Why are MHP syndications ideal for mitigating risk?

On New Year’s Eve in 1967, daredevil Evel Knievel attempted to jump over the fountains at Caesars Palace in Las Vegas. Falling short on the jump, Knievel crashed spectacularly, suffering a crushed pelvis and femur and fractures to his hip, wrist, and both ankles. He spent several weeks in the hospital recovering.

22 years later, Evel’s son, Robbie Knievel, successfully made the jump his father had failed to complete, becoming the first person to ever clear the fountains at Caesars Palace.

So why did one jump end in disaster while the other one ended in glory? Because Robbie mitigated his risks. He studied his father’s jump and determined his father’s choice of motorcycle, a Harley-Davidson XR-750, was not the ideal bike for the jump.

Robbie decided to go with the lighter and more agile Honda CR500 motocross bike he had been using up to that point because unlike the Harley, which was built for dirt track racing, the Honda was built for jumping in motocross events. By making this one important decision, Robbie was able to mitigate the risk of crashing and successfully made the jump his father had missed two decades earlier.

In 2020, many Americans experienced a different type of crash. As COVID-19 ravaged the U.S. economy, unemployment shot up to levels not seen since the Great Depression. Many workers suffered economic hardship from which high numbers are still struggling to recover.

In 2008, amid the Great Recession, many Americans suffered a similar economic crisis as many are experiencing now. Emerging from that economic disaster, many of those affected individuals vowed to never be caught in that situation again. They decided to mitigate future risks to avoid the type of economic devastation they had just suffered through.  

In the aftermath of the Great Recession, many investors reevaluated their investment portfolios and decided moving forward they would focus on three things that would help them weather future downturns: 1) cash flow, 2) appreciation and 3) alternative assets – with recession-resistance as the driving force.

Recession-proof cash flow would compensate for any loss of employment income. Recession-proof appreciation would protect against inflationary pressures during a downturn. Alternative assets, non-correlated to Wall Street would ensure continuing cash flow and growth.

Those investors who learned from their mistakes in 2008, just like Robbie Knievel learned from his father’s mistakes, mitigated the risk of future disasters like the one in 2020 by turning to recession-resistant assets that offered ongoing income and growth – essential to not only riding out a storm but essential for achieving financial freedom.

What assets did the survivors of 2008 turn to that helped them weather the 2020 disaster? Many turned to income-generating real assets and by investing passively, investors were able to earn an income around the clock as well as create multiple streams of this income – allowing them to move more and more away from their dependence on labor income.

The real asset class many investors gravitated towards was affordable housing. As demand in all other classes of real estate dropped in 2008, demand for affordable housing bucked the trend. Loss of jobs and reduction in income forced many to downsize to affordable housing.

In the years since the Great Recession, there has been a continuous shortage of affordable housing as homeownership has become more and more elusive to a greater number of Americans. And the gap between supply and demand has only grown since 2008.

Knowing what we’ve learned about the demand for affordable housing in the past decade, it should come as no surprise that the one segment of the affordable housing asset class that was not only recession-proof but thrived during the COVID-induced downturn was mobile home parks (“MHPs”).

While other segments of multifamily saw reduced occupancy, increased delinquencies, and reduced rents in 2020, MHPs saw increased occupancy and increased rents.

As 2020 has proven, passive investments in MHPs through private equity or syndications are ideal for mitigating risk and avoiding future economic disasters.

Why are MHP syndications ideal for mitigating risk?

• Recession-Resistant Income. Despite the name. Mobile homes are not particularly mobile. It costs an average of $7,000 to move a mobile home less than 100 miles. This ensures operators of MHPs a consistent, reliable source of cash flow from rock-solid occupancy rates.
• Value-Add Opportunities. Most MHPs are owned by mom and pops and suffer from management efficiencies. By implementing efficient processes and making minor renovations, seasoned MHP operators can increase rents and improve NOI without any reductions in occupancy because of the non-mobility of mobile homes.
• Lower Maintenance Costs. By owning only the land and renting out lots to tenants to plant their homes on, MHP investments have a significantly lower cost per door compared to multifamily properties. The lower cost per door coupled with drastically reduced maintenance expenses compared to apartment communities alleviate the pressure on cash many multifamily communities experience during downturns. Whereas apartment communities put off many repairs during economic downturns because of reduced occupancies and increased delinquencies, MHPs do not suffer the same pressures because 1) ongoing maintenance expenses are minimal and 2) MHPs don’t suffer vacancy declines during downturns resulting in reduced income.
• ​Low Supply Means Ideal Conditions for Future Exits and Dispositions. There are 44,000 mobile home parks in the U.S. and because of strict zoning laws due to social stigmas surrounding them, very few new MHPs are developed in any given year. “Not in my backyard,” is the common refrain heard at City and County planning meetings. This is why the market for MHPs is continually a seller’s one – ensuring healthy profits from a future sale or disposition.

If there was ever a year to test the proof of concept of the recession-resistance of MHPs, 2020 was that year. Not only did MHPs demonstrate resilience but they experienced growth while other segments shrunk. That is why passive investments in MHPs like syndications are ideal for mitigating the risk of future financial disasters.

By investing in recession-proof cash flowing real assets that have demonstrated consistent, historical growth, investors will give themselves the best chance of sticking the landing in the face of overwhelming economic challenges.