From time to time, we'll share some thoughts (which you may or may not find useful) on our investment philosophy as it relates to mobile home parks, real estate and investments in general.
Why Mobile Home Park Investing is “Anti-Competitive”
Rational investors seeking superior returns should seek less not more competition. Yet this is rarely the case as the herd craves company. Case in point, if you submitted an offer on a high quality, well-located office, apartment or retail building, you would likely be one of 10+ (sometimes 30) bidders in most major markets today. Inevitably this degree of competition translates to higher pricing / lower yields and creates a vicious cycle:
- Cap rates (unlevered operating yields) that were unacceptably low just a few months ago start to win deals;
- Investors' expectations recalibrate;
- Investors (tired of losing deals) get anxious buy something and start stretching for yield;
- Ultimately, the margin for error becomes too tight to withstand negative cash flow surprises (ex: unforeseen major capital items) and deals fail to hit pro forma returns.
Furthermore, when the stock market is hot (as in now) retail investors are – counterintuitively -- less concerned about risk and are more comfortable entering the market, thus bidding up prices. In highly competitive markets investors succumb to “animal spirits” and are not appropriately compensated for risk.
Contrastingly, when we make an offer on a underperforming mobile home park, it’s clear we’re one of just a handful of bidders and occasionally, the only bidder. Negotiation is all about weakness, which relates to the availability of alternative options for either party. This dynamic translates to favorable outcomes for Park Street Partners and its investors.
Furthermore, mobile home park investments offer additional “anti-competitive” benefits:
- No competition from new supply – municipalities are not exactly in a hurry to entitle new mobile home park developments for their community. If you own the only mobile home park in town you’re the affordable housing equivalent of Microsoft circa 1997 (monopoly).
- Loyal customers – there is little incentive for tenants to leave a park for a competitive property. The majority of tenants own the home (we rent them the land) and it costs +/- $5,000 to move a mobile home.
- Few institutional players to compete against – it’s a highly fragmented, inefficient market with the largest players owning less than 3% of the total properties.
We love asymmetric negotiation situations; we hate competition and we’re definitely contrarian investors, which precisely why we own and operate mobile home parks.