The New Factory-Built Trend for Your Rental Portfolio!

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Manufactured housing appears to be making a comeback. Boosting the supply of prefab homes is a major part of a new government initiative. Factory-built housing is also getting the attention of real estate investors looking for hard-to-get rental homes.

Hi, I'm Kathy Fettke and this is Real Estate News for Investors. If you like our podcast, please subscribe and leave us a review.

The Biden Administration announced its Housing America initiative last month. One component of that initiative is to increase the supply of manufactured homes. Other components include things like down payment assistance, the rehabilitation of existing homes, new loan options for manufactured homes, and collaboration with local governments to reduce zoning limitations. (1)

Prefab Homes Gaining New Respect

The manufactured housing component could be a game changer for a market that has so few affordable options. And with improvements to the manufacturing process, prefab homes are losing the stigma they once had for being inferior to site-built homes.

In 2020, a HUD report says: “Factory-built housing has undergone many physical changes that have made it more similar to, and in many ways indistinguishable from, conventional site-built housing… Quality improvements in construction and installation practices have increased durability so that the life expectancy of factory-built housing increasingly is comparable to that of site-built or onsite housing.” (2)

The Manufactured Housing Institute says essentially the same thing. In a 2021 industry overview, it says: “Today’s manufactured homes can deliver outstanding quality and performance at prices that are up to 50 percent less per square foot than conventional site-built homes. These savings allow more and more Americans to own their own homes.” (3) That also applies to investors who might want to buy more affordable rental homes.

Cost Savings for Prefab Homes

So what are the price points for manufactured homes compared to site-built homes? The Institute says the average price of a manufactured home is $81,900. If you break it down to price per square foot, that’s about $57 compared to $119 for a site-built home. Average size for a prefab home is about 1,450 square feet. The average for a site-built home is 2,500 square feet, so the price of a prefab home is about ¼ the cost of a site-built home.

According to rebusinessonline, manufactured housing accounts for about 5.5% of U.S. homes. They also accounted for 9% of home starts last year. That’s about 95,000 homes, which is double the number of prefab homes shipped in 2011.

Strong Investment Activity

According to Chad Hagwood at Lument, investors are paying attention. He said in an interview for rebusinessonline.com: “The market for investment sales is the strongest it’s ever been.” He says: “Having been an active participant in this industry for almost two decades. The sales volume, the interest, the activity is unlike anytime I’ve ever seen.” Lumen provides loans for multifamily, affordable housing, and senior housing. (4)

Lument recently produced a white paper on the manufactured housing industry. It begins with comments about the need for affordable homes and the “growing popularity of lower density living” and how that’s providing a new option for both homeowners and investors. (5)

It says: “The combination of robust cash flow growth, particularly in Sunbelt and Western markets, cap rate compression, and liquidity provided by the GSEs makes a compelling case for manufactured housing community acquisitions and refinances.”

In the section about revenue trends, it says the inventory-weighted average rent of $840 for prefab homes in 31 markets compared favorably to other rentals in the same areas. That includes rents of about $1,100 for C+ to B- apartments, and $1,400 for overall average apartment rents.

Pros and Cons

Let’s take a look at the pros and cons of manufactured housing.

According to that HUD report:

  • Modular housing construction is faster and takes place in a climate controlled environment which saves time and avoids unpredictable weather events and damage to materials.
  • Due to improvements in design and quality that make manufactured homes more similar to site-built homes, public perception has gotten better (although it still needs improvement).
  • The trend could build quickly as potential homebuyers, renters, and investors learn more about this type of housing.

Getting a loan for a prefab home is also getting easier. Last month, the Federal Housing Finance Agency announced that Fannie Mae and Freddie Mac would be allowed to purchase loans for single-section manufactured homes.

On the other hand:

  • Builders are concerned about switching to factory-built homes because they’d lose workers they may not be able to get back, if needed.
  • Transportation of modules can be expensive.
  • Pre-construction costs could be significantly higher - as much as 50%.
  • Public perception of manufactured homes needs further improvement to prevent NIMBY attitudes.

NIMBY Issue Somewhat Neutralized

The NIMBY issue has been somewhat neutralized by recent trends in minimalist living. Tiny homes have been popular for people who want to simplify their lives, and the lack of housing has encouraging many homeowners to add small rental units or ADU’s to their properties. Legislation in California makes it perfectly legal to do so on any single-family lot that’s big enough. There’s also some extremely innovative ideas for manufactured housing that are getting the attention of the real estate world.

We just interviewed the co-founder of Boxabl on our other podcast, The Real Wealth Show. (6) The Nevada-based start-up has a very unique product that addresses the transportation problem by making the unit “fold-up” for delivery. Once it arrives at its destination, it takes just a few hours to set up. There are also plans to make the smaller “casita” units modular so they can be put together into larger homes. The concept has caught the attention of Tesla and SpaceX founder, Elon Musk, who reportedly lives in one. We’ll have a link to that interview and the other reports in the show notes at newsforinvestors.com

You can also learn more about rental investing at our website by joining RealWealth for free. As a member, you have access to the Investor Portal where you can view sample property pro-formas and connect with our network of resources. That includes experienced investment counselors, property teams, lenders, 1031 exchange facilitators, attorneys, CPAs and more.

And please remember to hit the subscribe button, and leave a review!

Thanks for listening. I'm Kathy Fettke.

Links:

1 -https://www.housingwire.com/articles/manufactured-housing-is-key-to-affordable-homeownership/

2 -https://www.huduser.gov/portal/periodicals/em/WinterSpring20/highlight2.html

3 -https://www.manufacturedhousing.org/wp-content/uploads/2021/05/2021-MHI-Quick-Facts-updated-05-2021.pdf

4 -https://rebusinessonline.com/lument-manufactured-housing-communities-garner-investor-interest/

5 -https://www.lument.com/wp-content/uploads/2021/08/Lument-white-paper-manufactured-housing-2021.pdf

6 - https://www.realwealthnetwork.com/real-wealth-show-podcast/?utm_source=Podcast&utm_medium=Real%20Wealth%20Show&utm_campaign=2020wp-login.php%3Fredirect_to&reauth=1&wchannelid=nnhnv5t81j&wmediaid=gjwh7p0qfp

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