Why Mobile Home Parks are a better Passive Investment for Retirement?
Real estate is a great investment for retirement and can be passive if you know the right way to do it. The saying that 90% of millionaires become so through real estate is true. It is a great accumulator of wealth when done right. Many people think of single-family residences when thinking of real estate but often neglect better-performing niches like mobile home parks.
Common Pitfalls in Retirement Planning
I was shocked to find out that only 6.7% of American tax filers reported owning a rental property. Even more shocking is that 66% of Americans own their own homes. This suggests that Americans primarily view real estate as a place to live, even though most homeowners consider their homes a main part of their retirement savings. More disturbing is that Americans have almost 50% of their retirement wealth tied up in their primary residence. To capitalize on that equity, they either need to sell or take out a line of credit, which only adds more debt burden to a retirement plan.
They just never connect the dots on taking the next step and looking at real estate as the main driving force behind their wealth accumulation and retirement cash flow.
In contrast, 63% of Americans currently have investments in stocks, including mutual funds or retirement accounts. For high-income earners, 84% of households earning over $100k own stocks and mutual funds as part of their retirement plan. They view it as their main source for accumulating wealth for retirement.
Many high-income earners believe that investing in stocks will provide them their path to retirement and financial freedom. Earning a high active income at a job can be a distraction from the real goal: cash flow, appreciation of wealth, and freedom. Earning a high income may make you rich, but it won’t make you wealthy. A high income can make you believe that you will be okay in retirement, but that’s not always true unless you do something with that income. Not just save, but invest. Invest in what? As I found out, 84% of high-income Americans believe it’s stocks, mutual funds, and typical stock-based retirement accounts.
Is This the Best Option?
I considered it might be until I researched the return rates and fees charged to earn that rate on a typical investment. When looking at stocks before any fees, the average return of stocks over the last 20 years is just over 9% annually. When considering management fees of 0.5% to 2%, you could be looking at around a 7% to 8.5% return in growth of your money. That is just in growth of value, no cash flow, no monthly or quarterly payouts. That is the appreciation growth of your money sitting there untouched by you.
But what if you want to touch your money? What if you need to spend money? Well, that would decrease your nest egg invested, and although you will get the same % return, it will be on a smaller nest egg, which decreases your overall retirement.
That’s the problem with stocks: they don’t pay you to own them. Their entire value proposition is just a % rate of return on the investment if you never, ever touch it. As a way to combat this, many look to dividend stocks. These stocks will provide both growth and a quarterly payout that can be used as cash flow to fund retirement. These stocks on average return less than regular stocks. Over the last 20 years, they returned (excluding dividends) 6.1% with an average dividend rate of 3.8%, putting you around 9.9% on average for the last 20 years. So 6% and 3.8%—that’s what you would get each year on your money invested in stocks.
To me, this doesn’t seem logical, nor does it seem like the ideal option for high-income Americans looking to retire with the same lifestyle they are currently accustomed to. Yet these are the common options for retirement for the average American. Although they may make a great addition to a balanced retirement portfolio, too many Americans rely on them because it’s all that was taught to us.
Advanced Options for High-Income Earners
Many high-income earners are the first in their family to earn the level of money that puts them in this class of earner, coming from low-income or middle-class families. Stocks, retirement accounts, IRAs, 401Ks, and buying a house to live in for 30 years were what was taught growing up.
You don’t know what you don’t know.
As a high-income earner, there are more advanced options, but you will need access to them, typically through an advisor and confidence in that asset class. Private equity investments, real estate syndications, funds, fund of funds, and the list goes on. Yet stocks still make up the majority of High Income Earners Retirement.
Financial advisors recommend 4% of your retirement funds as a drawdown for annual living expenses, under the assumption you can draw that down and replace it with the nearly double return on investments you should get each year. But that would mean you need $1,000,000 invested to have an annual expense of $40,000. That is a very low annual expense—just over $3,500 per month to live. Realistically, for the typical high-income earner, it is $180,000 per year in expenses needed to be able to afford to live the life they are accustomed to, which is closer to $4.5 million saved.
What happens if the market underperforms during a given year, the market crashes, or an unexpected expense or life event occurs, and your investment balance becomes lower? Well, then your expected 7%-8.5% post-fee return becomes less, which means you need to take the money from your principal balance, leaving less to earn your required lifestyle payouts for your retirement. The more this happens, the less you have, and the less you earn, until eventually, it becomes $0.
That is the assumption many make: to spend all their money. What happens when you spend it before you expect too or are forced to cut your lifestyle to accommodate this shortfall? What happens when you need to hold on to your current lifestyle? What income will you receive during retirement, or are you always going to be looking to draw down on the growth of your principal asset balance?
Cash Flow and Growth: The Key to Retirement
I firmly stand by the statement that you need cash flow and growth to retire. Even better, you need cash flow and growth that are not dependent on one another. The cash flow stays the same even if the asset value declines.
The best way I found is real estate, but NOT through single-family rentals or even owning and operating your own real estate rental portfolio. The best way for Americans who are working, earning, and saving is to focus on their active income, their career growth, and not distract themselves with operating a rental portfolio or even buying them and handing them off to an unmotivated third party to manage. Rather, place that income into passive investments that will provide cash flow, appreciation, and tax benefits. This way, you are able to continue feeding this investment asset over many years with your income and accelerate your retirement fund. Decrease the time frame to when you are financially free to do as you wish without the worry of retirement and becoming a financial burden to your family.
There are many ways to start, but showing you what options you have when you are earning a high income and have money saved is the priority. Americans earning over $200,000 per year are at a unique advantage over the average American.
The Case for Mobile Home Park Syndications
When you look at a passive mobile home park investment, you get paid multiple ways. Let’s say you are invested in a syndication, a passive way of purchasing a stake in a mobile home park. They are open to accredited investors and also non-accredited if you meet other criteria. You would be surprised how available these options are once you start looking and setting yourself goals to participate. You will typically get a preferred rate of return, something that the operator of the deal will pay out on a monthly or quarterly basis from the rental income. So, for example, you may get an 8% preferred rate of return on your investment, split into quarterly payments. You will also receive a % of the equity in the deal. So when it comes time to sell or cash out, not only will you get all your initial investment back, but you will also get a portion of the proceeds. Typically, these amounts range from an additional 5% to 10% annualized, sometimes more with riskier and rarer deals. However, if you look at the preferred rate of return of 8% and, let’s just say, an annualized return of another 8%, that’s a total return on your money of 16%. To be clear, these are all post-fees. These figures are something you should be looking for in mobile home park passive investing, after the fees of the operator are taken.
I have one more tip that many don’t know: I speak at greater length about it in another post. However, these investments often go on into perpetuity. What does that mean? Well, often these syndications are structured in a way that is unique and very beneficial to passive investors. Initially, you invest your principal amount, then the operator provides quarterly cash flow from the rental income. While they operate the deal, they improve it in various ways and increase the value over the course of five or more years. They then look to leverage that improved value with a refinance event. This event can typically return all of their investors’ principal balance and maybe even a substantial profit. Many think at this point, they got their money back and the investment is over, they are out of the deal. That’s how it usually works, right? Not in many of these structures. In fact, the operator, while refinancing, ensures that the new debt taken on by the bank is sustainable on the current cash flow the asset is earning, while still leaving a good amount for distribution to investors. The investors remain in the deal and still earn the cash flow distributions like before. Now often this amount is much less than what they earned before, sometimes the % ownership changes once all equity is returned to the investor. Regardless, passive investors stay as limited partners in the deal, continue to receive any cash flow distributions, continue to receive tax benefits, and one day when the operator sells, they will also get another payout on the sale proceeds based on their percent equity.
It’s a gift that keeps on giving.
Compared to stocks as a retirement option, this is much more aligned with what the goal should be: cash flow and growth. Cash flow that can be spent while not affecting the performance of the asset. Cash flow that comes in even after you have returned your investment principal back into your account to redeploy on a new deal. A perpetual cash machine that helps you achieve the freedom in retirement you deserve.
Another point that often goes unconsidered when placing retirement funds is the tax benefits of a certain investment and how it helps reduce tax liability of earnings. Now, I am no CPA, and everyone’s situation is different, but there are huge tax advantages when investing in real estate deals such as mobile home parks. Yes, even investing in a mobile home park syndication provides you with tax advantages for your share of the investment. There can be your typical depreciation, and some deals may offer accelerated or bonus depreciation that can be a huge tax windfall in the initial years of the investment. Discussing with your CPA the best options for you is a great place to start when wanting to learn how much a real estate syndication can help you reduce your tax burden.
Mobile home parks as an asset are a great addition to a retirement plan. The asset has proven to be extremely stable over the last few decades. The rental income generated by the asset is rising with inflation, providing a layer of protection from high inflation in our economy. If you have found the right operator to invest in, you can generally expect the park to perform similarly year after year. Mobile home parks have one of the lowest vacancy rates in the world of property rentals, often seeing tenants stay on average 10 years or more in the park. Collection loss is also one of the lowest, typically below 5%. Although they get a bad reputation for the demographic of people they serve and the locations they are in, they are often the unsung hero of the cash flow and retirement world. A good operator can keep a park cash flowing and paying investors for years with proper planning and budgeting for expenses. Mobile home parks are also a sector of real estate with a very limited supply, very few being built while many are being redeveloped. However, although mobile home parks may be dwindling from the American landscape, the low-income American demographic is only growing, leaving a huge need for affordable housing in America. While it may not be profitable to build large apartment complexes and housing developments in rural areas of the US, often income levels don’t support those mainstream housing options. Mobile home parks provide that gap in these areas, often having high demand from locals looking for an alternative to high rents or travel into more dense metros to find affordable housing.
Although mobile home parks are considered to be a much more complex investment to operate than a single-family home or apartment, with the right operator and the right investment structure, it can be a completely hands-off and passive investment that provides cash flow and growth for retirement.
As a high-income earner, you are in the driver’s seat of your retirement future, with options open to you that many will never have. The worst part is many high-income earners never save or invest any different than the average American, which still sets them up for the same stress and worry about retirement as the American who earns much less. This should not happen after all the hard work put in to rise to that status.
When the time comes that you want to slow down and just be free—free to travel or spend more time with your family, live with your children again and take care of your grandchildren, give your family experiences they will never forget, explore the places you never had a chance while building your wealth—will you have the income from cash flow to live that lifestyle? Are you confident that you can do this without having to draw down your principal retirement balance and cannibalize the nest egg that provides that annual or quarterly payout?
Looking into a mobile home park syndication could be the answer to provide you exactly what you knew you needed but didn’t know where to start. Don’t just settle for growth and no cash flow. Cash flow is the key to lifestyle, while the growth or appreciation of your principal is the key to wealth. Placing your money in an asset that only provides one will over time be detrimental to the other. Rather, consider options that provide both, and to make it even better, consider the option that even sprinkles in tax benefits. Mobile home park syndications can be a great option for many high-income earners and provide the trifecta of cash flow, growth, and tax benefits.
– The MHP Operator
Leave a Reply