrets of the 1960’s through 1980’s was ownership of a manufactured housing community (i.e., mobile home park).
Although it wasn’t a sexy business, many millionaires were made by developing and/or buying these affordable living communities. And the wealth was created because the demand for rental spaces was relatively inelastic to changing macroeconomic conditions.
That is, the owners understood that the Value side of the equation could be built by basking in the glow of the denominator — the required Rate of return, which is a proxy for risk or volatility of the numerator. So, buying a mobile home park was like buying an electric utility plant — no matter what, the cash was going to keep coming in.
I believe there are five (5) significant reasons for income stability, and, therefore, a low required Rate of return for mobile home parks:
1. Immobility of Housing. It ain’t cheap to move a manufactured home. In fact, it is about $2,000 to $4,000. So, rather than lose my home, I will ante up the 200 or so bucks in monthly rental fees.
2. Affordable Housing. Manufactured housing is an affordable housing option. So, in bad economic times, people have to live somewhere, and affordability is paramount.
3. Limited supply. They aren’t making many more mobile home parks; thus, supply is limited and declining. Zoning boards, NIMBY’s (Not-In-My-Back-Yarders) and state legislators have put the kibosh on manufactured housing community development.
4. High fixed assets to total assets. The cost or value of a mobile home park is in the land and site improvements. This translates into less reliance on management for the success of the business. Poor management can certainly keep the property from excelling, but it also will not destroy the business. The fixed assets drive the business model more than human resources.
5. Low operating costs as a percent of total revenue. Operating costs are about 30 to 40 percent of revenues for a mobile home park. For an apartment complex, it is 50 to 60 percent. Mobile home parks do not have to replace carpets and paint the walls, and the longevity of tenants is substantially longer on average (about seven years for park tenants versus less than two years for apartment tenants). So, when economic times take a turn for the worse, park management has much more margin with which to work in terms of cutting prices or making deals to maintain occupancy.
MBA curricula should add a course in “denominator management” and use manufactured housing communities as a case study… and as Forrest Gump said, “…that’s all I have to say about that.”
Posted on Wed, May 26, 2010
by Timothy E. Moffit