Here at Casey Research we believe what Doug Casey

first_imgHere at Casey Research, we believe what Doug Casey calls the “Greater Depression” is coming, and that it will be here sooner rather than later. Americans will get poorer. Not that they’re doing so hot right now: Baby boomers, 10,000 of whom turn 60 every day, have saved nothing. Pension plans are broke, and the average 401(k) balance is just $84,300. 46.5 million Americans are on food stamps. That all adds up to a bull market in low-cost housing, especially for retirees on fixed incomes and the working poor. Such housing exists, but is in short supply. Granted, this is not a glamorous sector. But it has the ingredients for investment success—growing demand and restricted supply. Some of the best-known and richest investors in the US already have huge investments in trailer parks. You might be scared to enter one of these developments. Don’t be. Go ahead and drive through a mobile home park near you. Get comfortable. It might be the investing opportunity you’ve been looking for. Falling Supply, Plenty of DemandMobile homes are universally hated—except by people who actually live in and own them. There are 8.6 million mobile homes in the US, and 12 million people live in them. “That number is not likely to grow,” writes Gary Rivlin for the New York Times Magazine. “We learned in Southern California, given restrictive zoning laws and the prohibitive cost of building a new park in the boonies, meaning supply is static even as demand for cheap places to live is high.” “Since peaking at 374,000 units in 1998, manufactured home placements have fallen by nearly 90 percent,” Fannie Mae Housing Insights reported in June of last year. “During the last four years, manufactured housing placements have averaged 51,000 units per year, one quarter of average annual production during the last three decades.” New parks are scarce no matter where you look. Planning boards and city councils are shy to approve land use for them. They’re ugly and have a bad reputation for squalor and attracting police activity. No one wants to stick their neck out for more of that. A bank I worked for in Las Vegas financed the construction of a new park, but that was back in the late 1980s. The town has quadrupled in population since, and I never heard of another new park in the area. But I did see a number of parks bulldozed to make way for more houses, when residential land prices increased tenfold. In talking to a couple of my appraiser contacts recently, one said he hadn’t appraised a park in eight years, and the other said he couldn’t remember the last time he appraised a park, but it was at least five years ago. Like Being Chained to a Booth at Waffle House Unlike apartment projects, where only a security deposit and maybe first and last month’s rent prevent tenants from skipping out, rolling a trailer into or out of a space costs around $5,000. Also, many people own their coaches and don’t want to walk away from that equity. Once a coach is set, park owners have a paying tenant who isn’t likely to go anywhere, even if they bump rents up $10 or $20 a month each year. The Nevada Legislature considers a mobile home park rent-control bill every two years, evidence that landlords aren’t shy about jacking up rents. Frank Rolfe, longtime park investor and teacher for Mobile Home University, says tenants get used to annual increases, just like they do with their cable bills. Rolfe has raised the rent in one particular park 30% in just three years. He quips, “We’re like a Waffle House where everyone is chained to the booths.” With thousands of veterans going to college after WWII on the G.I. Bill, trailer parks appeared around college campuses all over the US to accommodate ex-soldiers looking for cheap housing. I reside in the college town of Auburn, Alabama, and trailer parks here are both numerous and in great demand. A friend has lived in a park on the west side of town since 2006 when he enrolled at Auburn. His rent has risen from $175 to $255 since he moved in, and management just emailed him to say it’s upping his rent again. His rent will double each month if he doesn’t sign the new lease with higher rent. With Auburn University’s vet school just down the road, management can play hardball. The good news is that my friend can sell his coach for what he paid for it anytime he wants. Trailer Park Moguls Sam Zell is known as the savviest real estate investor in the US. Nicknamed “the grave dancer,” Zell has bought all types of real estate low and sells most of it high. But trailer parks? He hangs on to them. Zell is chairman of Equity LifeStyle Properties, formerly known as Manufactured Home Communities, a company he took public in the early 1990s. The company is the mobile home industry’s largest landlord, with 370 communities containing close to 140,000 lots. Zell said at a conference of Equity LifeStyle Properties Inc. in 2012, “We like the oligopoly nature of our business.” Zell isn’t the only big shot in the mobile home industry. In 2003, the Oracle of Omaha himself, Warren Buffett, bought Clayton Homes, one of the country’s largest mobile home manufacturers, for $1.7 billion. Buffett says the manufactured housing industry, from the production side, has “endured a veritable depression,” with no recovery apparent. According to Berkshire Hathaway, US manufactured housing sales were 49,789 in 2009, 50,046 in 2010, and 51,606 in 2011. That’s compared to 146,744 homes sold during the housing boom of 2005. But Clayton is still making money. Private equity companies are also becoming interested in mobile home parks. Carlyle Group purchased two parks last October for a combined price of $31 million. Both are higher-end senior parks where tenants have to be 55 or older. Not Sexy, But Profitable Dan Weissman and David Shlachter wanted to own a business that wasn’t sexy but was fragmented. “The litmus test was if we told someone at a cocktail party what we do and their response was a grimace, we were on the right track,” Shlachter told Bloomberg. “It’s hairy, and it’s colorful, and it’s sometimes scary.” For instance, two hours after they closed on the purchase of their second park, a SWAT team descended on the property in Indianapolis, looking for one of the park’s tenants who would eventually be charged with arson and murder. The partners, both in their thirties, found small parks for sale around the country with deferred maintenance and vacancies. “When you stop maintaining anything, it goes bad,” Shlachter says. “When you stop maintaining a mobile home park, it goes real bad, real fast.” These are the kinds of situations where new owners can create value. In one case, Weissman and Shlachter paid $485,000 for a park and invested another $250,000 toward improvements. This year they think they’ll earn $150,000 from the park, with the project only 40% full. Mobile home park pros say buyers should look for parks with a master water meter, which means the current owner is paying for their tenants’ water. The first thing savvy new owners do is install meters for each trailer so renters can pay their own water bills. Mr. Rolfe says investors should steer away from tenant-friendly states like California and New York, where it takes too much time and money to evict deadbeats. He won’t touch Las Vegas or Phoenix, believing distressed home prices are low enough to compete with parks. However, both housing markets have rebounded sharply and, I believe, will offer opportunities. The guiding sales metric for real estate purchases is cap rate. A project generating $50,000 in annual net income changing hands for $500,000 equates to a 10% cap rate. Low interest rates have brought cap rates down, but Rolfe and Reynolds still look for 9% to 10% caps when they buy. Lot rent should top out at half of what a decent two-bedroom apartment in a particular area goes for. However, the sweet spot for lot rent is $495 a month. Go over that and it “could mean death.” Nationwide, rents average about $390 per pad per month, according to real estate researcher JLT & Associates. While Sam Zell’s parks offer swimming pools and clubhouses, Rolfe says, “We don’t like amenities of any kind.” Rolfe and his partner Dave Reynolds understand mobile home living is the last chance for many people, and he keeps expenses and rent as low as possible. If he buys a park with a swimming pool, he shuts it down to save on expenses and liability insurance. Laundry rooms and vending machines? Forget it. Rolfe and Reynolds fill vacant spaces with used trailers they can rent out cheaply. Rolfe says he and his partner are making a “contrarian bet on a poorer America.” The bet is paying off handsomely so far, with annual returns of 25%. “By catering to those living on the economic margins,” writes the New York Times’ Rivlin about Rolfe and Reynolds, “their parks generated more than $30 million in revenue last year. More than half of that was profit.” This is not coupon clipping. But if you’re interested in potentially great returns, a great place to start is MobileHomeParkStore, which has “for sale” park listings located all over the country: all shapes, sizes, cap rates, and price ranges. Just remember: as the economy gets worse, this bet may go from contrary to expensive. Good luck and happy hunting in the trailerhood. Poverty in America is almost sure to rise in the next few years, as the United States slides nearer to the brink of economic collapse. Don’t believe it could happen here? Watch our new documentary, Meltdown America. Using the harrowing stories of three survivors from Zimbabwe, Serbia, and Argentina, it shows how stealthily a major crisis can creep up on you—and why the US may well be the next domino to fall. If you haven’t yet, watch it here.last_img

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