As an advocate and expert in mobile home park investing, I’m often approached by individuals potentially interested in investing in MHPs but may not have the time, experience, or expertise to prospect, buy, and manage their park.
This is a common question lobbed my way, “Since I’m busy and don’t have the time, should I invest in a manufacturing housing REIT? I then go on to explain how REITs work – explaining both pros and cons and letting the individual make up their minds.
REITs are definitely an option for investing in manufactured home parks (i.e., mobile home parks), and here’s how they work. Real Estate Investment Trusts (REITs) are the most popular form of CRE investing because of their accessibility and liquidity.
What are REITs? REITs are creatures of the tax code (Internal Revenue Code or IRC) that offer significant tax benefits, including exemption from federal and state taxes at the corporate level if certain requirements are met. Although they can be both private and public, the majority of REITs are publicly traded companies.
The principal requirements for qualifying as a REIT are:
- Must invest at least 75% of total assets in real estate, cash, or U.S. Treasuries.
- Must derive at least 75% of gross income from rents, interest on mortgages that finance real property, or real estate sales.
- Must pay a minimum of 90% of taxable income in the form of shareholder dividends each year.
Pros of Investing in MHP REITs. Public REITs can be invested in with as little as the price of one share of stock. The low barrier to entry, liquidity, and convenience of public REIT investing allows time-constrained investors to participate in a solid asset class without the headaches – all with the swipe of a phone screen.
Alternative to REITs. REITs aren’t the only game in town when it comes to MHP investing. There are other viable alternatives.
Direct Ownership. For those with the capital and free time to directly buy and operate their own MHP, direct ownership offers investors control of every phase of the MHP investment continuum. Direct ownership is ideal for the “roll up your sleeves” micromanager with the knowledge, time, and capital to do it on their own.
Private Fund. A private fund run by sponsors experienced in the MHP sector offers investors the opportunity to leverage the know-how, time, processes, and infrastructure of these experts without the high capital or labor costs of doing it on their own. Private funds offer participation through equity and debt investment structures – offering investors a diversity of investment options. Private funds may be geographically focused but are typically not asset-specific. Asset-specific funds are more commonly known as syndications.
Syndications. Syndications are private funds that are project or asset-specific. In other words, they’re focused on one or two specific assets. Syndications are also unique in their waterfall structure of compensation, where distributions of profits and cash flows are prioritized at various acquisition, operations, and disposition stages, with first dollar profits typically going to the investors (i.e., limited partners).
When it comes to MHP investing, no one shoe fits all because every investor has their own risk tolerances and investment objectives. For the investor who wants to be in control of everything – including profits – direct ownership might be the best fit if they have the knowledge, capital, and time to pull it off.
REITs and private funds are viable options for the time-constrained – both with their own pros and cons. REITs are ideal for the capital-constrained who have a short-term investment window and high-risk tolerance. For the more sophisticated investor with more substantial resources and patience (i.e., long-term investment window), private funds offer the opportunity for above-market returns without the volatility of REITs.
Private funds are a superior option for investors who can meet the qualification (accredited investor status) and minimum capital (typically $25k+) requirements. Here’s why.
Cons of REITs. The accessibility, convenience, affordability, and liquidity that make REITs attractive are also their drawbacks. Because they’re traded on the stock market, REITs are highly correlated to the broader economy. While private MHP funds demonstrate little correlation to the broader markets and market crashes, MHP REITs are rarely spared from sharp market downturns.
The 90% rule is another selling point of REITs but beware of the small print. The 90% rule that says REITs must pay 90% of their taxable income in the form of shareholder dividends each year has a loophole. Since the rule is based on 90% of”taxable income” and not gross income, unscrupulous managers may take advantage of this provision at the expense of investors. The “taxable income” provision exposes REITs to mismanagement where taxable income can be depleted through high salaries and excessive asset management fees in lean times – leaving little in the way of dividends to distribute to investors.
Should you invest in MHP REITs? You already know my answer but don’t take my word for it. Do your research and due diligence, and you’ll likely come to the same conclusion as I did. If you don’t have the time to do it yourself, an investment in the right private fund with the right sponsors offers investors the best option for investing in the MHP investment class – not REITs.