Why Warren Buffett & Sam Zell Bet Big on Mobile Homes: What You Need to Know

We often picture towering apartment complexes, sleek office buildings, or cozy one-family homes when we think of real estate investing. But what if I told you that some of the world’s most astute investors, like Sam Zell and Warren Buffett, have earned extraordinary profits from something far less glamorous? We’re talking about mobile home parks, a sector that’s often overlooked, but is bursting with opportunity.

The Quiet Power of Mobile Homes

Even though mobile home parks don’t exactly scream “high-profile investment,” their resilience and profitability have consistently caught the eye of investors.

Consider Sam Zell, who’s synonymous with smart real estate moves. Back in 1983, he made his first investment in mobile home parks, which he called one of the best of his career. As a result of Zell’s excellent timing, he was able to hold onto his mobile home park assets while shedding other commercial assets. Today, Equity Lifestyle Properties operates the largest mobile home park in the world, demonstrating the sector’s resilience.

And then there’s Warren Buffett. Through Berkshire Hathaway, he owns Clayton Homes — which happens to be the nation’s leading mobile home manufacturer. The fact that Buffett endorses these assets speaks volumes about their financial stability and robust nature.

From Law to Landlord: A Real-World Investor’s Perspective

Furthermore, Ferd Niemann, a lawyer-turned-mobile home park investor, provides a compelling real-life example. Starting out as a financial analyst for Jackson County, Missouri, he dealt with large-scale commercial real estate and tax incentives. As he experimented with single-family home investments, he quickly realized that scalability was an issue.

In his search for a more stable investment vehicle, Niemann explored alternative assets like self-storage and mobile home parks. According to his research, mobile home parks have lower expense ratios than other forms of real estate investment. Additionally, the less crowded playing field offered one of the best opportunities for those interested in learning the game.

Despite maintaining his day job, Niemann gradually expanded his portfolio, acquiring his first park in 2014. By 2018, he was investing full-time in mobile home parks, utilizing his legal knowledge to navigate the industry’s intricacies.

The Numbers Don’t Lie: Financial Advantages Explained

So, what’s the secret sauce behind mobile home parks’ profitability? It boils down to favorable expense ratios.

While multifamily apartments can easily consume over 50% of revenue, mobile home parks typically operate with expense ratios between 35% and 40%, explains Ferd. There are even parks where it can dip as low as 22% when well-managed.

Imagine a park with direct-billed utilities, full occupancy, and a minimal amount of park-owned homes. It is possible to make significantly more money than with an apartment complex of comparable size. Furthermore, the stickiness of tenants – moving a mobile home is a logistical and cost-intensive experience – translates into lower turnover rates and consistent cash flow. As of 2024, mobile home park cap rates typically ranged from 7% to 10%, with some sources suggesting even higher rates, reflecting their potential for steady cash flow. 

The Wealthy Diversify: Beyond the Stock Market

According to Preqin, alternative investments under management are expected to total $29.2 trillion by 2029, as reported in the Motley Fool. In addition, wealthier investors are more likely to use alternative investments, with 69% of ultra-high-networth (over $30 million) investors using alternative assets in their portfolios compared to 45% of mass affluent (between $250,000 and $1 million) investors. 

On other words, despite popular belief, stocks make up only a small portion of their portfolios. Rather, they prefer tangible, cash-flowing assets such as real estate, private equity, and mobile home parks.

Traditionally, mainstream financial advice has hailed the stock market as the gold standard for wealth accumulation. As a matter of fact, the world’s most successful investors understand the power of tangible assets, which offer higher returns and lower volatility than stocks.

Decoding the Buffett & Zell Playbook

Although previously mentioned, here’s a breakdown of the investment strategies employed by titans like Buffett and Zell.

• Manufacturing and financing power. With Clayton Homes, Buffett isn’t just investing in manufacturing; he’s investing in control as well. In order to streamline the process and drive profitability, Clayton Homes offers financing programs that make it easy for park owners to fill vacant lots.
• The long-term vision. The Zell approach is rooted in long-term value creation. A consistent cash flow is achieved by acquiring parks, improving their quality, and holding onto them for a long time. As a result, he understands the unique dynamics of mobile home parks, where residents own their homes but rent the land, which creates a more stable income and lower turnover.

Why Mobile Homes Offer a Competitive Edge

The following are some of the advantages of investing in mobile home parks:

• High demand, low supply. We aren’t going to see an end to the affordable housing crisis anytime soon. While mobile homes offer a vital solution, zoning restrictions and local regulations make it difficult to develop new parks. As a result of the supply-demand imbalance, existing parks are in high demand.
• Market inefficiencies. In contrast to the highly efficient stock market, the mobile home park industry is highly fragmented. By identifying underperforming parks, savvy investors can unlock their potential.
• Flexibility for smaller operators. Unlike traditional real estate, where large companies dominate, mobile home parks offer a level playing field to smaller investors. Local buyers offer a personal touch to “mom-and-pop” owners, allowing smaller investors to compete.

Key Investment Strategies

There are a number of strategic investment opportunities in mobile home parks, such as;

• Value-add investing. If you are interested in investing in mobile home parks, it is a good idea to purchase properties that are not yet attractive to institutional investors. An investor can elevate a lower-tier park into an asset that REITs will pay a premium for by increasing occupancy, upgrading infrastructure, and improving the community’s attractiveness.
• 1031 exchanges. By using a 1031 exchange, investors can reinvest their profits without incurring capital gains taxes. In this way, proceeds are reinvested into another “like-kind” property, thereby deferring taxes. To continue deferring taxes while benefitting from passive investment opportunities, some investors use Delaware Statutory Trusts (DST) or tenants-in-common (TIC) structures.

The Future is Bright: Mobile Homes as a Smart Investment

With endorsements from investment giants like Buffett and Zell, mobile home parks are undeniably attractive. Due to limited supply, growing demand, and market inefficiencies, this investment case is compelling. Despite institutional investors’ increasing presence, off-market deals and strategic improvements remain opportunities for smaller investors.

Compared to traditional real estate, mobile home parks offer a stable and high-yield investment alternative. These often-overlooked asset classes have the potential to offer investors long-term returns through the strategies of Buffett, Zell, and Ferd.

Key Takeaways

• High profitability and resiliency. As Sam Zell’s successful strategy demonstrated, mobile home parks can offer strong returns even during economic downturns. Additionally, they are highly profitable due to their lower expense ratios (35-40%, potentially as low as 22%) compared to traditional multifamily properties.
• Stable income and Low turnover. Typically, residents own their homes but rent the land, resulting in fewer moves and a more stable tenant base. Due to the high cost and logistical challenges involved in moving mobile homes, turnover rates and cash flow are lower.
• High demand, low supply. There is a high demand for affordable housing, and mobile homes can provide the solution. Furthermore, zoning restrictions and local policies limit the development of new mobile home parks, increasing the value of existing ones.
• Inefficient market and opportunity for value-add. A fragmented market for mobile homes occurs, with many parks owned by smaller, less sophisticated companies. Due to this inefficiency, investors can acquire underperforming parks, improve them, and increase their value.
• Attractiveness to wealthy investors. Investors like Warren Buffett and Sam Zell hold significant stakes in mobile home parks, verifying their profitability. In comparison to traditional stocks, wealthy individuals allocate a significant portion of their portfolios to alternative investments, such as mobile home parks.
• Financing and manufacturing advantages. Clayton Homes (owned by Berkshire Hathaway) offers financing programs that help park owners fill vacant lots, reducing upfront costs. Parks stay full thanks to the manufacturing sector.

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