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Investing in Manufactured Homes with Your Self-Directed IRA


  |  By Chris Shanahan, CISP®

When thinking of real estate investment opportunities, you probably conjure up a list of the usual suspects, like single family homes, REITS or multi-family units. 

What about investing in manufactured homes — which are often called mobile homes — or manufactured home parks?

One of the great parts about my job at PENSCO is that I get to work with clients who are always finding new and unique ways to use their self-directed IRA funds to invest in alternative assets. While big name investors like Warren Buffett and Sam Zell have made investments in the manufactured home space — through Clayton Homes and Equity LifeStyle respectively — we’ve also seen our clients diversify their retirement holdings by investing in manufactured homes.

Before getting into the nitty-gritty of how investors have done this, let me clarify what a manufactured home is, and how it differs from a mobile home.

While the two terms are often used interchangeably, as Bigger Pockets explains on its blog, mobile homes have actually not been made since 1976 when the U.S. Department of Housing and Urban Development issued updated standards for all homes built in a factory. Manufactured homes are pretty much the 2.0 version of mobile homes, and they are built to new and higher HUD standards.

The Corporation for Enterprise Development says the term “mobile home” is a misnomer because the majority of manufactured homes are never moved once they’re installed. And to be held in a self-directed IRA, a manufactured home cannot be mobile and must be attached to the land.

Potential advantages of investing in manufactured homes with your IRA

You can think about these types of real estate investments the same way you would with real estate investments made within self-directed IRAs where the client owns a piece of investment property in their IRA. The IRA can then rent, lease or sell that property, and the IRA owner can accumulate earnings in a tax-advantaged account. It’s also similar to traditional real estate-backed private equity vehicles like REITs where the client buys a percentage of a fund that happens to invest in a portfolio of real estate.

However, there are certain factors that might make manufactured home investing more appealing for some IRA investors than buying multi-family complexes, traditional single-family homes, or entities that invest in those types of assets.

Lower cost of acquisition

With manufactured homes, the cost of acquisition is generally much lower than a traditional real estate investment property. According to the Manufactured Housing Institute, the average price of a new manufactured home, excluding land, is $64,000 compared with $249,429 for a new single-family home. But many manufactured homes, especially used ones, can be purchased for prices far below that. That allows the IRA account owner to diversify their portfolio by purchasing multiple homes and then having any earnings from renting or selling the properties accrue either tax-free or tax-deferred in their self-directed IRA. 

An IRA account owner could also buy a manufactured home for $5,000, hire a property manager to handle any necessary repairs, and sell that manufactured home for $10,000 via a 5-year mortgage. The buyer would pay down principal and interest each month, thus creating a significant return for the mortgage holder, who originally only paid $5,000 plus repair costs for the mobile home.

Potentially lower rate of default

At PENSCO, our clients have seen a low rate of default when it comes to investing in manufactured home loans. One reason is that residents who live in manufactured homes tend to be stable residents. According to CFED, typical turnover rate in a manufactured community is only 2-4% per year.

But these loans certainly do not come without risk. According to CFED, manufactured housing represents nearly 12% of housing for families living at 50% or less of the poverty level. CFED found that defaults of manufactured housing loans averaged 9.7% at the end of 2012, which was better than the 10.8% default rate of government-backed loans. But that was only after excluding loans from the U.S. Department of Agriculture's rural development 502 loan programs. Defaults rose to 15.9% including those loans.

For investors who don’t want to purchase individual manufactured homes, there is the option of buying a manufactured home park via a private equity investment vehicle — similar to buying a multi-family complex. While IRA account owners can form their own entity to purchase the manufactured home park, investment companies will pool investor funds to buy an entire manufactured home park, which they plan to refurbish and manage. Many of these companies have found that the capital expenditures as a percentage of revenue are much lower with manufactured home parks than multi-family apartments complexes. Investing this way takes a lot of the legwork out of process for the individual IRA holder, as the investment company handles all the ins and outs of what goes on with the park.

Investing in manufactured homes and parks can be a great way for an IRA account owner to diversify their retirement portfolio and potentially realize above-average returns. But as with any investment, risks are certainly involved. Be sure you take the time to do your homework and that the opportunity lines up with your long-term retirement investment goals.

Stay tuned to the PENSCO blog as we explore other unique assets that investors hold in their self-directed IRAs. Want to learn more about investing in real estate with your IRA? Download our guide.

Editor’s Note: This is an updated version of a post we originally published in December 2014. We welcome new comments and questions below.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.