Billionaires Are Jumping On This Niche Investment -- Should You?
"Are you going to retire after you sell your company?" I once asked the chief financial officer of a company about to be sold for a huge sum.
This surprised me at the time -- but over the next few years, I realized that many people who have the drive and acumen to build vast fortunes aren't even motivated by wealth. Yet it seems that monetary rewards are a result of their actions nonetheless.
This realization made it clear to me that the key to investing success was to learn from and try to follow the examples of the wealthiest businesspeople and investors. Most of the self-made millionaires I know made their fortunes through real estate investments, and many of my small-business friends use real estate to supplement their income.
This piqued my interest in real estate investment and led me to start a successful part-time marketing business. Through my hands-on experience, I've noticed a distinct shift in residential real estate trends.
From around 1980 to 2007, homes kept getting larger and larger, culminating in so-called McMansions -- huge new homes on tiny lots squeezed up right next to their neighbors. After the real estate crash, financial crisis and ensuing economic plunge last decade, consumers began to seek smaller homes that were easier and cheaper to maintain.
And just like the growth trend that brought us McMansions, the downsizing trend is leading in the opposite direction, to the smallest and cheapest homes available -- mobile homes. As of 2012, about 6% of Americans lived in mobile homes, according to the Census Bureau.
While not classified as real estate per se, mobile homes serve the same function as traditional residential real estate. As you might expect, Warren Buffett jumped on this trend early with his purchase of Clayton Homes, the largest manufacturer of mobile homes, in 2003.
Hedge and private equity funds are starting to ride this demographic trend by investing in trailer parks. A recent Bloomberg article named Sam Zell's investment trusts and the Carlyle Group as two of the high-profile investment groups stepping into this market.
As I see it, there are four main reasons that trailer parks make investment sense:
| 1. Demographic Shift |
 Everything is getting smaller. My local Ikea is showing off a 100-square-foot house concept. This would have been laughed at before the financial crisis, but today, it's an accepted trend -- and many consumers think it's a great change. Trailer homes are the ultimate in downsizing. |
| 2. Post-Recession Economic Reality |
 Many families have yet to recover from the Great Recession. These consumers might not qualify for mortgages or be able to afford a single-family home. Trailer homes provide needed shelter for a fraction of the cost of other choices. The average mobile home rents for under $400 a month, and they give residents the feel of a single-unit home for less than what they'd spend on many apartments. |
| 3. Rising Interest Rates |
 Interest rates have finally started climbing, which will likely put home ownership out of reach for even more consumers. While rates have been rising, mortgage applications have plunged. People have to live somewhere, so more people are turning to trailer homes -- the most logical choice, in many areas of the country -- out of necessity. |
| 4. Following The Billionaires |
 As I mentioned, some big players are investing in mobile home parks -- and following the moves of top-tier investors is a time-honored strategy.
I think this trend is in its infancy, and just like with actual real estate, there are multiple ways to invest. For investors who aren't interested in buying and managing their own properties, there are REITs (real estate investment trusts) that specialize in this niche.
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My favorite is the largest REIT in the space, Zell's Equity LifeStyle Properties (NYSE: ELS). With a market cap of $3.4 billion, ELS is the largest mobile home park owner in the country. The REIT owns or is a partner in close to 400 mobile home parks and more than 140,000 sites across the U.S.
ELS recently posted strong first-quarter results and has $714.6 million in revenue over the past 12 months. The company also continued its streak of occupancy growth, now up to 18 quarters, and its RV portfolio grew 6.6% in the quarter. With a payout ratio of 78%, the trust throws off a forward dividend yield of 3.2%.
A look at the technical picture shows ELS has been trending upward since late December. Shares are trading solidly above the 200- and 50-day simple moving averages, but the Relative Strength Index isn't pushing into the overbought zone.
Risks to Consider: A jury recently awarded a $100 million victory to plaintiffs in a lawsuit against the trust's California Hawaiian Mobile Estates. The suit alleges the company failed to maintain the property, but ESL is appealing. Always use stop-loss orders and diversify when investing.
Action to Take --> It would have been a stroke of good fortune for investors if the California Hawaiian suit had knocked ELS' price down -- but the stock market doesn't think much of the verdict, as price barely budged when it was handed down. As it is, my strategy is to buy on a breakout above $41.50 with stops at $39.50 and a 12-month price target of $46.
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