Due to their low prices, new real estate investors often consider buying modular homes. With this approach, you can start buying rental properties without a ton of capital.
While modular homes have the potential for great ROI, they tend to be terrible investments in terms of time and effort. The hassle of managing them doesn’t outweigh the ROI benefits. To invest successfully, I suggest buying modular homes, renting them, and selling them on-contract to the tenants.
In this article, I’ll explore some more considerations about investing in modular homes. Specifically, I’ll cover each of the following topics:
- Modular vs. Manufactured vs. Mobile Homes
- ROI Benefits of Investing in Modular Homes
- Challenges to Investing in Modular Homes
- Modular Home Investment Strategies
- Final Thoughts on Modular Homes
Modular vs. Manufactured vs. Mobile Homes
A lot of confusion exists around these home types….So, before diving into a discussion of modular homes as investments, I want to outline the differences between these types of real estate.
The primary difference between modular and manufactured homes comes down to construction, whereas mobile refers to a naming/age convention. Here are the details:
- Manufactured homes: These homes are built in a factory, and then they’re transported to the physical home site. Upon arrival at this site, they become largely indistinguishable from homes built on-site. As such, people generally don’t move these homes after they’ve been initially placed. From a regulatory perspective, these homes need to be constructed in accordance with Housing and Urban Development (HUD) federal building codes.
- Mobile homes: These home types are simply manufactured homes built before June 15th, 1976. After that date, they became obsolete as a result of HUD policy changes. Today, manufactured homes have replaced mobile homes.
- Modular homes: Similar to manufactured homes, these homes are built in factories prior to delivery to a home site. However, these homes have chassis—either permanent or temporary. “On-frame” modular homes have a permanent chassis, while “off-frame” ones have a temporary chassis. This distinction will determine how builders assemble a modular home at its destination site.
Of note, as you research potential modular home investments, you’ll likely hear the term “double-wide.” This means that a builder has hooked two modular homes together to provide more living space.
ROI Benefits of Investing in Modular Homes
At first glance, modular homes seem to have tremendous ROI potential. For example, you can purchase a used one for around $5,000. If you charge $700 per month in rent, a realistic rate, the returns seem astronomical. Assuming a 10 percent net profit margin, you would take home $70/mo. Multiply that by 12 months, and you net $840, which translates to a first-year ROI of roughly 17 percent.
$840 may not seem like a ton of money, but factor scale into those returns. If you can buy one modular home for $5,000, buying ten for $50,000 moves that decimal point to the right one place. Now, your 17 percent return puts $8,400—not $840—in your pocket every year. Not bad.
And, these returns don’t even assume leverage. Purchase those modular homes with debt, and you can amplify your returns significantly. With back-of-the-napkin math like this, it becomes clear why so many people view modular homes as incredible investments.
Challenges to Investing in Modular Homes
But before buying a portfolio of modular homes, you need to look beyond the above numbers to the reality of investing in this property type. While yes, modular homes offer the potential for high returns, they typically have absolutely horrible returns in terms of time and effort. Here’s how it’s worked in my personal experience.
First, you buy a fairly inexpensive modular home. Next, you find a tenant to move in, and you start collecting rent. This is where the rubber hits the road, and those rosy numbers from above start to fall apart. More precisely, the reality of investing in modular homes comes with the following major challenges:
If you place your modular home in a community, you need to pay a community fee and a lease on the actual parcel where you place the home. These can be very expensive fees relative to rents, as it’s not uncommon to pay between $400 and $500 per month. And you owe these fees whether you have a tenant in the property or not.
With a tenant in place, these costs cut into your margins. Without a tenant, these costs can rapidly crush a landlord’s reserves.
Unfortunately, you’ll often deal with tenants in modular homes who don’t pay rent on time—or at all. In these situations, you need to pour time and effort into rent collections. Or, you can pay collection agencies to do it for you. With the first path, you spend tons of your own time pursuing rent payments. With the second, you end up paying tons of your own money to have someone else pursue collections on your behalf.
During these collections efforts, you still need to pay your community fees and land lease. This means that, while you’re running around trying to collect rent, you still need to figure out how to pay your bills.
Do single-family homes have fixed costs, too? Yes, of course. But, a traditional home’s non-mortgage fixed costs typically aren’t nearly as large a percentage of rent. And while you can certainly have tenants who don’t pay rent with these properties as well, you’re more likely to require collections efforts with modular homes.
Bottom line, investing in modular homes requires a lot of work for not a ton of money. And relative to the rent you’ll collect, the costs you need to pay can be extremely expensive—especially if you don’t have tenants paying rent on time.
Modular Home Investment Strategies
Despite these challenges, I do see some potential paths to successfully investing in modular homes. Each of the below three investing strategies could work well, depending on your unique situation and financial objectives:
- Make a deal with the community: Before committing to placing your modular home in a community, you can negotiate a fee deal with the management. Rather than pay the community fee every month, sign a contract to pay only when you have a tenant in the property. That way, if the property’s vacant for a couple months, you limit your vacancy-related costs.
- Place a modular home on its own land: As discussed, modular home community and land lease fees eat into your margins pretty heavily. Alternatively, you can purchase a parcel of land A) with an existing modular home, or B) and place your own there. This saves you fees, but the associated drawback is that you actually need to buy the land.
- Sell to a tenant on-contract: Many modular home tenants want to purchase properties but don’t have the cash. As an investor, you can sell to these tenants on-contract. They occupy the property, and you apply their monthly payments to the agreed upon purchase price. Essentially, you act as a lender and have the tenant pay community fees him- or herself, saving you those costs. Once the tenant makes all payments, you transfer the title. If he or she defaults, you repossess the property.
Final Thoughts on Modular Homes
Due to their time- and energy-consuming natures, I typically don’t recommend modular homes as good investments. But, successful investing strategies do exist if you’re willing to deal with the associated challenges.
Learn how to make money flipping real estate with us by attending our next webinar.