When Henry Ford invented the assembly line for automobiles, people were thrilled to have an affordable option: the Model T. Not many folks could afford the Rolls Royce Silver Ghost, for example. But many people likely thought that while certainly accessible, the Model T was probably inferior to handmade cars.
Such is the fate of modular homes, homes that are built in a factory on an assembly line. The perception by many people is that modular homes are inferior to classic home construction.
The assembly line proved to work for the production of cars, but what about houses? Is a modular home a good investment? Let's consider the pros and cons of a modular home.
What a modular home is and is not
The main types of homes are classified as stick-built, mobile/manufactured, or modular.
Stick-built homes are built on-site and will (in most cases) remain on the site in which they are built. Stick-built homes are what most people consider to be traditional homes, which for investors means they are a tried-and-true product that people understand and accept.
Mobile and manufactured homes are similar products. "Manufactured" is the newer term, but both are homes built in a factory off-site. Mobile homes, also called trailers, are attached to a chassis and can move from site to site. They can later be set up on a permanent foundation if desired. The term "manufactured homes" refers to the same type of home but with standards that adhere to the HUD Manufactured Home Construction and Safety Standards. Manufactured homes can also be double- or triple-wide, as opposed to mobile homes, which are typically single-wide.
The modular home has features of both stick-built and mobile/manufactured homes: Modular homes are built off-site in a factory like mobile/manufactured homes, but when the sections are brought to the home site, they are joined together and then placed on a permanent foundation, like a foundation on which a stick-built home sits.
Consistent product/controlled environment
Because modular homes are built in a factory and then assembled on-site, buyers know what they're getting as long as they're familiar with the builder. There's a level of quality control that happens in a factory setting that doesn't necessarily happen with a stick-built home. Weather conditions, the particular builder for the home, and whether things are done incorrectly (perhaps from a rushed build) can all affect the final product of a stick-built home. Modular homes, on the other hand, are immune to those issues.
It's not chattel
Chattel in real estate refers to movable property: furniture, jewelry, and a mobile/manufactured home, for example. Modular homes are not considered chattel since they are not movable property. This is significant because of the type of mortgage loan available to you with a modular home: It's the same as with a stick-built home. But with a mobile/manufactured home, you would need to get a chattel mortgage, which usually has higher interest rates and shorter terms than a traditional mortgage does.
Just as the assembly line made the Model T cheaper than a handmade car, the factory approach for homes makes them cheaper as well. Both brand-new modular homes and resale modular homes tend to cost less than their stick-built counterparts.
Not as highly perceived
How the public perceives your product is key when buying a modular home as an investment vehicle, particularly if you intend to buy the home for a quick resale, as in a flip. Modular homes are typically tougher to sell. One reason is because the public has not accepted them as they have traditional stick-built homes. Another consideration is that iBuyers Opendoor and Offerpad, for example, don't (as of this writing) buy any sort of prefabricated home, so if you get in a pinch, you might not have the option of selling to an iBuyer as you would with a stick-built home.
If your intent is to buy a manufactured home and rent it out, however, there should not be much of a difference from any other rental product on the market. Just make sure you study your market, as you would with any investment home you intend to rent out.
The bottom line
As with any real estate investment opportunity, you need a plan for your investment (flip or rental), and then you need to crunch the numbers to determine whether the deal makes sense. Modular homes are not as respected overall as stick-built homes, but that doesn't mean you can't make money if you buy one. If the deal makes sense, then a modular home could be a good investment for you.