A few days ago, I restated my case that we are in the middle of a nationwide housing crisis.

I talked about the chronic deficit of listed homes for sale… Tepid housing starts, plagued by labor shortages and inflated raw materials costs… Soaring mortgage rates (and plunging new loan originations)… The lowest homeownership rates in a generation.

I encourage you to go back and read it, but it all boils down to this…

If you’re in the market for a home right now, you may have to cough up an extra year’s salary to buy a cute 3-bedroom, 2-bath home in a quiet neighborhood.

Many can’t. Or won’t.

All of this is good news for landlords, of course. That’s why, in that earlier piece, I listed a few housing REITs worth considering. But there is a much smaller – I would say hidden – asset class benefitting from these same conditions. (More on that in a bit.)

This Hidden Asset Class Stands To Benefit…

I don’t expect this situation to be resolved anytime soon, especially considering it took 15 years of under-building to get us here.

_{Source: Axios}

But today, let’s pivot just a few degrees. That’s where you’ll find another class of real estate feasting on these same bullish fundamentals.

You see, this overlooked subcategory of real estate developers has come up with a novel solution. One that is putting families into affordable homes – while earning investors market-topping returns.

I’m talking about manufactured homes, which offer a much better bang for the buck.

Manufactured Housing: Not What You Might Think…

First things first, let’s clear up a few misperceptions. For some, manufactured housing is a pejorative term that conjures up the image of run-down trailer parks. I can’t help but think of song lyrics from the late, great Jimmy Buffett.

I’m just the son of a son of a sailor. The sea’s in my veins; my tradition remains. I’m just glad I don’t live in a trailer.

My family bought a trailer about the same time that song was released in 1978. It was a great fishing camp, but I wouldn’t have wanted to live there either. But that was a different world back then. In fact, the last truly “mobile” homes were built in June 1976.

Today’s models are constructed with quality materials under standards set by the Housing and Urban Development (HUD) department. These regulations are often stricter than local building codes. Interior furnishings have evolved as well. These modern, energy-efficient residences now offer many of the same features as traditional site-built homes.

Think fireplaces, whirlpool baths, walk-in closets, top-end appliances, and vaulted ceilings. I’ve even seen two-story, customizable floorplans with a bonus room over the three-car garage.

_{Source: Signature Building Systems}

The neighborhoods have also changed for the better. Many manufactured home communities have lakes, tennis courts, pools, bike paths, fitness centers, and other amenities. Heck, even Matthew McConaughey lives with other wealthy celebrities in a manufactured home community in Malibu where price tags range into the millions.

Jimmy may not have been a fan, but another Buffett named Warren sees the investment potential. Berkshire Hathaway invested nearly $2 billion to take control of Clayton Homes, a top builder. Billionaire real estate tycoon Sam Zell, who recently passed, was also big on this niche.

A Better Bang For The Buck

We’ve talked about the aesthetic misconceptions about manufactured homes. But let’s talk about the practical stuff.

The industry has moved past that outmoded term “mobile homes.” That’s largely because these homes aren’t really meant to be moved around. It takes specialized equipment, and relocation costs can run $10,000 or more. It’s not uncommon for manufactured homes to occupy the same foundation for decades.

That low turnover benefits the companies operating in this space – considering they often rent out the underlying land. (While most tenants own their homes, they lease their lots.)

Millions of buyers are awakening to the affordability of manufactured homes, too. They cost around $50 per square foot versus $150 to $200 per square foot for site-built homes.

The closer a median stick-built (a term the MH industry loves to use) home prices edge towards $500,000, the more attractive these $100,000-ish homes become.

But the biggest growth catalyst in this business is home rentals. If renting out land in these neighborhoods is smart, then why not expend some capital to acquire and lease homes as well?

The average manufactured home has approximately 1,250 square feet of living space and rents for $1.00 per square foot. Compare that with 1,000 square feet at close to $2.00 per square foot for a standard apartment, duplex, or townhome.

That’s about $700 less per month ($1,245 versus $1,996) for 25% more space.

No wonder 22 million Americans now live in fabricated homes. They account for 8% of the occupied housing inventory in Nevada, 11% in Texas, 13% in Georgia and 16% in Florida. Nationwide, shipments of factory-built homes represent about 10% of all new home construction.

Action To Take

A handful of publicly traded specialists dominate this industry. Permits for new construction are tough to come by, which means high barriers to entry. That’s one reason why this small group has outrun the broader REIT market in 9 of the past 10 years.

I am a big fan of this sector. But since the choices are limited for income for investors, you’ll have to check out the latest issue of High-Yield Investing for the name of my top pick.

In the meantime…

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