“MHC will remain the best dollar-for-dollar value in residential rental until innovation invents an alternative,” Bradley Rymer told Multi-Housing News.
The CFO of Haven Capital Ventures, a private real estate investment firm, is convinced that, despite the current tight financing environment, investors with the right approach and resources can find lucrative opportunities in the market.
Haven Capital Ventures recently launched a $20 million fund targeting manufactured housing communities in emerging areas. In the interview below, he explains why MHC investment continues to provide a cushion against economic shocks.
READ ALSO: How Havenpark Is Enhancing the MHC Resident Experience
Why is manufactured housing a safe harbor?
Rymer: It’s worth keeping in mind that we began 2023 in an economic cycle that was, unfortunately, at another low point. Ten-year real estate cycles are a thing of the past and will continue to shrink moving forward, and identifying this pattern is the first line of defense when investing. As with any cycle, though, success largely depends on your investing plan. The aftereffects are nothing new to a seasoned MHC investor seeking high-leverage loans. For those basing returns on leverage in this sector, the road ahead may be tough. This is especially true if you’re looking to buy into a seller’s market that is still clinging onto the traction of the previous year’s unrealistic purchase price activity.
As an MHC investment consultant and former executive at a top five portfolio company, I cannot stress enough the fact that leverage is based on community operational NOI—not total combined revenues. Understanding this difference will drive return potential. No matter how you invest, we strive to educate the masses because it benefits the tenant base and investment community. The primary objective for MHC investing has been to eliminate negative stigmas associated with it, while providing affordable and sensible housing options.
However, there’s also reason for optimism. Lofty pricing expectations are feeling the lack of traction from the shrunken buyer pool as we move on in the second quarter of 2023. While lending is scantily available, there are positive signs of a gradual recovery. Government initiatives on manufactured housing, coupled with financing programs, will help investors turn a trailer park into a manufactured home community.
That said, value-hunters have become scarce, and leveraged investment strategies are gasping for air. Existing portfolio owners have retreated from growth initiatives and are focusing on the future, investing organically in community improvements to boost value on the flipside of this forecasted 2-to-3-year cycle.
Do you believe the MHC sector is the lowest-risk and most recession-resistant niche in real estate? Why?
Rymer: MHC lot leasing is the most affordable way to rent residential real estate. After removing the general stigma surrounding MHCs, society will notice that this option can provide a collectively desired privacy within a land space that is not four walls. Residents will rarely find an affordable option in any economic cycle with a sense of ownership, privacy, infrastructure, parking and, when available, amenities. Consumers want to conserve.
For investors with a lucrative plan, MHCs have remained stable throughout. The inherent characteristics of an MHC provides a natural safe harbor in the face of any threat—economic or contagion.
You mentioned the stigma around mobile home park investing. How exactly can the sector repair its reputation?
Rymer: The increasing investment and positive attention in the affordable housing sector—coincided with notable institutional-grade investment—contributes to the recent mitigation of the negative stigma surrounding MHC operation. Investors are transforming properties into livable communities, ridding them of the negative presumptions.
Contrary to bad press, residents experience upgraded security, infrastructure and amenities while the surrounding neighborhoods experience higher ratings in the technological era. Urban sprawl pushes value out and increases property values.
Ultimately, it is the residents themselves who form the backbone of these communities. Property owners who offer affordable rent with embedded amenities are instrumental in driving tenancy and promoting greater acceptance of the sector.
To what extent do you expect the MHC sector to be impacted by the brewing recession?
Rymer: As many reports have revealed, the MHC sector not only weathers the storm of economic downturns, but it thrives in them. Recently, we have used proprietary analytics in concert with very reputable data sources to determine that the MHC sector has a commanding performance history over the major commercial real estate sectors, no matter the condition of the economy.
We use advanced tools to formulate data points and develop reliable, universal keys to triangulate critical factors that contribute to strength and endurance in the sector. This is a key time, within a short window… MHC investment has become mainstream as a result of the published cash flow health, therefore increasing valuations, triggering appraisal hikes. Sellers have been made aware of these trends.
Financing is more difficult than usual so many investors have retreated, leaving only a small pool with the unique capabilities to identify and acquire what remains on the market at investment-worthy price points. Otherwise, it’s about finding the needles in the haystacks.
The White House announced major incentives to promote manufactured housing production and to remove barriers to mobile home ownership. Could this be a gamechanger for the sector?
Rymer: While there is potential for significant momentum, it’s important to consider the historical traction of government stimulus efforts in this sector. For manufacturers and homebuyers, we can expect eventual relief. Pricing liberation and financing for consumers will coincide. How this translates to community ownership, where these homes reside, is only speculative.
For community owners, financing via government agency options—Fannie Mae and Freddie Mac—specific to MHC, has evolved in the past 5 years. The evolution took two years starting in 2017, following when they reached out to the major owners to standardize underwriting. The acceptable characteristics of community composition under these programs only covers a fraction of the existing 43,000 community assets in the MHC sector. Outside of that, the financing options are banks, credit unions or private financing. Additionally, as the economy experiences volatility, confidence in the assets wavers, leading to a decrease in incentivized investment, yet the net effects spur an increasing need for affordable housing.
Owners and investors use their capital to elevate the habitable attributes of the living environment for the tenant, not returns. Some cities offer relief to tenants with a shared grant or similar program. Contrary to common belief, increasing rent is not an attempt to force tenants to stay beyond their financial means, but rather a joint effort to offer affordable options that are below the market average. After all, what is gained by being the highest rent, comparably speaking, with substandard options?
What areas are you targeting for your Haven Fund II portfolio?
Rymer: The Haven Fund II MHC portfolio seeks out unique investment opportunities using an analytical approach that provides access to both public and private listings within a proprietary, real-time database. With a specific focus on the Midwest, Mid-Atlantic, Central Plains, and certain Gulf Coast regions, the portfolio harnesses the power of technology to uncover hidden geographical anomalies that might otherwise go unnoticed.
What are your expectations for the manufactured housing sector for the mid and long term?
Rymer: Over the past decade, there has been significant growth in the MHC sector with exponential year-over-year increases in notoriety. It is expected that financing will continue to drive investment activity within this sector. This drives valuation reporting and periodic purchase prices.
In the long term, after the cyclical inflation tempered peak pricing in 2022, it is expected that in the next few years, the decrease in investor tolerance will result in a decline in transaction volume. By 2025, a considerable portion of the investment-grade MHC assets are likely to have been traded or have owners who have realized their true value, leaving only those undiscovered assets as the remaining true value propositions available. This will leave the undiscovered assets to the company with the tools and experience to find hidden value in the remaining properties.
