Story Highlights:
Your home is your castle, as the saying goes. But that tired expression is getting a makeover these days, as more Americans — especially millennials — are downsizing and choosing smaller living spaces.
The reason is obvious: Cost.
Smaller homes mean lower budgets and mortgages. And this tiny house mega trend offers a great investment opportunity.
I’m talking about everything from tiny cottage-sized houses to converted school bus or shipping container homes. But one industry is set to soar from this trend.
The prefabricated housing market.
Prefab houses are manufactured tiny homes that are attracting more and more millennials today. There are some amazing tiny home designs out there. I’m keeping a close eye on this industry because I believe that there’ll be a major tipping point. Then the prices will really start to fall, even while the design quality rises.
That creates a great opportunity, and that’s when I will pull the trigger.
This week, I read about a Texas company called Arched Cabins that sells 12-foot-by-24-foot one-room homes for just over $5,000.
(Source: InterestingEngineering.com)
And there are plenty of options for those who want a little more in their tiny house.
Amazon is already selling $20,000 homes. It recently acquired custom home builder Plant Prefab and has a distribution deal with Fortune 500 real estate company Lennar.
To me, this means it’s only a matter of time before Amazon and other market leaders pump up the volume, standardization and service expertise necessary to bring the cost of new home construction down significantly.
There is a lot of regulatory complexity in the real estate market, which means that the prefab housing market’s path to success won’t be clear and easy.
But there will be huge winners — including investors who put their money into these growing ventures.
It reminds me of Uber. The ride-sharing giant started out as Uber Cab, but had to change its name because it wasn’t a licensed cab company.
Early investors initially passed because they assumed the taxi industry would knock Uber off of the map.
But then Uber plowed ahead.
It refined its business and marketing plan, and the service has taken off. Those early investors — and millions of others — realized Uber couldn’t be stopped, and that the company’s success would lead to reform of the taxi cartels, not the other way around.
I see a similar thing happening with the prefab housing market. And industry leaders like Amazon’s Plant Prefab are going to benefit.
Housing is one of the four sectors of the economy driving inflation.
I call the sectors the Four Horsemen of U.S. Inflation. The type of inflation the housing market is driving is called cost-push inflation, whereby a cost increase is caused by an inefficiency or supply shortage relative to demand.
All four industries operate with supply constraints. Housing supply is limited by zoning. Reams of red tape bind the industry, which drives up the cost.
The sheer inflation in the housing sector means that the annual revenue is massive. And gigantic revenues attract the most ambitious entrepreneurs.
The companies that will set the stage for this new housing boom will apply cutting-edge tech to either add efficiencies, or more likely, completely disrupt the old-world inefficiencies.
Like Arched Cabins and Plant Prefab.
There are companies looking to apply new tech and business models to all of the Four Horseman industries, which also won’t be stopped. Just like Uber.
They are out there and many are going public. At IPO Speculator, we are determined to get them into our portfolios before they become fashionable holdings of the big money managers parading through CNBC studios.
But there are a few ways to play the prefab housing trend now.
One way is through REITs — real estate investment trusts — which own the manufactured housing communities.
These communities tend to be the lowest-cost non-subsidized housing option in the regions they operate, although many locations are moving upmarket.
Local officials have restricted the growth of manufactured housing communities due to an unwarranted negative perception. With restrained supply, the returns on the managers of these communities have been outstanding.
Adding one of these REITs — Equity LifeStyle Properties Inc. (NYSE: ELS), Sun Communities Inc. (NYSE: SUI) and UMH Properties Inc. (NYSE: UMH) — is one of the best ways to ways to buy into this mega trend.
ELS owns more than 400 manufactured home communities and RV parks across 33 states and Canada. With a modest but growing dividend, it’s strongly positioned for a declining rate environment, or even an economic slowdown, if that happens.
On the tech side, you can buy Redfin Corp. (Nasdaq: RDFN). Redfin was one of the first tech companies to try to cut out the brokers and go straight to consumers.
It had a hard time with that model at first. But now it’s become an online broker representing the sellers and driving down the cost and hassle of real estate transactions for all parties. The company has completed hundreds of thousands of transactions and offers the closest thing to a fully digital, turnkey solution.
And Redfin has massive amounts of buyer and seller data, having originally started down this path in 2006 when Microsoft co-founder Paul Allen raised $8 million in funding.
Microsoft is based in Seattle. And you know who else is based in Seattle, is thirsty for data and just entered the real estate game?
Amazon.
As we mentioned earlier, Amazon recently entered the housing market, and we think it might be interested in acquiring Redfin for its valuable data and industry-leading software.
That kind of move can give Redfin a push up. And when that happens, investors will be in a great position to collect huge gains.
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