Self-Storage and Mobile Homes, the Perfect Odd Couple

Cash Flow Connections is focusing on both self-storage and mobile home assets with its latest fund. The two asset classes are seemingly an unlikely pair, but the firm says that they are both a good fit and complementary to each other, providing favorable risk-adjusted returns with healthy cap rates and value-add potential. The fund is still in raising capital, but Hunter Thompson, a principal at the firm, expects it to close with $6 million in commitments.

“The timing of all of this coincides well with the significant increase in prices that other asset classes have seen, particularly multifamily,” Thompson tells GlobeSt.com. “Many of the conversations we have had with investors reveal that multifamily has always been their preferred investment vehicle, but it has just become too challenging to make the numbers pencil. For example, many desirable multifamily markets are trading below 4.5% cap rates, while mobile home parks within 10 miles are trading at 7.25%. Of course, cap rates will not paint the whole picture of an investment, but that alone is intriguing for most investors who are looking to allocate capital in today’s economic climate.”

This is not the firm’s foray into either asset class. It has been investing in both mobile homes and self-storage since 2012, and even has a separate self-storage-focused fund that recently closed with $12 million in commitments. Because both are asset classes are niche markets, they can present challenges. “With mobile home parks, investing in properties which require a significant amount of work can be very challenging and capital intensive,” says Thompson. “Of course, this is how more lucrative returns are created, but given how sticky the tenant base is, simply raising rents and decreasing expenses can generate far more favorable risk-adjusted returns.”

On the self-storage side, this fund will focus on value-add self-storage assets with upside. This is a divergence from previous strategies, where the company focused on stabilized and well-occupied assets. “This is in part due to the fact that there has been an increase in development in self-storage starting in late 2016 which is creating an opportunity for us to be recently developed, under-occupied and significantly mismanaged assets,” explains Thompson. “Once we purchase the properties, we can lease them up to market rates more quickly than the developers as well as implement additional management strategies such as adding ancillary income, cutting costs and leveraging strategic relationships with nearby universities, truck rental companies, and military bases. From our perspective, it is quite intriguing to purchase recently developed units since the upside is still there, but we do not need to incur the risks associated with development.”

Thomson says that these two asset classes are a natural fit, especially for a value-add business plan. “In the markets we are investing in, MHP assets will trade at higher cap rates of 6.5-8%, while self-storage will trade at 5-6%. This allows the MHP assets to provide more in-place income, with the self-storage facilities providing more upside potential,” he explains. “For example, for every $100,000 of NOI growth added to a MHP, we may be adding close to $1.5mm in value, while for every $100,000 of NOI growth added to a self-storage property, we are adding $2,000,000 in capitalized value.”