As a real estate and investment specialist,
I am frequently asked about current
market trends and ways to generate
passive income. As such, I am always on the lookout for investment alternatives in real estate
that that yield healthy returns. When discussing these alternatives with potential investors,
three real estate classes surface to the top of my list: Multi-family apartments, self-storage
properties, and manufactured home communities.
Multi-Family Apartments (MFAs) I meet people all the time who buy a home to either fix up and sell, or to rent out. Both of these are great ways to actively participate in real estate investing. However, I also meet a great number of folks who have full-time jobs and don’t have the time to actively participate in their investments. For these people, I recommend adopting a passive approach to real estate investing. Multi-family apartments (MFAs) offer a great alternative.
Passive investors in MFAs typically work participate in syndicates, whereby they pool money from passive investors. In short, the syndicate acts as the “active” partner in the deal, and “passive” investors fund it. The syndicate groups we work with tend to target older apartments in order to take advantage of the value-add aspects. Much like to home renovation shows where individuals purchase a home, fix it up, and flip it, value-add syndicators follow the same process, but on a larger scale. Generally, they can add value by renovating interiors and exteriors, and by hiring more sophisticated property management companies to improve operational efficiencies
Value-add syndicators commonly target a 10% cash-on-cash return in the form of quarterly distributions. They also target an overall IRR of 20% over the life of the project, which is typically a five-year hold upon which the asset is sold.
MFAs have additional advantages over other types of investing. To illustrate, MFAs can take advantage of economies of scale. For example, the operating expenses to run a 100-unit complex may not vary too much from the operating expenses of a 200-unit complex. In addition, MFAs that are Class B/C value-add properties tend to perform better in economic downturns. For example, newer-built (Class A) apartments tend to show occupancy drops of 15-20% in economic downturns. Class A monthly rental rates are higher than that of Class B/C properties, and as such renters are looking to lower their rent and frequently move to a less expensive apartment or move back home to reduce costs. Thus, B/C assets tend to be more resilient in economic downturns.
Self-Storage Properties Another asset class that I like are self-storage properties. Self-storage follows an attractive
investment model. It has a much lower cost to build than your typical real estate property.
Generally, a self-storage build consists of concrete, steel frames, and garage doors. There are
no plumbing or finish-out expenses for individual self-storage units. In addition, they are less
expensive to operate and maintain, especially in today’s marketplace where much of the
operation is automated. Another operational advantage of self storage is that turnover costs
are low. Unlike apartments, with self storage you sweep out the unit, provide a new lock, and it
is ready for the next renter.
In addition to these advantages, self-storage tenants tend to stay around. Some estimates indicate that a third of self-storage users rent their units for over three years. On the flip side of the long-term renter is the short-term nature of self-storage leases, which can be month to month. A month-to-month lease provides owners with quick turn-arounds and the ability to raise rental rents more frequently. Unlike apartments, which often have a break-even point at 65% occupancy, self-storage break-even occupancy hovers around 45%. For owners of selfstorage facilities, this translates to fewer financial impacts if several vacancies hit at one time. In a recent WSJ article, Ryan Dezember indicated that investors are “socking away money in self storage.” Like value-add apartments, self-storage facilities have a resiliency that is helping them gain popularity as attractive investments.
Manufactured Home Communities (MHCs) Manufactured home communities (MHCs), also called manufactured home parks (MHPs), are an often-overlooked asset class in real estate investment. However, as demographic trends favor renters, the need for affordable housing exists, and MHCs are filling the gap between renting and home ownership. This asset class has several advantages for the investor. David Thompson shares, “The rise of housing costs and overall living costs keeps affordability of buying a home at bay for many. More and more folks are retiring (10,000 baby boomers retire every day) with little savings and live primarily on social security to make ends. Low wage earners also cannot afford the rising cost of home ownership so their only options are low-rent apartment housing or MHPs. MHPs are an affordable option for many folks who need a place to live.” As America’s middle class gets squeezed, the growing demand for affordable housing helps to keep MHCs in the forefront as an alternative to traditional home ownership.
While demand for MHCs is high, supply tends to run low. Throughout the United States, there are roughly 50,000 MHCs, with only about ten new MHCs built in an entire year. As such, less supply helps to increase the value of existing parks and positions current MHC owners in an environment with virtually no competition from future MHC development.
Unlike MFAs and self-storage facilities, there is a lack of mobility in MHCs. Typically, the owner of a mobile home rents the space where his home sits. It is cost prohibitive for many mobile home owners to move their homes to another park, with costs ranging from $3,000 to $5,000. In general, the trip from the factory to the mobile home community is the only move that home will ever make. This limited mobility helps to keep rents steady for the owner of the MHC.
On investor returns, David Thompson shares, “Cap rates for the sector are typically higher than both apartments and self-storage. Costs are much cheaper since the owner of the MHC does not typically own the manufactured homes and just rents out the lots.” While lot rents can increase at a reasonable clip, mostly due to lack of mobility of the manufactured home, MHC owners also benefit from very maintenance costs, as the manufactured homes are not owned by the MHC owner.
If you like this, or any of the other sectors I’ve shared with you, one of the best ways to play it is through syndication. As a passive investor, you can invest with experts that know these asset classes well, and that frequently acquire and manage these properties to improve performance. Accredited status is required for many of these deals, but if you meet that criteria, you have an opportunity to put some of your money into what I believe are very attractive investment classes.
Reach out to me and we can spend some time understanding your goals and objectives to see if future opportunities are an interest and fit to grow your wealth. I think what you will find that these exciting asset classes can help to accelerate your financial goals much faster than you realized.