Architecture is one of my favorite things about investing in real estate. I love looking at the aesthetically pleasing properties. I’m not alone in putting value on the property’s form. Most Class A properties – the highest quality properties in the best locations – tend to trade in at a higher value compared to the less attractive properties.
This focus on aesthetics can cause investors to overlook properties that have historically been better investments. One category of property that can be deceptive is manufactured home communities. The sector has quietly been one of the best performing real estate classes for investors over the past two decades.
Image source: Getty Images.
Attractive growth
Manufactured housing communities lease plots of land to owners of manufactured homes. Some also rent out the manufactured homes they own. These communities tend to have very stable rental income due to the high cost of moving a manufactured home to a new community. This high conversion cost also allows the community owner to pay annual rent increases, even during a recession. Due to elastic demand, manufactured home communities have had above-average growth in net operating income (NOI) over the past two decades:
Data source: Sun Communities investor view.
As this graph shows, the average manufactured housing community has developed a NOI level of 4.8% CAGR since 2000. This is second only to the self-storage industry during this time frame. It’s more than twice the rate for traditional real estate investments such as industrial, multi-family, retail, and office.
superior performance
Despite its resilience and outperformance, not many big investors focus on the sector. There are currently only three publicly traded REITs (real estate investment funds) focused on industrialized societies. Leader Sun Societies (SUI 1.15% ). It has interests in 602 manufactured home communities, RV parks, and marina properties across 39 states.
Sun Communities’ focus on manufactured residential communities has generated significant gains over the years. The Residential real estate Same community NOI has grown at a 5% compound annual rate since 2000, outperforming the sector and all other real estate classes. The company complemented its organic growth with a consolidation strategy. It has steadily taken over manufactured condominiums and other types of unfamiliar properties such as RV parks and marinas. These catalysts have enabled the company to achieve higher total returns compared to other REITs and the broader market over the past decade:
Data source: Sun Communities investor view.
Sun Communities currently operate as one of the Top Five Performing REITs of the Past Decade. To put its outperformance in perspective, Sun Communities has grown a $10,000 investment made 10 years ago to nearly $65,000. The same amount of $10,000 to invest in Standard & Poor’s 500 It would be less than $40,000 today.
REIT has a lot of future growth drivers. Manufactured housing communities, RV parks, and marinas remain highly fragmented industries. This provides the company with a significant growth path as it continues its consolidation strategy. It recently entered the marina sector and quickly became a pioneer and standardizer. Meanwhile, it is entering the holiday home gardens sector in the UK. It will be the second largest operator in a sector where the top 10 platforms control only 7% of the market.
Underrated real estate investment
Manufactured home communities achieved above-average income growth due to high conversion costs and recession resilience. This has benefited Sun Communities, the industry leader, which has generated massive total returns by focusing on strengthening this segmented segment. It still has plenty of room for growth, especially given its expansion into other types of real estate, making it a REIT that investors won’t want to continue to overlook.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
