Many people look at a handful of listings on Mobilehomeparkstore and Loopnet and declare “mobile home parks are overpriced!” But is that really true? In this Mobile Home Park Mastery podcast we’re going to focus on this topic and examine it factually. Are all the good deals gone? We’re going to talk about that.
Episode 242: Parks Are Overpriced, Right? Transcript
[pause]
Frequently I'll hear people say, "Mobile Home Parks. Yeah, I looked at them. They're over-priced." And I'll say, "Well, how did you come to that conclusion? What did you do?" "Oh, you know, I looked at a few of them online, and they looked to me like they were asking way too much, way more than they're worth." So, are Mobile Home Parks overpriced? This is Frank Rolfe, The Mobile Home Park Mastery Podcast. Let's look at this topic scientifically, it's easy to broad brush by looking at one or two listings on Mobile Home Parks store or LoopNet and come to any conclusion. But what's really going on out there in the big wide world of Mobile Home Park values? Well, let's first define what is overpriced? What does that really mean? Mobile Home Parks like any income property are purchased by smart investors based on the spread, and that spread between the interest rate on the loan and the cap rate on the property, that's what creates the high rates of return. If you bought any asset for all cash, the most it would return would be the cap rate, but if you apply leverage as a tool and the cap rate is higher than the interest rate on the loan, it boost your overall return. Now, to get the 20% cash on cash return or high will require at least a three-point spread over interest rate, so if you're borrowing money from the bank at 5%, you'd have to hit at least an 8% cap rate to hit a strong double digit returned.
But I've been through periods when things truly were overpriced in the Mobile Home Park industry, now for those who were in the business, they remember it well, and it was in the mid-2000s, in the mid-2000s prior to the Great Recession, there were people buying Mobile Home Parks at cap rates that were lower than interest rates, so they had leverage working against them, their rates of return were amplified into the red, that is the true definition of somebody... Something that's overpriced. So you have to have the positive spread between interest rate and cap rate and right now, on every deal that you see that actually closes, not the crazy things that some people may put online, but things that are actually closing, you will always find that healthy relationship between cap rate and interest rate in as much as the cap rate is in fact higher than the prevailing interest rate, and that's not going to change because lenders are just not nuts. Yes, they were not back in the mid-2000s, and the ledgers all admit that now, after the horrific fall from grace of the great recession, but the modern Mobile Home Park lender, whether it be Fanny Mae, Freddie Mac conduit bank debt, even seller carry, they're not suicidal.
They only wanna get involved in deals where you can actually make your mortgage payment, many lenders even put additional stress tests on top of that, there's people out there who go ahead and say, Well, what would happen if the revenue declined by 5% or 10% or the cost went up, lots of what if scenarios, just to make sure they don't get too carried away, and because the lenders have been very rigid in their underwriting standards, that has helped keep the industry correctly priced, what happened the been 2000s, which allow there to be cap rates lower than interest rates was simply the fact that lenders let that occur. We all use debt on properties, I don't know anyone who buys properties with all cash, at least certainly not anyone trying to get their maximum yield, but when you start allowing people to pay crazy prices and finance them, that's what causes the problem. But you won't find that right now. Now, the second thing you have to realize when people tell me, "Oh yeah, I looked at Mobile Home Parks, but they're all over priced", this is not a lazy person's industry, so deals are definitely hard to find when the only way you're trying to find them is through listings, a Mobile Home Park store or LoopNet or even casually calling a couple brokers that is not casting a big enough net, and that's certainly not the part of the net that's gonna get you anything good.
Online listings are perfectly fine, but they have limitations 'cause typically people... When they put something out there to the big wide internet, they get very bold on the pricing, hoping there's someone out there, we call it fishing for idiots, the person who often buys things based on the price that they're given online, well, they make terrible buys, but it typically doesn't happen 'cause the banks went underwrite it anyway, and if you're gonna go to brokers, you can't just hit a couple, you gotta hit them all. There's about 100 in America, but all the time people tell me when they're... I ask them alright so you're talking to brokers? Yeah, I'm talking to one. Talking to one? You're still shortened 99. The other problem is that the really great deals don't come from those easy resources, anyone can go out Mobile Home Parks store or LoopNet right now in your computer, so there's really no barrier to entry, the barrier to entry happens when you get into three areas, cold-calling, Direct Mail and pocket listings.
So what's cold-calling? Well, that's when you simply call up people who own Mobile Home Parks to see if they would like to sell now, there's effort just in assembling the list, you have to go through the tax assessors database, you have to put it in the address of the Mobile Home Park, that thing gives you the owner and their contact information.
That's some effort that some steps, and then it's effort and out of your comfort zone, actually you didn't called them, and that's why far, far fewer people do it the same with direct mail. It's a little less scary. No phoning required, but you still gotta get the owner's name and address from property records, and you still have to then send them the postcard or the letter to start the process, and again, that requires some effort and then there's pocket listings, that's back to brokers. You'll say, Wait a minute, I thought you said brokers, that's the lazy way. Well, no, the way people approach it, where they call it a couple is a lazy way, but the real, real, difficult way that really yields results is when you not only reach out to all the 100 plus brokers out there, but you earn their respect that they start showing you what are called Pocket listings, these are not publicly advertised listings, but private listings, typically, you've got a mom and pop who tells the broker, "Yeah, I'd sell my park, if you had someone who would offer me X", but you can't go ahead and advertise it.
I don't want my manager and my residents to know that, but you can't just get the pocket listings when you show up without any little effort, without earning the right, they only wanna show those to people that they believe will actually buy them, because if for any reason word got back to the owner via the manager, that the property was for sale then the owner would never let that broker ever sell that property. So there still are lots of things out there, if you'll just follow the harder methods and not just online listings and calling a few brokers, don't forget that there's roughly 44,000 Mobile Home Parks in the US, and that's a lot of Mobile Home Parks. There's more Mobile Home Parks in the US than there's self-storage facilities and heaven knows, you see those everywhere, but unlike self-storage, there's only 4000 of that entire supply that are owned by institutional players. If you take number one through number 100, number one is good old El Sam Zell Rit. Number 100, I think is Abraham Anderson one of our boot camp attendees, and you take the total number of Mobile Home Parks that all of those top 100 owned, these are the 100 largest owners in the United States, it doesn't even total to 4000, it doesn't even total to 10% of the entire quantity of them in America storage is very different.
If you look at all the self-storage facilities owned by public storage and all the others, you will find it's a much larger piece of the pie. It's about three to four times larger. So the supply for Mobile Home Parks is still out there. So when you add it all together, the simple fact that there's still parks out there to buy, and the pricing is still good, and the problem is that people just aren't using the right method... The real answer to it is yes. Things are over-priced, if you try and take the easy lazy route, our industry is not... Nor has it ever been a get rich quick industry. You see those infomercials on TV, you see books at the bookstore for $20, telling you that you can make vast riches in five seconds with no effort. I always love those commercials because anyone who had believed a commercial that says you can make a million dollars with no effort and no risk in no time, well, you know, that's not really an opportunity. Right, that's stupid. Most people would realize that isn't how life works, if it was that way than whoever wrote that commercial, we'll just do it themselves, why would they tell anybody.
It doesn't make any sense. Our industry is entirely different. It's all about effort, it's all about strategy. It's all about the time, the time to learn what you're doing and the time required to turn a property around, that's why you find such a strong fellowship, of park owners out there because they've all put in the effort and the time, they've all earned the right to talk to each other in intelligent manner, it's like somebody who's served in the military, so the answer to the question is no, Mobile Home Parks are not overpriced, no, all the great deals are not gone, they're hardly dented. But if you wanna get a piece of that, you've gotta put in the effort, it's like going to the gym, you can sign up for a gym, you might go a couple of times, but you're not gonna lose any considerable weight or gain any muscle mass by going and lifting weights one time a year, instead you have to put in a very consistent focused effort, a smart effort, that's what rewards you at the gym, that's what reward you with buying Mobile Home Parks. This is Frank Rolfe the Mobile Home Park Mastery podcast.
Hope you enjoyed this. Talk to you again soon.