When it comes to investing in real estate, most portfolios focus on office buildings, apartments or retail strip malls. The majority of broad-based real estate investment trust (REIT) funds such as the Vanguard REIT Index ETF (ARCA:VNQ) are held in such sub-sectors. However, there are plenty of opportunities for investors outside the norm. One often ignored prospect lies with the realm of manufactured home (MH) real estate. Shedding the rundown trashy trailer park image of yesterday, today's communities sit on manicured lawns, pristine roads and feature high-end amenities like pools and access to golf courses. They're also steady cash cows for investors. For those looking for a niche sector to beef up a real estate portfolio, the manufactured home community owners could be a great bet.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Sleepy, but Steady
It's hard to believe, but manufactured home real estate could be one of the better bets in the asset class. Yet, despite improving fundamentals and a great long-term outlook, the sector continues to be ignored by investors. Currently, the manufactured housing sub-sector is the smallest sector in the broad FTSE NAREIT Index and features a combined market capitalization of just $3.96 billion. That's less than 1% of the total equity REIT capitalization. Being ignored could be a huge advantage for longer term retail investors looking for profits.

The MH real estate sub-sector delivers those profits through a unique business model. The bulk of MH REITs income is generated through leasing the site on which homes are located. They own the underlying land, utility connections and the various common area amenities. However, homeowners are responsible for the maintenance of the home and leased site. Unlike, an apartment building owner who must deal with broken toilets and locked-out residents, MH REITs can sit back and collect their rents. Those rents are also quite stable. Residents tend to stay in MH communities for long periods of time due to the inherent cost involved in moving the home, which can top as much as $10,000. The average resident in a MH community will live there for approximately 19 years. That longevity contributes to the sectors stable and steady rent growth.

SEE: Add Some Real Estate To Your Portfolio

In addition, the recent housing slump seems to bode well for the sub-sector's long-term prospects. First, based on price per square foot, MHs are one of the cheapest forms of housing. The average sales price for a MH is nearly $64,000. That compares with the average price of a comparable newly built home at $264,900. With mortgage lending still scarce and many buyers beginning to source the Toll Brother's (NYSE:TOL) McMansion style home, manufactured community owners have started to get interest from a variety of families, both young and old. The Census Bureau reported an increase of 3.2% of newly manufactured homes in 2011. That compares to a 6% decline in sales of newly constructed traditional single-family homes.

Despite the positives, the MH sectors ignored status has been trading for cheaper metrics than broad real estate measures. Analysts at the Bank of Montreal (NYSE:BMO) estimate that the broad REIT universe is currently trading at a 19.2 times adjusted funds from operations (AFFO) for 2013. Meanwhile, the MH REITs are at about 12 to 16 times AFFO.

Buying a Lot
Given the sectors small stance in the world of real estate, there are just three publically traded firms for investors to choose from.

The largest and most popular is Equity LifeStyle Properties (NYSE:ELS). The firm, which was created by real estate magnate Sam Zell, currently operates 365 communities and more than 134,000 sites. Equity recently reported an increase in its funds from operations (FFO) and raised its quarterly distributions by roughly 17% to $43.75 per share. This is the ninth consecutive annual dividend increase for the MH REIT. Shares currently yield about 2.6%. For those investors looking for a single play on the sector, Equity's leadership position shouldn't be ignored.

However, for those investors looking for more yield out of the sector, smaller rivals Sun Communities (NYSE:SUI) and UMH Properties (NYSE:UMH) could be the ticket. Both have been buying up smaller independent sites in order to take advantage of current ideal conditions. The firms currently yield approximately 5.9 and 6.2%, respectively.

SEE: Why Dividends Matter

The Bottom Line
For investors, the sleepy world of manufactured home real estate could be a hidden gem. Featuring strong long-term fundamentals as well as stable rents, any of the major players will fit nicely into a REIT portfolio.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  2. Home & Auto

    Economics of Owning a Rental Property

    Learn how to find suitably priced rental property and the right rent level. Determine what maintenance costs to expect and what tax breaks are available.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  5. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  6. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  7. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  8. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  9. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  10. Home & Auto

    5 Mistakes That Make House Flipping A Flop

    If you're just looking to get rich quick, you could end up in the poorhouse.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center