APARTMENTS HAVE HIT THEIR RENT CEILING. WHAT’S THE MOBILE HOME PARK LOT RENT LIMIT? By Frank Rolfe

APARTMENTS HAVE HIT THEIR RENT CEILING. WHAT’S THE MOBILE HOME PARK LOT RENT LIMIT?

It would appear that apartment rents have finally achieved terminal velocity with aggressive increases during the pandemic coupled with a weakening U.S. economy. In some markets rents are starting to come with small discounts (1% to 5%) or a couple of free months. Of course, that’s on an average U.S. rent of over $2,000 per month. So if apartments have finally hit the “top” where do mobile home park lot rents stand, and are they approaching that limit?

First let’s put a microscope on why apartment rents are having trouble

I know that Americans are big on housing, but who ever thought that a $2,000 apartment rent was a sustainable goal to begin with? If you assume that housing should represent a third of your income, you’d need a sea of $70,000+ per year earners to make this happen and why would anyone at that price-point not simply spend their rent on a $200,000+ mortgage? It used to be that the housing food chain was that higher demographic people bought houses and lower demographic people lived in apartments until they could save up enough or improve their earning enough to buy a house. But at a $2,000 per month apartment rent it’s pretty much putting apartment residents on par economically with home owners and that’s a crazy stretch in my opinion. Some would say “but the average single-family home is $400,000” but those people must not be acquainted with the website Realtor.com as there’s a huge number of sub-$400,000 homes out there. My personal opinion is that apartments are in trouble with their rent levels because they decided to try and fight outside their weight class and pretended to be the “house alternative” instead of their rightful place as the “placeholder before you move up to a house”. As more new apartment developments have flooded the market – with investors hoping to cash in on $2,000 per month rents – the market is swamped with product and competing for a pretty rare customer that is not desiring to simply buy a house.

Now let’s compare apartment rents with mobile home park rents

Although nobody tracks it scientifically, it’s thought that the average mobile home park lot rent in the U.S. is around $300 per month. That’s insanely low and around 85% less than apartments. The income you need to pay a $300 rent is only $900 per month, which is nearly 50% less than minimum wage of $20,000 per year in most states. So that’s just ridiculously low, right? Even institutional owners that have pushed rents significantly find themselves at around a $500 per month lot rent which is right in-line with minimum wage guidelines. That’s why mobile home parks truly are the only affordable form of housing in the U.S. that is not artificially created through government subsidy (such as Section 8 in apartments). In addition, cities have not allowed new mobile home parks to be built in about 50 years, having gone into moratorium on new park construction since around the 1970s. As a result, there is no new mobile home park product to compete with for existing properties.

But you forgot about the mobile home that goes on the lot, right?

Wrong. Around 80%+ of mobile home park residents own their homes free and clear. And of the remainder, most have tiny remaining mortgages as used mobile homes typically sell for $1,000 to $10,000. Only a tiny fraction of mobile home park residents have newer mobile homes with larger mortgages to contend with, but even then those home mortgages are typically around $500 per month. So when we’re talking about lot rent we’re talking the only cost that 80%+ of residents have, and nearly the only cost the remainder has to pay.

So high can mobile home park lot rents go?

So if mobile home park lot rents are 70% to 85% less than apartments – and that’s an apple-to-apple comparison – it then begs the question “how high can mobile home park lot rents go?” And that’s an unknown at this point. But there are some examples that help to illustrate the simple fact that they have a huge amount of potential for upward growth. In Denver, Colorado, for example, lot rents are now hovering near $1,000 per month yet the parks are 100% occupied with waiting lists. There’s no discounts or free months as apartments now have. And Denver rents are low by comparison to those in Los Angeles, in which lot rents are around $2,000 to as much as $5,000 per month. Sure, those are vibrant markets with high competing home prices, but the stats of Denver or Los Angeles are not 500% to 1,000% higher in home cost. Instead, those owners are simply more sophisticated in what market prices actually are and they’ve proven that by finding rents that keep their parks fully occupied while reflecting their worth as a housing alternative. I would imagine that all mobile home park rents could double and there would be little effect on the demand for the product or the rate of occupancy. And in come markets even triple.

Why are they so low to begin with?

Good question. Most of the responsibility for mobile home park lot rents being insanely low falls back on the original mom and pop owners who maintained a strict program of “mom and pop quantitative easing” in which, despite annual inflation, they never raised their rents. Decades might pass and they would not increase their prices. If you look at what most mobile home park lot rents were when the parks were built in the 1950s and 1960s – and adjust for inflation – you’d find the current dollar pricing was around $500 per month. But today’s rents are roughly 50% of that a mere 50 years later. That’s what happens when you fail to raise your rents in line with CPI. In addition, since no new mobile home parks were allowed to be built in the past half-century, there was never any reminder to mom and pop owners about what the rents should really be, since there was no new Class A park pricing to compare with and set Class B older park rents.

Conclusion

Sure, apartment rents have topped out. $2,000 per month was never sustainable as an apartment rent to begin with, particularly when there is no limitation on new construction. But mobile home parks share a different problem: our rents are unsustainably too low. Mobile home parks will either have to raise their rents going forward or be torn down to make room for … more apartments.

By Frank Rolfe

Frank Rolfe has been an investor in mobile home parks for almost 30 years, and has owned and operated hundreds of mobile home parks during that time. He is currently ranked, with his partner Dave Reynolds, as the 5th largest mobile home park owner in the U.S., with around 20,000 lots spread out over 25 states. Along the way, Frank began writing about the industry, and his books, coupled with those of his partner Dave Reynolds, evolved into a course and boot camp on mobile home park investing that has become the leader in this niche of commercial real estate.