Brokers frequently claim that a market is “hot” which they equate to being of superior quality and therefore worthy of potentially overpaying. But it this a good idea? Should you favor “hot” markets? In this Mobile Home Park Mastery podcast we’re going to explore this concept in depth and offer some constructive pointers regarding buying parks in these parts of the nation.
Episode 350: Understanding The Concept Of “Hot” Markets Transcript
Webster's dictionary defines hot as of intense and immediate interest. And we all know that mobile home park brokers throughout the mobile home park industry frequently refer to certain markets as being hot. But what's the truth about hot and how does that relate to making money with a mobile home park? This is Frank Rolfe with the Mobile Home Park Mastery podcast. We're gonna drill down on this whole concept of hot markets and where they come from and what they mean and how you can kind of predict where they may be going. Let's first start off by saying that hot is horribly overused in our industry. Virtually every broker and every listing will proudly put on there that it's a hot market. And that's just not true, because a hot market is rare. It's not average, it's above average. And it's thrown about so frequently in the mobile home park industry that it would seem that it's just very run-of-the-mill, which it's not. Now, a hot market in reality would have to have the following attributes. Number one, very strong growth in population. I've never seen anyone refer to a hot market where it truly was defined as hot where the population was stale or was declining. When we think of a hot market, what do we think of?
In Texas, we think of Austin. That's a hot market. In Tennessee, we think of Nashville. Okay, that's a hot market. What do they have in common? Well, the population always seems to be going up. Number two, hot markets traditionally have in common the fact that they trade at lower cap rates. So typically when someone says this is a hot market, what the broker is trying to tell you is expect to pay more, expect to get a lower cap rate because it is so very hot. So it typically leads to a financial situation that's not quite as good as it might be in some other markets. And also when a market is hot, we assume there'll be strong lender favorability and that's probably what allows for the lower cap rate is the fact that banks are willing to stretch more, to extend themselves a little farther because of their perception of that market as being hot. It typically also means you have higher lot rents right now because hot markets, traditionally being identified as hot, leads to rents going up more than in other markets.
And also, hot markets typically have little supply versus demand by buyers because everyone flocks to the hot market and says, "Hey, I wanna buy a mobile home park in Austin or I wanna buy a mobile home park in Nashville." And they kind of beat it to death, constantly hitting up every park owner, offering things that the park owner did not expect. And then suddenly the number of parks available is reduced. So typically there's a supply and demand function that is not favorable to the buyer. Typically it's more favorable to the seller. But in all of the things I just mentioned, what are you not hearing? Well, if you add all those together, one thing you're really not hearing is the ability to make lots of money. If you're buying things at a lower cap rate, if you're buying things where there's much greater buyer demand and lower supply, all of these things would lead you to not making as much money. And that just is part of buying in hot markets traditionally, the returns just are not as high as in markets that don't have that same level of heat.
So, let's talk for a minute about Austin and the parks that we bought in Austin. Austin is a hot market, but it's not always been a hot market. And when we bought our parks in the Austin area, we bought them because we knew we were ahead of the curve. We were there before a lot of people in our theory that Austin would expand out and that Austin would become a hot place to own a mobile home park. And those parts have all done very, very well for us. But the key, the critical feature was that we bought them before they became hot. So really, if you wanna make money with the concept of hot markets, to pull that off, you've got to spot a hot market before it becomes on the radar screen of everyone being hot. That's where the real money is. Buying deals before the cap rate drops, before everyone converges on the market simultaneously. So you've got to have that vision, that ability to see things that will be hot in the future while you can still buy them at attractive prices today. So therefore, how can you spot a future hot market? Well, the first thing you would do is you would take and map out markets that have right now very high single family home prices. And that would be your central core.
Throughout America, you have certain cities and markets that have abnormally high single-family prices. So that would be kind of your epicenter of what a future hot market would be. And then you would make concentric circles. Maybe a 30-minute out circle and a one hour out circle from that super hot urban core of really, really high real estate prices. Because we all know that over time that market, if it truly is hot, will expand out like that. That was one of the tricks of Austin. We learned from Austin that Austin was like a supernova and as it would explode and expand outward, all park values would increase seismically simply by being near that super hot urban core. Then you've got to determine what the path of progress really is going to be. What direction is that city going to move? It's not hard for the modern American to drive 30 minutes out to get a better home price or even an hour out to get a home like they want with the lifestyle they desire. But what direction do you think they'll be going? So how do we figure out where the pathway of progress will be?
Well, there's a lot of ways to do it and here are some of the key ones. Number one is figure out where all the roads are going. Many people do not realize this information is always available to anyone for virtually free. It's published by the State Highway Department. It's also published by the city or the county. And their entire handbooks will show you every proposed road they're looking at building and it will have them in tranches. It'll have the ones where they're discussing building the road and then where they have the plans and then when they're buying the right of way and then when they do the bidding process and then when they build it. It's not hidden. It's completely out there for public view, but most people just don't know to ask for it. But you can obtain that information. And you will see from where those roads are going exactly where the future path of progress lies. There'll be interstate highways potentially being extended that way. Certainly county roads will be going that way, major secondaries and you can easily map it out. It's not hard to map out all those future road projects right there from the plans that you can get from the state or the county or the city.
Another great way to see the future is to figure out where the utility lines are and are going. So in this case, you could talk to the city or the county and ask them, "Hey, where are the water and sewer line expansions going? Once again, obviously they're putting those in in anticipation of a lot of residential growth. So that will again, point the way to where things are heading. You can also look where single family permits have been going in because many builders also try and ride the wave and get ahead of the hot markets. So see where that's going. If it's in a county which doesn't have a lot of zoning, well, there will be a lot of zoning going where it's gonna be hot 'cause they're gonna want to be building those subdivisions and shopping centers. Watch for zoning, those kinds of issues. Look where the Walmart stores are going. Walmart has proven to be the most reliable source of advanced knowledge on future growth. When you see a lot of Walmart stores going in or even one single one going in, that's probably gonna show you the pathway to growth in that market.
Another thing to do if you're looking for markets that are gonna be very, very hot in the future but not now is do a lot of lot rent comps. Look for anomalies. Look for situations where lot rents are low and too low for what you see the future holding. That will give you the highest level of profitability 'cause those lot rents will increase as the price of all housing grows from that market expanding out. Also, look for underappreciated states. There are states out there that have just historically not gotten much respect from the mobile home park community at large. Now, there are some states, I don't know if I had put in that listing. I'm not really sure that the maturity is still there for Louisiana and Mississippi to be the future hotbed of hot markets, but it is true that much of the southeast is very underappreciated, particularly states like Alabama, where you have very little institutional ownership, yet home prices have risen substantially, as have apartments. Also follow along and read a lot of articles on where the prediction is of future hot markets. And it doesn't have to be just mobile home parks, it can be many other niches of real estate.
Where are the future hot markets for multi-family, single-family, commercial of all types. Follow all that. And also follow all the articles talking about future population boosting markets. So where do we see the population trends going? And then finally, what's your gut instinct? Where do you think the future hot markets lie? We all have our own opinions. We all watch the media. We read lots of articles. We think a lot. Where does your brain tell you those hot markets are gonna be? The moral to it all is the best way to make money with hot markets is not to buy them when they're already hot. That's not always been the good recipe to make good cash flow. But instead to buy mobile home parks that are in markets that are not currently hot but will be in the future. This is Frank Rolfe, the Mobile Home Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.