INVEST TO PROFIT FROM A RECESSION

Written by Posted On Monday, 22 July 2019 10:56
When the tornado sirens go off, everyone heads for shelter - well, almost everyone. 
 
Those in the line of danger will drop what they’re doing, gather their families, and hide from the storm.  There are the crazy few, however, who do the opposite and actually run towards the danger.  These storm chasers, both amateur and professional, get as close to disaster as they can ... all with their individual motivations, all with something to gain.  Some do it for the thrill, some do it as part of scientific research, and some do it for the money - uploading their videos to social media to garner views or selling them directly to news outlets.      
 
In a recession, most people also tend to run for the hills, hiding out until the storm passes.  Many will unload stocks and other Wall Street products to slow the hemorrhaging of their portfolios in an economic downturn.  For most, recessions are about surviving and weathering the storm.  If the gathering clouds are to be believed, some may already be preparing to take shelter as a recession may be right around the corner.  
 
As of July of this year, the U.S. is officially in the midst of the longest economic expansion in history going back to 1854 when expansions and recessions started being tracked according to the National Bureau of Economic Research, breaking the record of 120 months of economic growth from March 1991 to March 2001.  With the average expansion lasting around 3.25 years, it seems we may be long overdue for another recession.  
 
Just like storm chasers that feast on disaster, there’s a group of investors that actually run towards danger and invest for a recession.  These investors profit both during prosperous times and downturns.  These investors allocate their capital towards a commercial real estate subsegment that thrives during a downturn - that being mobile home communities (“MHCs” or mobile home parks or manufactured home communities).  
 
So, why MHCs as a recession strategy?  Andrew Lanoie of Four Peaks Capital Partners, a prominent player in the field, explains, “It’s simple supply and demand.  New mobile home parks are not being built.  Since the Financial Crisis, the supply of affordable housing has been severely constrained with demand far outpacing supply with the gap ever-widening.  This problem is more acute in the MHC space where due to strict zoning laws, very few new MHCs are being developed.  During a recession, tenants will gravitate towards more affordable housing solutions. Since mobile home parks are the most affordable option, this results in higher demand from prospective tenants.”  
 
The data backs up Andrew’s position.  According to PGIM Real Estate research, a unit of Prudential Financial Inc., only 10 new MHCs have been built in the last two decades.  Compare that to apartments buildings, where 350,000 new units were built last year. While there’s a never-ending supply of new apartments, there is a declining supply of MHCs where not only are new ones not being developed but some of the existing ones are redeveloped into other uses.   
 
So while affordable housing, in general, thrives during a recession, what makes MHCs stand out even among this class?  Compared to apartments falling within the affordable housing segments, MHCs offers the following advantages over apartments:
 
High Demand
As the most affordable among all segments of affordable housing, the demand for MHCs is consistently strong in good times and bad, and the outlook sees demand continually growing stronger.   Over 20% of the U.S. population has a household income of $20,000 per year or less (which is nearly the poverty line). On top of that, 10,000 baby boomers are retiring per day into social security checks that average only $14,400 per year. The demand for affordable housing literally grows daily, and this will continue for over a decade, according to most economists.  MHCs are attractive because not only are they the most affordable form of housing, but unlike apartments, tenants can still have pride of ownership since they can own the structures and sometimes the land.
 
Low Turnover
Despite the name, mobile homes are not actually mobile.  Only about 2% of homes leave MHCs per year, versus the average apartment tenant yearly turnover, which was 48.6% in 2018, according to the National Apartment Association.
 
Lower Operating and Capital Expenses
MHCs have lower operating and capital expenses due to fewer maintenance costs and amenities.  According to Andrew, “We rent land, which is cheap to maintain.”
 
Less Volatile Rents
With reduced competition compared to apartments, MHCs see very little volatility in rents.  Andrew appears to relish this lack of interest in the MHC space by other investors.  “Let’s face it; nobody stands around a water cooler talking about MHCs.  It’s unsexy. I get it.  But that’s exactly why we’re in the space.  It’s a cash cow. I’d rather have an old reliable work truck to get me to the top of the wealth hill than a fancy sports car that quits halfway up.”
 
Prepare now for the next economic downturn, instead of running for the hills when it hits.  Embrace the inevitable and invest with a recession in mind.  Invest to profit from the recession.  And for high, stable recession-proof returns, nothing beats MHCs.
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