If you would like a connection to Turnkey Mobile Home Park providers please send me an email. Lane@SimplePassiveCashflow.com
Why is the smart money like The Carlyle Group getting into Mobile Home Parks (MHP)?
Watch the old deal webinar (First half general overview, second half Moberly deal overview we did back in 2018)
I am marking it out to an Educational Seminar for MHPs to learn about it the right way!
Sample old deal (more on the high risk high reward profile since it was a basically an unstabilized 20-40% occupied deal):
Please fill out this initial interest form if you are ready to move forward.
Mobile Home Parks?!?
Take the hint from other high level investors and be aware that MFH Apartments is where a lot of new syndicators are starting businesses and where all the gurus are teaching about the space. It might be time to look elsewhere other than Apartments and into mobile home parks.
If you are getting that same nervous twinge that I received when I first heard about this asset class in 2016 then read on.
Note: 2014 – I had the same reaction when someone told me it made more sense to go after 100+ unit apartment buildings than a 20 unit building.
Another Note: 2012 – Same reaction when someone told me to purchase out of state where I could not see or touch my property.
And Another Note: 2009 – I bought a single family home and started renting it out. Who would have known…
Some stats from ApartmentList.com
- An estimated 5.6 percent of all Americans, or 17.7 million people, live in manufactured homes, commonly referred to as “mobile homes” or “trailers.” Metros located in the South and Southwest have the highest share of households living in mobile homes.
- The number of mobile homes and trailer parks in the United States grew rapidly in the 1980s, when the federal government slashed funding for affordable housing. Today, mobile homes are the largest source of unsubsidized affordable housing in the U.S., providing shelter for one in ten households living below the poverty line.
- Nationwide, the average monthly gross housing cost for a mobile home is $564, compared to $1,057 for a site-built home or apartment. In the 100 largest metros, mobile home residents spend 40.5 percent less on housing costs than those living in non-mobile homes in the same metro, on average.
- Manufactured homes can be built faster and cheaper than traditional homes. Yet, even with a growing gap between the supply-and-demand of low-cost housing, they are rarely viewed as a solution to the affordable housing shortage. In less dense areas, local leaders can leverage mobile homes to increase the low-cost housing stock.
- More info here
A Change in Viewpoint
In the last few months, about 3/5 of the people I’ve had intro calls with want to be apartment investors (General Partner role/operator).
In my opinion, those people are a little late to the party.
Would you tell your kids to be a software developer? Although that occupation gets paid well today it is likely to be a common commodity in the future. That’s how I feel about the next generation of apartment investors who are just starting to get good at remote single family home investing.
As I am starting to learn there are so many investments other than apartments/MFH and how more experienced investors are investing in Uncorrelated Assets. These asset classes perform in different ways depending on the economy.
Starting out you have to get good at something and progress from there. Part of my success is that I built the skills needed to analyze and detect tricks that apartment syndicators play in executive summary documents and has allowed me to cut through the BS to build the Hui Deal Pipeline Club. I know what I know, and I know what to look for and know all the little sneaky levers you need to pull to get the 80-100% ROI in 5-years or whatever investors are looking that particular time.
But now we venture off into a bit of the unknown. Now, I rely on the network I’ve built up to this point and the mastermind groups I’ve joined to learn something out of my comfort zone.
Mobile Home Parks or MHP!!! Let’s do this!
Stay with me here. The fact that there was a small anxious twitch response is the exact reason why it is such a secure and lucrative investment. Call it less of a nervous twitch and more of a spidey-sense that others will give up. And inherently we know that competition or lack thereof is one of the ingredients that lead to opportunity.
Don’t get me wrong I still believe in apartments due to this country’s need for Class C and B housing. But, I remember this rule that I developed the past couple of years:
Four ways Sophisticated investors diversify in syndications:
1) Different leads/operators
2) Asset classes such as MFH, self-storage, mobile home parks, assisted living
3) Geographical markets
4) Business plans (5-year exits vs legacy holds)
I’m opened minded but where do I start?
Looks like the Hedge funds are playing in the Mobile home park space –
And Sam Zell is bullish on manufactured housing in the COVID19 era
Here are some of the initial steps that I took to study up on the asset class. I suggest you do the same.
Follow my progression on how I learned about this forgotten asset class that provides stronger cashflow and is a lot less crowded space than apartments…
First thing I did and I encourage you to do the same thing is to Google it.
Now that I was understanding the lingo I used my contacts to reach out to the experts…
I spoke to fellow podcaster Kevin Bupp who helped me way back in 2015. His group no longer do single asset LLCs, they just do blind pool funds (Here at the Hui Deal Pipeline club we like Single Asset LLCs so we can view the investment as a stand alone.)
There are two ways to syndicate capital with multiple passive investors.
1) A Blind Pool Fund – capital is raised for investments with a narrow or very wide/obscure scope “say good deals?!?”
2) A single asset LLC, for example, this Group is going to buy the 150 unit apartment at 123 Main Street.
In my opinion, most sophisticated investors invest in single/finite asset LLCs so they can underwrite the exact deal and have good oversight as a LP in the financials. Most blind pools are confusing and give the lead investor a little too much leash. Blind pools tend to have the most scams associated because it’s tough for someone not in the GP to track the money. Personally, I like Single asset LLCs which are similar to “single-malt scotch” as opposed to blind pool funds or “blended whisky – some 18-year-old stuff with mostly some cheap 9-year stuff.” Essentially, with a Single Asset LLC, you know exactly what you’re getting into up front.
Back to learning about MHPs…
Then I went on here and made a forum profile to follow the dialogue: https://www.mobilehomeuniversity.com/ (BiggerPockets forums for MHP)
Next step is to get around people doing it!
Mobile home parks not for the Queazy
I get it.. most people, when they think of mobile home parks, think of Eminem’s movie 8-Mile set in the rough parts of Detroit. Where else does the phrase “trailer park trash” come from.
On a personal note when I was a construction supervisor from 2007-2012 many of my crew lived in these mobile homes. In the end, they were good people who mostly wanted the space to store all their tools and junk. Plus they were a little cooky where they would be uncomfortable living in an apartment setting. Plus they were terrible with their money which is why they can’t save $20,000 to buy their home. But again… good people!
If you are a little queezy about the idea of supposedly Class-D housing then that “getting out your comfort zone feeling” should be a good sign to move forward.
Don’t be like other unsophisticated investors who only invest on what they feel comfortable with. These are the people who live on the West Coast or Hawaii and invest in Las Vegas or Phoenix. The numbers just don’t make sense there from a cashflow perspective, its a single point economy, and that those are two markets that absolutely got killed in the last recession.
I’m not saying to go rouge completely or get out of all apartments but consider diversifying out of your comfort zone.
In 2018, our investor group pooled together $1.1 million dollars for the Moberly mobile home project. When filling up the investor slots I discovered that investors were very polarized where they were either turned off or extremely excited (granted it was a development deal non-stabilized). My observation was that those who chose to invest in that deal were the higher level investors who had larger portfolios and more investing experience.
At the end of the day, remember at least 25% of the population cannot afford $500 per month for housing costs. With the average apartment rent at $1,000 a month and many of our Class C deals in the $500-650 a month range, this provides good housing (with private yard, no shared walls) in a safe environment at a good price to serve this population which aligns with our mission.
A history lesson on MHP Origins
In the 1920’s, mobile home parks came on the scene as a luxury item. This was a way to hit the road on vacation in a time where you could not book hotel arrangement easily online or utilize short term rentals like AirBNB or VRBO.
In the Great Depression, please used mobile homes as a means to get out of the city and move out west.
Then during World War II, mobile homes became more standardized and were clustered in parks which resembled today’s configurations.
The story of the last 50 years has been pretty much a decay of the American middle class where the demand for workforce housing (while still having that American Dream feeling).
During 1960-1990, over 40,000 mobile parks were owned and operated by mom and pop operators.
Consolidation will occur due to 1) institutions getting into the space, 2) mom and pop operators retiring or unable to change with technology, 3) almost non-existent expansion of the mobile home park zoning.
Now a lot of those mom and pops (who can barely use the internet… oh my) are retiring. That is our opportunity!
And if we reposition them right an institution can buy it from us or we just keep for cashflow. That is our two exit strategies.
Some personal criteria (I’m flexible on these)
3 star or better
Quality MSA (primary, secondary, tertiary)
Lower leverage 60-65%
Public utilities (not lagoon system – yuck)
Low/No RV/park owned (less than 5% in order to get lending)
10% NOI growth in year one and 5% years after (leverage oscillates between 40-60% leverage)
Brandon Turner’s (Fellow Forbes Real Estate Council writer) research into MHP – Link
1. Lower Cost Per Unit
When investing in large multifamily properties or single family homes the cost per unit is high.
But mobile home parks allow a person to jump in and acquire more units for less money. According to Lanoie, “MHPs offer the lowest cost investment per unit of any real estate asset class with potentially higher risk adjusted returns”.
Most park owners own the land, not the housing units themselves which means that the cost of the investment is typically going to be a lot less in comparison to the number of units owned.
You can easily expect to pay $100,000+ per home or apartment unit versus paying as little as $10,000 per lot in a mobile home park.
2. Lower cost for repairs and maintenance
One of the factors that makes me the most excited about mobile home parks is that I don’t have to work with contractors. To put it bluntly, I hate dealing with contractors. When you’re working on single family homes and multifamily properties, dealing with contractors is a daily hassle.
However, by not owning the actual homes that your tenants live in, it means that the mobile home owner is responsible for the maintenance, repairs, and updates for their residence, not the landlord. While the mobile home park owner is still going to need to account for the expenses of the upkeep for the park, it will most likely be significantly less than what they would pay for the upkeep of the homes.
3. Spread Out Risk
Because mobile home parks allow investment companies to acquire more units for each investor dollar (as discussed above), the risk for loss decreases. In other words: with more tenants, the risk is spread out more. For example, let’s say you own four single family houses, and one of the tenants forces you to evict them and you are left with $20,000 in expenses. Bummer. There goes five years of profit from your entire portfolio. While those kinds of situations are rare, they do happen.
However, when you own a large collection of units, the high cost of those freak occurrences are spread out across your entire portfolio.
4. The Demand is High
Due to numerous factors, the demand for mobile homes inside well-managed parks is ever increasing. According to Lanoie, new mobile home parks are not being developed due to government zoning, gentrification, and zoning changes.
However, while home prices are climbing to historic levels, incomes for many Americans are not rising. The need for affordable housing is only getting stronger.
Lastly, baby boomers on fixed incomes are retiring in record numbers creating a greater demand for affordable housing that will only continue to grow. According to Lanoie “10,000 Baby Boomers retire each day with an average social security benefit of just $1,294 per month. 75% of retirees have less than $30,000 in their retirement accounts, and the bottom 50% have zero measurable savings.”
More and more lower income Americans and retirees are looking to mobile homes as their chance of still being a homeowner.
5. Less Tenant Turnover
As a landlord of numerous single family and multifamily properties, I know that one of the largest expenses for a property owner is tenant turnover. Cleaning their unit, needing to track down a new tenant, and the lack of income during the vacancy can take thousands of dollars per unit out of the investor’s pocket each year.
But when a tenant owns their own home and simply leases the land turnover drops dramatically. According to Lanoie, “it can cost a tenant $5,000$7,000 to move their home out of a park and thus 98% of mobile homes will remain in the same location after the second year.
75% of owners expect to stay in their Mobile Homes for 5 years or longer, and a large percentage expect to never sell.”
This means that there is very little turnover and thus very little risk of losing tenants and going through the pain of finding new ones. When tenants choose to ‘vacate their homes,’ often the owner of the MHP may acquire a new asset that, with a few upgrades, can be sold to a new tenant. The penalty for moving also gives landlords increased leverage when it comes to raising lot rents.
6. “Mom and Pop” Owners
Many mobile home parks are simple “mom and pop” operations. While investors and corporations are starting to catch on to this lucrative industry, most are still small time enterprises. This is great news for potential mobile home park investors for a couple reasons.
One reason is that many of these owners are retired or will soon be entering retirement age and this makes them interested in cashing out of their business. So despite the fact that the demand is high, you can still currently find MHP owners who are interested in selling.
Secondly, many of these owners are not professional landlords. Often times these owners face difficulties in bringing new homes and new tenants into their parks. They also may not have been exemplary with operational standards and income potential. This gives you the ability to buy the parks at a reasonable rate and then upgrade them and/or improve management, thus increasing the current tenant experience and attracting new, stable, long-term tenants.
7. Less Competition
Mobile home park investing is the best kept secret in the real estate investment industry.
This is great for investors who are looking for a great deal and don’t want to compete with the flood of new investors, homeowners, and institutional investors fighting for scraps with traditional real estate investments.
What are the Downsides to Mobile Home Park Investing?
As I’ve been venturing into this business, I’ve quickly discovered that mobile home parks are a different sort of animal from traditional multifamily investments. One of the constraints in the MHP sector is the small investor trying to invest directly without an established team or systems in place.
Even with the emergence of the Internet as a tool for research and acquisition opportunities, the manufactured housing community sector remains highly fragmented and inherently localized by nature.
This week, personally I’ve looked at several dozen mobile home parks but finding good data or even an accurate accounting of the parks’ income and expenses has proved incredibly challenging. According to Lanoie, “Opportunities persist for established companies like Four Peaks Capital Partners because they are equipped to identify areas of inefficiency.”
Established investors, like Lanoie who have experience and staff (Lanoie’s company has over 100 employees) possesses the ability to mine for and review opportunities not easily attainable to small investors. Additionally, investors like Lanoie align with local operators to gain knowledge in the marketplace, identify special situations and inefficiencies, and find hidden gems located in their target market. To overcome these difficulties, investors can either learn to navigate the industry themselves, or choose to passively invest with a team like Lanoie’s to obtain above average returns.
So should you invest in mobile home parks? For me – the answer is an obvious and definite “yes.” What about you?
These were my top takeaways
- I like how it is slightly uncorrelated with the economy. If there is a recession a lot of people will be displaced to this asset class.
- No city out there in their right mind will permit a new MHP and this is why it is in such high demand. MHPs are an endangered species. The time to act is now.
- Stronger cashflow and longer hold periods leading to higher total returns than apartments
- We don’t own the homes (or the liability of the upkeep of them) and if a tenant wants out there is an $8,000 fee for them
Please fill out this initial interest form if you are ready to move forward.
This is a direct investment in a 77 Space Mobile Home Park, why is this not in the Fund (Blind Pool)?
This deal has lower occupancy but higher return. An acquisition that cashflows from day one typically fits the fund’s “box”. The fund typically picks up properties that are at 60-80% occupancy. This park is obviously not the case but the potential for returns is higher. I (Lane Kawaoka) have been hard work trying to find an operator do a direct investment exclusively for Hui Deal Pipeline Club Members.
The Proforma shows 76% return in 5 years for no leverage. For the refinance plan, what are the 5 year total return and 6 year total return? What are total returns so I can compare with apartment deals?
MHP deals are a little different than apartment deals we have done in the past. The holds are a longer and cashflow is a little stronger. 140% year 5, 170-180% year 6 in the refinance scenario.
Which exit plan is more likely? How many projects has the operator sold and how many are in refinance mode. Also how many are between year 0-4?
Cash out refinance. 3-5 year hold the refinance with a 7-10 year total hold. This strategy differs from buying and churning assets, paying massive capital gains tax & depreciation recapture and constantly having to chase new deals.
24 parks, company year 4, Mike Ayala has been doing MHPs since 2004.
Andrew had a turnkey company with 125 homes.
Tell me more about the operators?
Before & After Pictures – https://fourpeaks.box.com/s/gj67hx1bxqerjs3furyseyd08ulqpjoc
Fund V Excel Projections (with 3 purchase scenarios) – https://fourpeaks.box.com/s/0hsngl2xmje4ysg3ohpiiak8yvfosvhe
Lenoir City, TN 1st Update & Returns: https://fourpeaks.box.com/s/haghu3jsee34fqmdmq78fhi9vagh4ubv
Lending Fund Track Record – https://fourpeaks.box.com/s/4viboi4zfha4z52hcvov75rzql3od1ry
Case Studies – https://fourpeaks.box.com/s/u9r7fdejj5632ps46ydixpyturhp267d
Community P&L’s (please note income growth) – https://fourpeaks.box.com/s/44crl9pyuibvchgy6cl16ph0p9embfou
Venture Plan – https://fourpeaks.box.com/v/Venture-Plan
Team bios – https://www.fourpeakspartners.com/team/
Tell me about this interesting town?
It made the list of #69 of divorced, #90 males in industry, 101 females in retail trade. No development is in sight. 78k median home price which makes a 20-35k mobile home park ideal (8k to move away which helps protect us).
Multiple employers not just one meat packing plant.
No leverage so good for sdira?
Info on using retirement funds for deals:
[Note: From CPA and not this is NOT legal or professional advice]: When you invest in a business (syndicate = business) with your IRA, the IRA will be subject to UBIT (unrelated business income tax) and UDFI (unrelated debt-financed income).
For our purposes, UDFI is produced when an IRA uses debt to purchase real estate. Essentially, the portion of the property’s income considered UDFI is based on the percentage of rental income derived from debt.
For example, Property A is purchased for $100,000. You put down 25% of the purchase price as a down payment and finance the remaining 75% with a traditional mortgage from the bank. The property produces $10,000 in net income for the year. $7,500 (75%) of the net income is considered UDFI and is subject to UBIT.
There is a deduction for the first $1,000 of income subject to UBIT. Income subject to UBIT over $1,000 is taxed at trust rates. For 2017, trust tax rates start at 15% and max out at 39.6% after just $12,400 of income subject to UBIT.
UBIT is paid by the IRA account. If for whatever reason UBIT is paid directly by the taxpayer, the amount paid is considered a contribution to the IRA.
What is the process for tornados? Any past experiences?
Paid for by insurance. The tenants own the homes.
One of our value-adds is to convert to city water line from the existing lagoon water source.
Is Lane going to be investing?
Of course! I will be going in with $25,000-$50,000. And of course, putting my brand on the line once again.
Are non-accredited investors being accepted?
Yes, all welcome even non-accredited investors. But must be sophisticated and have a relationship with the General Partner – Lane Kawaoka.
$50,000 – exceptions can be made for first-time investors.
You will be sent the PPM for review and signature.
Your commitment is not completed unit all documents are signed and wire are confirmed in out account. As a note there have been instances of wire instructions being “phished” and electronically switched out for fraudulent instructions. This has not happens to us but just want you to be aware. Please send email confirmation once your wire has been sent so we can birddog it into the account.
The following are questions submitted by fellow Hui Deal Pipeline club members.
Some questions are a little out there but good job folks! I tried my best to answer them with Andrew’s help too. Note I might have to context a little off as I did not check the intent of the questions with the original source. As always the PPM reigns supreme in terms of precedence so remember to review that before making any investment decision.
We are currently oversubscribed by 130-140% so I will be reaching out to Mastermind members/past investors, those investors who have the highest investment amounts, and most qualified first these next few days.
How do utilities work?
Ideally, we want to be connected to city utilities (water, sewer) versus having private infrastructure to service these needs of the park. This allows us to get a bump in reversion cap at the end for a better sales price. Most institutions (our buyers) will not want to touch a park that is not on city utility. This is why we sunk over $750,000 which was the lion’s share of our Cap Ex budget on transitioning from lagoon to city utility. As you can see with that price tag and the fact that its a lot of stinky water you can see how it scares away most investors.
I’m trying to find some comps or buy my own park?
Try Craigslist, Ebay, Facebook Marketplace, or go on Loopnet for a broker (but not deals there cause its the graveyard for deals). Remember most sellers are unsophisticated mom and pops.
I’m trying to evaluate these deals on my own how do you do this?
Just like any other commercial property, mobile home parks are valued by taking the net operating income (NOI) and multiplying by the CAP rate. One nuance between mobile home parks and apartments is that in our business model only the amount of rent attributed to rental of the lot (not the whole rental of the home) is considered income in the calculation. In the beginning on more mixed business park models (mom and pops who do whatever) you will find a lot more mixed business models of more park owned homes. We would like to work toward owning none of the homes. As we implement the business plan you will see some of the home rentals fall off of the income sheet bringing the cashflow down, however this is part of the business plan to homogenize the unit mix.
• Annual lot rent income: 100 X $300 X 12 = $360,000
• Net operating income (NOI): $360,000 X 0.5* = $180,000 *50% rule but 30-40% expense rule is more realistic as you move away from park owned model
• Valuation of lot rent: $180,000/0.08* = $2,250,000 *8 Cap Rate
• Valuation of lot rent plus homes (if there are 5 park owns left): $2,250,000 + ($6,000 X 5) = $2,280,000
Is the cash flow split still 75/25 after refinance, i.e., during the infinite return period? On page 21 of the Moberly deck, top left corner says year 5 income (minus home sales) is $130k. Is that the LP income or to be split between LP/GP (what’s the split)?
Andrew said they could cash out refinance in year 5 and give investors their initial investment back, then keep cash flowing for another 5 years? Does that mean the investors (LP’s) continue to get cashflow? Or Four Peaks pays out all the investors, and only they keep getting cashflow?
Once 100% of the investment has been returned thru refinance it’s a 50/50 split on everything.
You will likely get a big chunk of money at refi which will likely be your initial investment back. This does a couple of things:
1) Is returns that is more favorable than ordinary income since its a refinance.
2) Gives you back your money so you can… well invest again… maybe in another MHP or whatever you like. I personally think it’s good to diversify in these types of long-term legacy “5-15 year” holds and 4-6 year “reposition and dump” deals.
Under what interest rate at which the GP would consider advantageous to refi instead of sales?
It depends, we will have to pencil out equity gain, cost of refinance and rates, Its in everyone’s best interest for us to refinance instead of sell, so we’ll make best efforts.
After refinance, how long does Four Peaks plan to hold?
The desired and likely plan is to hold on for a legacy home (5-15 years is a long time in the commercial real estate world). Cashing everyone else out makes sense from a tax perspective and allow people into other deals (especially another MHP). But again if CAP rates take a tumble because of a shaky economy it may make sense to exit the property to not chance more gains. A possible upside is that someone comes around and buys a crazy price in which all the LPs will be happy.
Is the decision to refi or sale something that LPs have a say, or it’s solely at the discretion of GPs?
LP’s do not have a vote. I would typically say this is not a good idea as there are always a lot of opinions in the “peanut gallery” but very few experts. I personally subscribe to Ray Dalio’s Meritocracy.
MHP sales cap rate ranges between 7-10% today. What’s the cap rate in MO or in that area? Is 8% exit cap rate after the cap rate inversion?
Exit cap is another word for reversion cap rate. CAP sales in this asset class have been 5-8% for stabilized assets. Nothing to do with Missouri….has to do with asset class and stabilization.
Are any distributions paid monthly or is everything paid in year 4 or year 5+ depending how the project goes?
Returns are paid quarterly along with quarterly reports/updates. There is cash flow for investors before the refinance or sale in year 4/5.
2.58% projected return in the 1st year. Correct?
Yes that is in the first four quarters of ownership. I thought it was weird… why not wait until quarter 3 to pay out 6-8%/APR like most deals? The reason is on this deal, there is no leverage and therefore no banks to control payouts. Most banks will require holdbacks of capital even though the asset is performing.
Can I do $40K cash and $10K IRA?
No we cannot due to the backend admin. By being a part of my Hui Deal Pipeline club I was able to bring the minimum down to $50K from the normal investment of $100K. I hope that makes everyone happy.
Would it be possible to see some sensitivities on returns around the planned refi event (ie interest rates +50 bps, +100 bps, etc)?
Sorry, we don’t have a sensitivity analysis like that for apartments.
And especially with the refinance its gets into the realm of double factors which makes the numbers on the back end go all over the place. Where the real factor (that we have control over) is what we can get that NOI up to interest rates don’t really matter much since again it’s the secondary/tertiary factor.
I appreciate it gets into double factors but if you have confidence in NOI targets that should make sensitivity on the refinance/sale easier, not harder, right? What am I missing?
At the end of the day and we briefly touched on it on the webinar is “how is your guys track record to get this park” absorbed with new tenants.
1) Mentioned that 2 a month is a very conservative absorption rate that they can beat
2) The have other parks that they can point to. It’s sort of like apartments where you can model the occupancy for example a typical expectation with bumping rents 10% is 80% occupied year 1, 85% occupied year 2, 88% occupied year 3, 90% occupied year 4-5.
3) Offline I was talking with Andrew with another project they have in the 200-300 space arena. That one he is a little concerned with getting the units absorbed but on this little 77-unit he was not concerned.
Who will refinance us?
Unlike apartments where the main two players are Fannie Mae and Freddie Mac, MHPs are typically financed via Community Bank level. Larger banks are a possibility. This recent bulletin gives good information about the lending world in general. At the end of the day, an apartment, MHP, or Amazon business, the business is evaluated based on NOI and applied a factor based on risk to determine lending terms.
Anything more you can tell us about the region?
Here are two ALN reports that I stuck in the due-diligence folder.
Any concerns about environmental issues after the lagoon is closed?
No. Once the lagoon is not operating, the liability goes away.
Can you break down the increase in lot rent income projection from year 1 to year 2? ( 94k to 160k) What % is an increase in rent and what % is an increase in # of lots rented?
What is the average rent per lot?
$240 / per month currently
New homes will be closer to $300 / month
If I receive my investment back after the refinance at year 4, what would be my estimated rate of return? ( I understand infinite rate of return because I would get my capital back, I assume it would be the cash flow from the property?).
At the end of year 5 we are projecting 136% return on your original investment. So a $100,000 investment would be $100,000 (principal)+$136,000 (gains).
What are the chances a tornado would wipe out the entire investment? ( it is a mobile home park after all) & Has Four Peaks endured any natural disasters within their parks and if so, how did they and their investors recover?
Residents own their own homes, and we loss of rent insurance (which is why I think syndications are far superior with being a direct operator because you ensure it as a business), in addition to other liability insurance. We have never lost a community to a natural disaster, and typically stay out of areas like OK, S Texas and Florida.
I noticed in the infrastructure plans that Four Peaks plans to spend $492K on the “lagoon”. Do they plan to fill it in? Or they plan to make it a community “feature”? $492K seems like a lot to spend on this?
This is the cost to convert the lagoon to city services, eliminating the lagoon and liability.
Seems like there are a lot of fees/expenses; Administration expense is $45K per year, Property Management fee is $5K to $20K per year, Asset Management fee is $13K to $45K per year, Acquisition fee of $27K? Are some of these redundant? Do they seem normal for you as an investor?
Nothing really stands out to me. MHPs is a little more hands-on for the asset manager due to the asset class (C and D) so id expect it to be a little higher. But you have compare it with the splits. Remember you are getting a pref and 75/25 split before refi which is pretty favorable for the LP.
Most times everything is backwards engineered to get LP’s the competitive 17-20% a year return.
I did some of the math to convert to percentages.
$45,000/year is 3.2% of $1.4M
$5K-$20K/year is 0.3%-1.4% of $1.4M
Usually, the big three are 1) Acquisition fee (1-5%) on property value, 2) Management fee (1-5%) of income, 3) Distribution/Refi fee (1-5%) of the property value.
1) Acquisition fee and 3) Distribution/Refi fee are bigger in terms of dollars because it’s off of the property value instead of income. So that’s a little trick.
Typically there may be other fees like bank finance fee, consultant fee, etc but I would try to put that into one of those big three to compare deals consistently.
Of course these fees have really nothing to do with the deal. If its a great deal who cares how much fees or GP portion of the returns are if LP gets their returns what they are looking for.
I saw another big lot down the street from the Moberly mobile homes site. Is that going to be another mobile home park that 4 peaks is doing? Or apartment building? Seems closer to the downtown. Just concerned about competition.
We’re not sure what that is. I think you are thinking too macro 😁
The house sales in the list of documents found in the “Tell me more about the Operators?” section under “Home Sales.” This is Four Point’s self reported home sales for Moberly over the last 2.5 years. So this isn’t a sale of other homes in Moberly, but what Four Points is saying their sales are for Moberly I assume. If I am reading the reports (below) across the last 2.5 years, they have only sold 7 homes in the Moberly MHP. Is the plan simply to pay more attention and ratchet that up with the capex?
Once we move forward with the lagoon process, we’ll be able to deploy more CAPEX funds, and set new homes. Until that happens, we’re limited on the number of homes that can be brought in/set in the community.
No data listed for Moberly.
What is included in the expenses of admin and operations? There’s also a property management fee which seems duplicative.
Property management and asset management are 2 different companies (and departments); and requires separate employees and accounting staff. For example, if you owned 25 single family houses in Dallas, TX — the 3rd party property manager is not responsible for the asset management of those homes; just the day to day operations w/ residents, collecting rents, etc etc.
What are the projections on leasing the vacant lots? How many are expected to be leased in each of the next 5 years so I can see how the lot income is being calculated.
In any given market, we conservatively run the home sales at 2 homes per month (this is an average, in Nov/Dec/Jan/Feb it’s not uncommon to sell less homes). So in 24 months, selling 48 homes will dramatically increase the occupancy.
In the financial projections for home sales, how many homes are estimated to be sold? I can see the net proceeds but I’d like to know how many homes that represents.
If annual returns are 2.6%, 9.4%, 12.1%, 13.2%, and 140% (subtracting out 100 out of the 140 for return of initial capital); this equates to a projected 77% return over 5 years.
The sale example is the “abort mission” scenario.
The Refinance year 4 is the more likely one. So subtracting out the 100% you are left with 50% in 4 years but then you need to do a bit of interpolating to get the year 5 and year 6 returns which put it on par or better with the 80-100% in 5-year standard.
The operator purchased this property at $225k and is targeting an exit at a sales price of ~$2.2M, which would be over a 10X exit valuation compared to the purchase price. Am I interpreting this correctly?
As for the sale of the property at 225k.
This is an example of how fragmented this industry is. The park had problems and thus the steal of a price on the acquisition and why cash was used. This is a tremendous opportunity for investors to get in before the NOI goes up.
Information sent out to investors previously via email
A direct investment (not a blind pool fund) in a…
77 Unit Mobile Home Park in Moberly, MO
140% in a 5-year return after the year 4 refinance where the goal is to get everyone’s original investment back and keep your equity position for a long-term hold (7-15 years).
Here are the steps to move forward:
I am very excited about this deal because it is 1) not an apartment deal and 2) with a proven operator – Four Peaks.
We are accepting investors with a pre-existing relationship (even non-accredited) with $50K minimums. First come first serve. The total raise is $1.4M and already $400-500K has been committed. Also, the park has already been purchased for $240k so your money with go right to work!
For those of you with Self Directed IRAs this is the time to invest because we are not using leverage on this deal. No UDFI tax!
Four Peaks only does 1 or 2 of these deals that are not in a blind pool fund format. And this deal is exclusive to the Hui Deal Pipeline Club with a personal relationship with me.
These past six months I realized that I needed to get outside my comfort zone to secure yield in different “non-correlated” asset classes. Mobile home parks is one of these safe havens especially when there is forced appreciation involved.
Too many non-investors say now its not a good time to be investing which I think is complete nonsense.
Yes, it’s not getting any easier but you definitely can’t sit on the sidelines. You need to get into solid cashflow deals (also take lazy equity off the table) which is a way of hedging your investment in case the economy takes a correction. Because you still cashflow after absorbing a decrease in occupancy.
In a nutshell, everyone is doing it (apartments and SFHs) and it’s just tough to pick the winners from the fakers.
Read “Cap-Rate Gate below”
Here are some of the headwinds:
Some of the top 30 U.S. metros over the next five years might be at risk of oversupply [I keep my eye to units coming online and how it is affecting rent increases] – https://www.multihousingnews.com/post/us-multifamily-supply-demand-forecasts-by-metro/
Time to Step Up the Value-Add Game [Just have to focus on forced appreciation and not just walk into value by just bumping the rents with the market]
Banks still love multifamily deals, but with pricing and rental rates hitting records numbers, they are being more selective [Where 1.25 Dept Service Coverage Ration was the standard not 1.20 is being accepted] – http://www.globest.com/2018/05/15/banks-tighten-multifamily-lending/?slreturn=20180703022119
The similarities to the years leading up to the “Apartment Recession” of 1972 are eerie. [Although coming from a crowdfunding guy and not an operator himself] – https://www.therealestatecrowdfundingreview.com/single-post/2018/06/28/How-Will-All-the-Apartment-Overbuilding-End
This is perhaps the reason why I don’t invest in things like Short Term rentals or restaurants because it’s just too accessible to the average person.
Competition is the key!
I am conscious that I need to be up leveling my game and moving into spaces inaccessible to the common guy. This is what makes brick and mortar companies like Railroads and Telecom/utility companies so popular because it costs so much to compete with them if not impossible from a legal and infrastructure standpoint.
I might be getting a little too political but often times more government regulation on an industry just drowns out the small players. When you look what happens it’s the big companies (think Big Oil) who are lobbying for more regulation on their industry to kill the competition.
In search for yield, we need to not look in the obvious investments (Stocks, SFHs, MFHs)…
Here is an outline on why Mobile home parks are just that.
Demand for an Asset class that is not being rebuilt:
Affordable housing is in high demand. Approximately 26% of American households earn $25,000 per year or less.
Class C-B apartments that I look at are 80 cents to a dollar rent per square foot. That means an average of $800-1000/month for a 1-2 bedroom.
For those making $30,000 a year (assuming 33% of their budget to housing) that puts their max at $800 a month. What about the folks under there? MHPs is the answer and we will have the pick of the litter for quality tenants.
New mobile home park developments adding to supply is just not happening. This eliminated new competition for current mobile home park investments.
I have to constantly watch new apartments coming online and absorbsion on pushed rents which is an afterthought for MHPs.
Higher Cap Rates Than Apartments:
Mobile home park investments have higher cap rates (1-3 percentage points higher). This equates to better cashflow if you are looking for more of a legacy hold.
Due to the scale, we will be doing a cost segregation to take advantage of the new tax laws for bonus depreciation in the first year of ownership. (Don’t know what Cost Seg is? Email me for an unedited webinar we did that is currently unpublished).
The majority of a mobile home park’s value is comprised of land improvements (roads and utility lines), which is be depreciated at a schedule averaging 15 years compared to apartments of 27.5 years and commercial properties of 39 years.
Key differences in operation:
1. Lower tenant turnover: 10-15% annual turnover vs >60% for apartments [Where else are they going? It’s a captive customer base] Mobile home park investments offer tenants more space than apartments and a better sense of community so it does not compete with apartments.
2. Minimal Ongoing Capital Expenditures: The value of roads, clubhouses and other common area improvements can be maintained with periodic capital expenditures averaging $125/site annually.
3. In order to achieve lower expenses and achieve better communities, we want our residents to own their homes and just rent the space from us. Reduced operating expenses: ~30% for MHP vs. ~50% for SFH/apartments. investing in an MHP you will own the land and property infrastructure (streets, utility connections, and common areas) and the leases the land to homeowners. Of course when we buy a park its a bit of a hodgepodge of existing operations but we get paid (lower buying price) to solve problems!
“What other multifamily rental property type enables investors/owners to collect monthly rental homesite lease payments; PITI home loan payments; and when present, apartment rent on homes sited throughout this unique, income-producing community? Answer: None!” Source: NREI
4. Why doesn’t a tenant run away with their home if they fall behind in rent? It costs $4,000-$10,000 for a homeowner to move and reinstall their home into another community. This money is taken as a deposit or down payment on the purchase of their mobile home park. We are not in the business of home fabrication but we have partnered with national builder Clayton Homes (a Warren Buffet company – he must think highly of this space).
As I have mentioned before one of the takeaways I discovered learning from the best passive investors out there is that often the most boring and least sexy investments make for the best cash flow machines. And if nothing else Warren Buffet is in the space currently.
For those of you with Self Directed IRAs this is the time to invest because we are not using leverage on this deal. No UDFI tax!
I truly believe if you have money in a self-directed IRA, this is likely to be the last opportunity to see one of these non-leveraged deals in 2018 (I’m evaluating another but who knows if I will move forward on it).
It’s when a syndicator manipulates the reversion cap rate to greatly influence the total returns, so they can attract investors to a deal.
Cap rate is the market determination of how much you should pay per NOI. It is what it is and Class A is lower than Class B and Class C. An increasing Cap Rate means it’s a softer market and you are not going to be paid as much for you NOI. To be a conservative underwriter you like to see the Reversion (exit) Cap rate +1.0% higher than the starting cap rate. For example if your starting Cap Rate is 6.25% then you want to use 7.25% as your reversion cap rate.
The Reversion is a “wild-ass guess” to begin with. That is why you want to be conservative as assume you will sell in a softer market. By using anything less than +0.75% is simply “kicking the can” down the road. Likely what the syndicator will do is just blame the missed targets on the economy where it was just screwed from the get go.
See below how much it impacts the total return. This is why you need to look under the hood and stop taking the “sticker price” for face value.
Other Resources for Due Diligence
North Dakota/South Dakota/Nebraska/Iowa/Kansas – From ALN (Note Multifamily not MHP analysis)
With fewer new construction units than many other regions, the markets in this area mostly experienced positive net absorption and occupancy movement. Most new units were added in the Des Moines market, at just over 900. Net absorption totaled almost 1,000 units for an average occupancy improvement of about half a percent. This was enough to push the average back to 90%, though still down from just under 95% in June of 2016.
The only other market to add more than 50 new units in the first half of the year was Omaha, with about 250 newly delivered units. Unlike Des Moines, net absorption significantly outpaced this new supply, resulting in occupancy rising by around 1.5% to just over 93%. With a loss of 0.5% Lincoln was the only market in the region where average occupancy declined.
Rapid City and Sioux Falls in South Dakota both performed strongly. Rapid City managed a 2.25% average occupancy improvement, and Sioux Falls touched 7%. Unfortunately, Sioux Falls still ranks in the bottom 10% of all markets nationwide with an average occupancy of 89%. The North Dakota markets, Bismarck and Fargo, both ended June above 90% occupied thanks to gains of about 1.5% in each market. Wichita ended June 90.6% occupied, after beginning the year at 90%.
Just about all the markets in this area experienced average effective rent increases between 1-2% in the first six months of the year. The exception on the good side of that threshold was Bismarck—at 11%. This brought average effective rent per unit from below $850 per month, to above $925 per month. On the other end of the spectrum, Sioux Falls suffered a decline of 0.75% in effective rents.
Oklahoma/Louisiana/Arkansas/Missouri – From ALN (Note Multifamily not MHP analysis)
Most of the activity in this region was in Kansas City. More than 2,000 were added, and almost 3,200 net units were absorbed. This was enough to push average occupancy up 1% in the market to end June at 91.5%. The rest of the region was a mixed bag. Some markets, like Northwest Arkansas, Baton Rouge, New Orleans and St. Louis added around 500 new units. Each market managed to barely surpass that new supply with newly rented units, except for New Orleans. The area only absorbed half the number of units that were added. The result was a loss of 0.25% in average occupancy—hardly a crisis.
Other markets in the region had little to no new construction deliveries in the period. Most took advantage and occupancies rose. Little Rock nearly hit 2% in occupancy growth, Columbia came in just under 3%, Tulsa rose almost 2% and Oklahoma City rose 1.25%. But, Shreveport remained flat to open the year and Monroe dropped by 0.67% despite no new units.
Average effective rent growth underperformed the national average for the period in each market in this region, other than Lake Charles. The increase there, of more than 5%, is mostly attributable to the new supply. As a reference point, Lake Charles added new units equaling 5% of the total market capacity** in the first six months of the year. The state of Missouri performed well, as each of the four main markets in the state surpassed 2% effective rent growth. Springfield led the way, barely falling short of a 3% gain.
Arkansas was similarly homogeneous, as both Little Rock and Northwest Arkansas achieved increases above between 2-2.5%. Oklahoma City ended June with a solid 1.25% improvement, but Tulsa managed only a 0.25% increase. New Orleans couldn’t match the Lake Charles leap, but nonetheless experienced an impressive 2.4% climb. Only Monroe lost ground in this region, losing 0.5%.
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Other thoughts from other Hui Deal Pipeline Club members:
“the median cost for a 2BR stick home in the area sell for (use sites like city-data.com and you typically want to see a price of $100K or more in the area so it doesn’t compete with the MHP market). Also how much is a class C 2BR apartment rent for in the area (use sites like rentometer.com and you want the lot rent to be about 50% less than a 2BR apt so you know there will be ample demand for low-income housing).”
Looks like the Hedge funds are playing in the Mobile home park space – Bloomberg – [The smart money is starting to flow into MHP space]