Why NOI isn't the most reliable indicator of a REIT's Development

Most investors frequently seek out products that give excellent returns with little risk. While making individual real estate investments might have many advantages, there are also significant financial dangers involved. However, a REIT or Real Estate Investment Trust allows investors to buy significant income-producing properties without the hassle of owning or maintaining the properties. A business that owns and, in most circumstances, manages properties that generate revenue is known as a real estate investment trust. Most REITs make money by renting out space to tenants, who pay rent. A REIT can be categorized into two groups:

Equity REITs: Equity REITs are in charge of acquiring, supervising, upgrading, and managing real estate assets. Rent payments are how they make money after renting out space to tenants.
Mortgage REITs (mREITs): In contrast to Equity REITs, mortgage REITs (mREITs) invest in mortgages and mortgage-backed securities. A mortgage REIT advances funds to property developers and makes money on the interest earned on the loans. The difference between the interest a mortgaged REIT earns and the cost of financing the loan constitutes its profit.

Equity and mortgage REITs' sources of revenue

Let's start by taking a look at equity REITs. Suppose 'APC' is an equity REIT. APC rents out a few sizable properties it owns that generate cash. Now, APC's profit comes from the rent it receives from the rented properties.

Say PAC is a mortgage REIT. Consider the scenario where PAC gets $10 million from investors and borrows an additional $40 million at a 2% annual interest rate. The business now puts $50 million into 5% interest-paying mortgages. The annual interest expenditure for the business in this instance is $0.8 million, or 2% of $40 million. In contrast, it will earn $2.5 million in interest per year, or 5% of the $50 million invested.

Therefore, the PAC's net income is calculated as follows: ($2.5-0.8) million ($1.7 million) = ($2.5-0.8) million ($0.8) million).

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How should a REIT's growth be assessed?

A common statistic used by some investors to assess a REIT's future growth is net operating income. Depreciation costs are a less exact measure of a REIT's growth because they are deducted from net operating income. FFO and AFFO (Adjusted Funds From Operations) are two metrics used by qualified investors to assess a REIT's growth. Depreciation costs are added, and FFO is computed by deducting any gain or loss from the sale of the asset. Let's look at an illustration.

Assume that a REIT had net operating income of $545,989 and depreciation expense of $414,565 in 2018. However, the property sale generated a profit of $330,450.

FFO equals ($545,989 + 414,565 - 330,450)/(Net operating income + Depreciation expenditure - profit on property sale) to arrive at $630,104.

The business will now use this leftover money to pay dividends. A REIT is required by law to pay out 90% of its profits in dividends to its stockholders.

Undoubtedly, FFO is more exact indicator than net operating income for measuring a REIT's growth. However, capital expenditure, which is also significant, is not included. A REIT must make improvements to the property after a lease's term expires and before leasing it to a new tenant. As a result, the capital expenditure goes up, and the REIT can utilize some of its profits to fund improvement projects. Therefore, qualified investors favor AFFO over FFO for evaluating a REIT's growth. Investors determine AFFO by deducting capital expenditure from FFO, despite the fact that there is no specific formula for doing so. Assume that the capital outlay in this instance is $160,212.

(Funds From Operation - Capital Expenditure) = (630,104 - 160,212) = $469,892 is what is known as Adjusted Funds From Operation. As you can see, AFFO delivers a more precise value, and that's why it's utilized by specialists for calculating a REIT's growth throughout the years.

Manufactured housing Investments Are Becoming More Popular

Due to a lack of accessible housing options nationwide, purchasers are looking for practical, cost-effective alternatives to stick-built homes. Manufactured homes are just one option that is becoming more and more appealing. Since the days of the mobile home parks, manufactured housing has advanced significantly. Higher-end prefabricated houses that are almost indistinguishable from their foundation-built counterparts are replacing the cookie-cutter, one-story "trailers" that formerly had a bad reputation.

In this essay, we examine the development of the manufactured home market, the factors driving current demand, and the reasons that both individual owner-occupants and institutional investors are interested in this business.

What is Manufactured Housing?

A portion of the residential housing market is made up of manufactured homes. A manufactured house is a structure that has been mostly or totally built in a climate-controlled facility off-site. Units can be put together either on-site or off, however the latter requires flatbed delivery of the house to its ultimate location. Instead of being anchored into more substantial foundations, the majority of prefabricated houses are constructed on top of concrete slabs or mobile platforms. As a result, prefabricated housing needs to be tethered to the ground or otherwise secured.

Building costs are often reduced by efficiencies brought about by the off-site, assembly-line-style construction procedure. When compared to conventional residential structures, prefabricated homes are more economical since these cost savings may be transferred to the end users.

A particular kind of prefabricated housing is modular housing. In essence, modular construction uses a "kit of parts" strategy, wherein different building categories (such as kitchens, bathrooms, and bedrooms) are built using lean processes, and each of these modules is then combined with the others, depending on the needs of the home builder or buyer, and shipped to the location to be put together on-site.

Manufactured housing, as opposed to typical mobile houses, may be found in a variety of sizes and forms. The size of a home might range from 500 square feet to 3,000 square feet or more. Depending on the requirements, they may be created in a matter of days or weeks and can be constructed with a variety of materials, amenities, and finishes. Some tasks might take months to finish.

A Look Into Manufactured Housing History

Over the past 50 years, manufactured housing has advanced significantly, especially as technology has advanced and enabled more efficient industrial building methods. Traditionally, stick-built homes were regarded to be of higher quality than manufactured homes. The quality of prefabricated homes today is frequently comparable to other entry-level residences.

Furthermore, the majority of prefabricated homes in land-lease communities throughout the 1970s and 1980s. An owner/operator would "lease" the land to a homeowner who would then use a personal property loan to buy the house that was built on that particular piece of property. In the modern era, more than half of prefabricated houses are sold to purchasers who then set up the homes on privately held properties, including more conventional residential developments.

This movement is due to a few factors: First, compared to those constructed in earlier decades, modern prefabricated homes are frequently bigger and more appealing. As a result, these houses mix in perfectly with both established and more recent residential neighborhoods. Many people who own a piece of property choose to have their dream home delivered rather than waiting to build one, which may save both time and money. Second, prefabricated homes are a product category that has gained popularity among consumers of all stripes as the available choices have increased. Mobile houses or manufactured homes are no longer regarded as affordable accommodation for tenants or buyers with modest incomes.

Drivers of Manufactured Housing Demand

A resurgence in manufactured houses is taking place. This specialized product category is beginning to draw interest from consumers, both individual and institutional, for a number of reasons.

Better Product Quality: Modern prefabricated homes are constructed in climate-controlled facilities under stringent quality control and oversight at every stage of the process. Due to this, product quality has increased, especially in terms of durability and energy efficiency. Granite countertops, central air conditioning, and high-end appliances are examples of modern materials, conveniences, and finishes that may be implemented into prefabricated houses of various sizes. The higher product quality has frequently rendered prefabricated homes identical to their stick-built counterparts.
Reduction of Regulatory Barriers: For many years, the development of prefabricated housing communities was hampered by widespread and continuous resistance to manufactured houses. The resistance to manufactured housing has decreased as product quality has increased, making it more possible for consumers to invest in or buy manufactured housing for their own use and enjoyment.
Lack of Entry-Level Home: Manufactured housing offers a feasible entry-level housing choice amid the nation's affordable housing crisis, especially in coastal cities like Florida where workforce housing is getting harder to find. Comparing manufactured homes to conventional stick-built homes, their construction costs are around half as much per square foot. Because of this, prefabricated homes are a desirable alternative for both renters and first-time purchasers.

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Broad Appeal: Manufactured housing appeals to a variety of demographics, not only first-time homeowners. The market for prefabricated houses is being driven by Baby Boomers, particularly those wishing to downsize or retire in warmer regions.
Low Vacancy Rates: The vacancy rate of current manufactured home communities has drastically decreased due to the scarcity of cheap housing choices and the rising popularity of manufactured homes. The vacancy rate in prefabricated housing communities in coastal cities like Miami, San Jose, Denver, and Salt Lake City reportedly stayed around or below 1% last year, according to a recent Marcus & Millichap research.
Rents are going up: Land-lease prefabricated house owners have been able to raise rents due to a lack of available inventory. In a recent study, 93 percent of operators predicted that rents will remain the same or increase in 2020. With a 4.6 percent increase, the Northeast outpaced the rest of the country in terms of rent growth. The Gulf Coast and Mountain Region both had 4.5 percent increases from the previous year. In certain areas, lot rent in coastal towns is starting to nudge closer to $1,000 per month.
Housing manufactured as an investment

It should come as no surprise that investors are beginning to think about include prefabricated housing communities in their portfolios given the demand factors mentioned above. This is especially true now that these developments are being managed better. Most prefabricated housing communities were until recently locally owned and run, sometimes by untrained mom and pop investors. These communities are now being purchased by more seasoned investors, including DST sponsor businesses, who are also bringing in professional management. By doing this, they put themselves in a stronger position to work on raising rents and, consequently, property values, which, if attained, may then be transferred to investors.

Larger investors are joining the game as the value of prefabricated home communities becomes increasingly obvious. Four new REITs were established in 1994, the first ones created particularly to invest in this product category (Manufactured Home Communities, ROC Communities, SUN Communities, and Chateau Properties). These REITs are still performing better than many of their more established residential REIT competitors. Today, a number of other REITs have added prefabricated housing to their portfolios.

Additionally, manufactured homes are increasingly regarded as reliable investments. The majority of land-lease communities feature constant (and rising) rents and little turnover. According to some estimates, over 90% of land-leased manufactured home communities are occupied.

The Future of Manufactured Housing

The future is bright for prefabricated homes, maybe brighter than ever. The dearth of affordable housing choices in the country can actually increase the attraction of prefabricated houses.

From an investing standpoint, individuals need to be ready for yields to compress. The majority of the top-notch manufactured home communities have already been acquired as more institutional capital has entered the market. Cap rates have already started to decline. In response, a lot of investors are increasingly purchasing smaller, less desirable areas with the intention of expanding or adding value.


The appearance of manufactured homes has drastically changed over the past several decades. Modern prefabricated homes are luxurious yet reasonably priced. Individual buyers, tenants, and investors of various sizes are drawn to them. Nevertheless, despite the industry's increasing popularity, there is still a lot of room for growth, especially at a time when other residential product categories are also seeing growth. People will always need a place to live, and if more economical choices aren't available, prefabricated houses can be a popular choice.

Perch Wealth collaborates with sizable, seasoned, and qualified DST sponsor businesses that provide accredited investors wishing to invest their 1031 exchange funds with manufactured housing investment possibilities. To learn more about this asset class and investing prospects, get in touch with Perch Wealth right away.

General Information

neither a buy-side nor a sell-side solicitation of securities. The material presented here is purely for informational purposes and shouldn't be used to guide financial decisions. Every investment has the chance of losing part or all of the money. Future outcomes cannot be predicted based on past performance. Prior to investing, consult a financial or tax expert.

Financial products made available by Emerson Equity LLC Member: SIPC/FINRA. Only accessible in states where Emerson Equity LLC has a recognized business presence. There are no other organizations mentioned in this correspondence with whom Emerson Equity LLC is associated.

1031 Risk Disclosure: * There is no assurance that any strategy will be effective or achieve investment goals; * Property value loss is a possibility for all real estate investments over the course of ownership; * Tax status may change depending on the income stream and depreciation schedule for any investment property. All funded real estate investments involve the risk of going into foreclosure; adverse tax rulings may prevent capital gains from being deferred and result in immediate tax liability;
1031 exchanges are illiquid assets since they are frequently issued through private placement offers. There is no secondary market for these investments. * Reduction or Elimination of Monthly Cash Flow Distributions - Similar to any real estate investment, the possibility of suspension of cash flow distributions exists in the event that a property unexpectedly loses tenants or suffers significant damage; * The impact of fees and expenditures - The costs of the transaction might have an influence on investors' returns and even surpass the tax advantages.