If one of your goals for 2013 is to buy a mobile home park, then you might want to consider what type of park is right for you – both financially and mentally. We have bought virtually every type of mobile home park there is over the last nearly two decades, and we are constantly refining and learning from our experiences. The type of park we seek today is different from those we bought early on in our careers.
Initially, you feel that the value-add must equal the profitability
As Americans, we are all brought up to believe that the more work you put into something, the better the outcome – that’s the very basis of our “work ethic”. So many investors view the most difficult and risky turnarounds as being the most lucrative. In that vein, many park purchasers will deliberately seek out parks that have every imaginable problem, from broken private utilities to piles of abandoned, derelict homes. Instead of a list of 10 things to fix, the list is more like 100. But after doing these deals, and seeing the net results, we believe that there is not a correlation, necessarily, between high risk and high reward.
Then you learn that there’s a greater return in just being smart
Why buy a park with 100 problems when you can make a better return on a park with only 2 or 3? Is it possible that you can outsmart the “work ethic” by just being a smarter buyer? We believe so. Here’s a recent example. We bought a park in Odessa, Texas that suffered from poor management. It was in great shape physically, and it did not need a lot of capital-intensive work. What it needed was a better manager, a rent raise, and some other easy-to-perform items. We sold that park last month, after a 13 month hold – for a $1 million profit. That would seem “unfair” based on our “work-ethic” beliefs, but the reality is that mobile home park investors are really rewarded for improvement in net income, not in the manner in which that improvement was accomplished.
What are “stabilized with upside” deals?
These are deals that have slightly less than or existing stabilized occupancy, no major infrastructure issues, and a turnaround plan that is nothing more than raising rents, billing back water/sewer, cutting expenses, renovating and selling a few homes or filling a few lots. If you can buy such a park at an existing 10% cap rate, then the deal already offers a good return day one, as well as the potential for spectacular returns over time, as the turnaround plan takes effect. In this type of deal, the risk is minimized, the effort is minimal, and the odds of success are extremely high.
Why we have grown to prefer “stabilized with upside deals”
Going back to the Odessa deal, you can make $1 million with a simple low-risk park, or you can do it with a highly risky, complicated transaction in which you have to fix some extremely expensive problem such as a failed packaging plant, or completely renovating 50+ homes. In that type of deal, you shoulder giant risk, and have a horrible return until the park turnaround is complete. In addition, a non-stabilized park is unable to obtain a loan, and even if the seller carries the paper, the capital intensive turnaround will require huge amounts of cash from the buyer. Assuming that both deals end up at a 12% cap rate, and a 20% cash-on-cash return, then the end result is the same in both deals. So why take the difficult road and not the simple one? Even more importantly, the risk level of the stabilized with upside deal is far lower and, like stocks, the return on risky deals should be higher, yet they often are not.
Conclusion
It has taken a lot of years for us to learn that stabilized with upside deals are the best type. It runs contrary to our “work ethic”, but not contrary to our belief that it’s smarter to shoulder lower risk and less effort to achieve the same result.
