Ways to Make Money As a Direct Investor

There are multiple ways to make money as a direct investor in the real estate. 

1. Fee structure - receive a fee to find/operate/develop deals for others

2. Flip structure - buy, improve, and sell

3. Cash flow structure - buy, improve, and hold

In the mobile home park industry, the conventional wisdom is to choose the third one. In most instances, it makes sense. Returns can be staple and juicy.

However, when starting out with little capital, it forces you consider all options to move forward towards your ultimate goal. In the first few years of business, the majority of our income comes from the fee structure. This provides capital for us to purchase more deals to hold long term. We take a hybrid approach to put food on the table and capital in our bank account while building to our ultimate goal. 

In conclusion, use all tools available in order to get where you are trying to go.

Tiny Home Fallacy

Occasionally, I get questions about tiny houses and their effect on the industry. In my opinion, it is a component but not a replacement of the current manufactured housing environment. It is a niche product. 

Several of our families in our parks are multi-generational and have many children. For example, three bedroom homes are more sought after than two bedrooms. Single-wide homes are less desirable than double-wide homes. Space is king if they can afford it! I struggle to live in 300 sq ft by myself, let alone with 3-4 other people. There will be a segment of the population that fantasizes about the minimalist lifestyle, but I don't think it will proliferate throughout the industry. Maybe I'm wrong.

One area of growth could be aging seniors. Throughout history, we have witnessed a growth of space. Single-family houses are considerably larger today than a few decades ago. People yearn for more and the working class is no different.

The Value of Learning Spanish

One of the more invaluable skills I've learned in this industry is the ability to speak and understand Spanish. Even a basic knowledge of the language can pay large dividends. 

This past weekend, I toured a used mobile home with an owner that didn't speak any English. My Spanish is muy malo, but I was able to communicate and understand the critical information to make a quick decision. "¿Que es el precio?" y "¿Tienes un título por la traila?". 

Several months ago, we purchased a property that had over 20 vacant homes, some needed extensive repairs. In less than 45 days, we sold off all vacant mobile homes by leveraging our Spanish skills. This alone added over $500,000 in equity.

The Hispanic population in the US is one of the fastest growing ethnic groups and likely to continue for decades. In our portfolio, several of parks are mostly Hispanic. In general, they are some of our most loyal, industrious, and financially-predictable residents.

The Long Game Philiosphy

At the beginning of the year, we publicly announced our goal to close $20mm worth of transactions. Today we stand at $625k, embarrassingly far away from our initial goal. 

The year is far from over, but Ryan and I strongly believe in transparency. We are still hunting. This deviation speaks to many failed attempts to purchase parks that never materialized. Entrepreneurship is hard even in established industries like real estate. 

On the contrary, we have no capital to place within a specific time frame.  We can focus on strong, cash flowing assets that fit our defined strategy. We don't mind sleeping on blow-up mattresses in communities for the next 5 years to make this work [our one year blow-up mattress anniversary is next month :)].

Our advantage in this industry is patience. 

I'm of the view that the participants overbidding for properties today will not remain tomorrow. Interest will fade some. Attractive opportunities will arise for those that wait patiently and watch fervently.

The Hardest Form of Upside

Vacant pads are the least attractive form of upside in the industry. Sellers often market their properties as value-add by quickly filling up lots. There is a reason they didn't capitalize on the 'easy' money. 

Moving in homes requires a few things to take place. First, you might need to obtain a dealer license, which can be quite an arduous process. Second, you should decide on new or used homes. Not all communities can support new homes due to appearance and tenant creditworthiness. New homes are backlogged by several months due to demand. Used homes are scarce and usually overpriced once you factor in setup and rehab costs. Then, non-recourse financing is hard to come by. Mobile homes are considered personal property and therefore depreciate. In some loan program, the landowner signs personally to backstop the loan for the tenant. 

The solution I see most larger players utilize is a lease-option or rent-to-own program where the operator holds the paper on their books. It isn't perfect but it can expedite the vacant lot fill up process if you have the capital. Another alternative is to partner with a mobile home lender and place the loan with them. While ideal, I've had little success with these types of programs. Not all locations are created equal.

Your mileage may vary.

Sources of Our Closed Deals

In a frothy market, deals are hard to come by. Yet more investors flood the market each day. However, people are still closing lucrative deals. 

What's the secret?

There isn't one. For the five deals we've sourced and closed, one strategy hasn't panned out better than another.

Here is our breakdown:

Deal #1 - Broker Deal

#2 - Mailer Deal

#3 - Cold call Deal

#4 - Cold Call Deal

#5 - Business relationship

Hit all avenues with continued persistence, opportunities will likely come your way over the long-run.

Best of luck

Podcast Launch

Ryan Narus, my business partner, recently published a podcast to give his perspective of mobile home parks. We love the industry but feel many things are left unsaid. In the first few episodes, Ryan discusses end game, spouse buy-in, and a due diligence mistake.

Hope you enjoy. 

If I given you any value in the past few months, please check it out.  https://lnkd.in/eW5emNa https://lnkd.in/evZnUSf

Lack of Thought Diversity

After many conversations with new investors and operators, I've noticed a similar trend. This industry suffers from the lack of thought diversity. 

A few educators and operators have done a fine job of generating interest in the space. New entrants are all looking to execute the same business plan. However, it's difficult to gain an advantage following your competitors' blueprint. After a year of turning around multiple assets, there are several things left unsaid. In fairness, I started the same way and still share some of their views. 

One of the largest misconceptions about the industry is the ease at which operators can manage multiple assets from their bathrobe. It can happen, but it isn't how you will likely start out. Unless you find a darling, most lucrative opportunities, in this environment, are value-add. Operations is where the money is made, and it takes a tremendous amount of work to get things moving in the right direction. 

Lessons From the Front Lines

Living in one of my mobile home parks for the past five months has taught me many things about the industry in terms of operations and tenant base. 

First, the negative stigma about the people and living conditions is largely a reflection of the management. Mobile home parks can be nice places to live. For instance, this month one of our parks will have a Christmas light contest for best decorated yard.

Treat people with dignity. I've tried many approaches with tenants and the most effective is to be calm, understanding, and respectful. I've evicted good-willed people out of their homes. It's not fun but a necessary part of the business. One woman even thanked me for working with her, even though she has an eviction on her record, because I tried to make it work. 

People will test your boundaries weekly. Appearance of yard is similar to the broken window theory. Enforce yard clean up to show order in the park. Even financially vulnerable people want clean and safe living environments. This is the first thing new prospects will notice. 

Rumors spread like wildfire. Word of mouth is a powerful force. Don't underestimate it. Encourage open communication with tenants so they know the truth. 

Mobile Home Parks Require Active Management

I've connected with several of the top 100 owners in the country. People usually correlate size with effectiveness and profitability. To my surprise, several 'sophisticated' owners are negligent in their operations.  Purchasing is the exciting part. Operating is where the money is made. Mobile home parks can be operationally less intensive than other real estate classes. However, it is still active management. I see many newcomers looking to collect rents and pay the water bill. While enticing, most parks don't operate this way. 

Here are a few ways to stay on top of multiple assets. 

- Visit your property once a quarter or so. In person visits are hard to replicate even with technology.   

- Have an open business line for tenants to reach out with concerns. Stand behind your manager but it's helpful to provide an outlet in the event the manager is slacking. 

- Communicate frequently with your manager. At times, it can be overwhelming.

- Monitor closely who rents in the park. Tenant screening is step one to eliminating headaches, but it isn't foolproof. It is an ongoing job. Yesterday, I confronted a meth addict who was renting from a owner's home. Even with strong systems, bad actors can slip in.

A Few Thoughts on 'Going All-in'

I jumped off full time into this business with no safety net.

At the time, I closed one deal and had one under contract. I made $4,500 in the first half of 2017. In a way, I got lucky. If it weren’t for one opportunity, I would have made less $10,000 this year. Every month, I met and speak with people looking to purchase mobile home parks. Some are even considering starting a fund. There are a ton of people doing the same thing. It would be hypocritical of me to suggest that these people shouldn’t do it.

I would just think through a few of the headwinds I’ve dealt with this past year.

How are you sourcing deals? Brokers alone will not get you to an “living salary”. It’s a seller’s marker. Don’t be reliant on one deal sourcing strategy. It took me over a year of mailing before a deal came through.

Mobile home park transactions are small relative to other forms of real estate. If you plan to finance and use capital partners, it will be sobering how little comes your way. Closing large transactions or several medium size deals is the only solution.

Financing can be tough. Would you be willing to go recourse for a good deal? Do you have capital partners that will as well?

Two Schools of Thoughts

Two schools of thought divide the mobile home park (MHP) industry.

One is to own only pads or, in other words, the tenants own their home. The MHP owner doesn’t pay home R&M. The downside is that rent is much lower.

The second is to own the homes called park-owned homes (POHs). This is essentially a horizontal apartment complex, since the MHP owner is responsible for home R&M and turnover. The increased rent should cover elevated expenses.

Both schools will ardently defend their model and claim more profitability than the other. I think the answer is more nuanced. Time may change my analysis. If you want massive scale, lot rent is easier to finance and manage. Also, the buyer pool is larger and deeper. In certain markets, lot rent is woefully behind apartment rents leaving a sizable delta between rents. In these cases, POHs seem to make a lot of sense. Age and upkeep of units will drastically sway expense ratios. HVAC costs alone can erase cash flow. Certain demographics make POHs easier to manage partially because number of tenants, leading to less wear and tear. Seniors seem to be a great tenant base for this.

For my vision, I gravitate towards a lot rental model but several local players find success in the POHs.

Quick Advice When in the Heat of a Deal

One invaluable piece of advice that a mentor told me: find ways to do the deal. If the numbers work, push it to the closing line. It's common to focus on small issues that don't matter. Put the ego on the sideline and find solutions to problems that inevitably arise in real estate transactions.

Deal Questions in a Frothy Market

Parks that never seemed attractive are fetching high valuations. Properties in small MSAs are being gobbled up. People are stretching their criteria to make deals happen.  One risk is when optimism fades away. Banks get choosy and investors flee to quality. People get caught in the changing of tides.  Investors can forget about the liquidity premium needed for small real estate transactions.

A few things I try to keep in mind as I value property:

- What is my price per pad? Does my overall basis feel right?

- How quickly can I push to mid teens unlevered returns? Do I get compensated for the lack of liquidity in real estate versus investing in a REIT?

- Would someone a few states away know the location or MSA I am investing in? How large is my buyer pool?

- What is the downside base case? Can I still service the debt if things don’t go according to plan?

Screen to Your Cash Flow Success

The quality of your cash flow is a reflection of your tenant base. Mobile home park operations is a collections business. Find and keep good tenants.

Here is a quick criteria of things to look for:

- No felonies in the past 10 years

- No evictions in the past 5 years

- No history of theft

- Gross monthly income should be at least three times monthly rent. Verify with pay stubs, bank statements, etc

- Analyzing the prospect's rent score to determine their ability to pay essential bills (utilities, car insurance, rent, etc.)

It isn't always clear if someone is on the fence. At which point, you can request several months in advance for rent or a strong co-signer. 

Relate On Their Terms

While technology aids the mobile home park business in numerous ways, one thing remains paramount - face to face interaction. This past Sunday I spent an hour or so with a older gentlemen looking to sell his park. He needs to money to move into a retirement home with his wife. We spoke on the phone multiple times but he repeatedly told me someone else was in line to purchase the park. I was second in line. Part way through our face-to-face conversation, he kept saying, "this is where your property line is". A shift happened once we met in person. 

With the older generation of owners, it's important to relate to them on their terms. A handful have mentioned that they don't use a computer and never open their email. When everyone around the country is calling their phone and sending them letter, you can easily differentiate by meeting face to face. It can close a deal. Not every deal is worth driving to before you have it under contract. But some might be the extra push you need to get the ink on the paper.