Mobile Home Park Investing Newsletter

There are roughly 20 million Americans who live in Section 8 apartments – that’s roughly equivalent to the total number of people who live in mobile homes in the U.S. What’s amazing about that statistic is that the government is such a huge supporter of the apartment industry, but does absolutely nothing to help the mobile home park sector. If you really think about it, wouldn’t the government be better off putting their money into programs that help Americans be homeowners, rather than keeping people as generational renters (Section 8 does not allow the occupant to be on a path to ownership)? At some point, the affordable housing crisis in the U.S. will finally get on political radar screens. We hope that the folks who run our government realize that there are other ways to cure this shortage than traditional apartments, and that helping to make a person a homeowner instills in them a sense of respect, as well as a much lower monthly payment!

It’s hard to miss the news stories about the Dow rocketing up and down on a daily basis right now. If there’s one thing that the market produces consistently its uncertainty. But what’s the impact of the unstable U.S. stock market on mobile home park investing?

Lower cap rates

With the stock market’s poor performance -- as well as the negligible rates now paid on bonds, CDs and Treasuries – cap rates have come down, since investors are willing to accept a lower rate of return now that most other investments out there are producing negative and near zero performances. As long as financial markets remain in anarchy, cap rates should remain low. But beware that while you can buy at 7% cap rates and up with fairly good security, anything under 7% is taking quite a gamble. Cap rates, like the stock market, also typically cycle, and you don’t want to be buying parks at 5.5% cap rates (which is pretty standard in California, for example) when caps start climbing.

More capital chasing deals

We have written many articles over the past several years about the new entrants to the industry: mostly well-known private equity firms. With these rookies come a huge amount of capital to spend. This has driven the cap rates to ridiculously low levels on some properties. Since these buyers are only interested in large, institutional-grade properties, their effect on most park owners is negligible. But they do have an important side effect, which is greater lender confidence in the industry. The entry of Sam Zell and Warren Buffet and the Carlyle Group have instilled confidence on the part of the banking community and obtaining mobile home park loans has never been easier on good properties.

Low interest rates

Just as the pathetic performance of the markets have driven cap rates lower, they have also pushed interest rates to near historical lows. Interest rates in 1776 were at 6% -- two points higher than they are today for most loans. As the stock market is a function of the economy, the weak economy has kept rates low for nearly eight years now, and there does not seem to be an end in sight. And, as the key to making a high cash-on-cash return is the “spread” of loan interest rate to cap rate, the two are somewhat related.

Need for employment diversity in every market

One casualty of our unstable U.S. economy is the havoc it wreaks on businesses. Take, for example, the oil and gas industry, which has watched its product fall in value by over 50% in one year. This, in turn, has turned formerly strong economic areas into virtual ghost towns overnight. If you owned a mobile home park in an oil and gas market, you’re investment is in jeopardy. The lesson learned is that you have to buy only in markets that are well diversified. Our favorite employers are hospitals, colleges, school districts, and government – industries that are immune to the rise and fall in the stock market.

Affirmation that you have to get off the beaten path

Perhaps one of the greatest lessons from the U.S. financial market instability is the necessity to take some risk and get off the beaten path if you want to show any type of investment return. If a mobile home park can produce a 15% cash-on-cash return, that’s the equivalent of 15 years of a 1% CD. With contrast that shocking, it’s a very compelling case to venture into investment options that actually have some type of significant return.

Conclusion

The future of the U.S. stock market remains unclear. It is currently showing a negative return for 2015, and the hope of it showing any significant in the few months remaining is negligible. The impact of this outcome is favorable for mobile home park investing, as a whole. But there are lessons learned that every smart investor will watch out for in the years ahead.

We are constantly asked “so how long will this mobile home park buying opportunity last?” We are pretty confident that it has about a decade to go, as long as interest rates remain stable and low and there are no collapses in the lending markets.

Moms and pops are essential for great deals

The main reason that we’ve been able to buy mobile home parks at such low prices and favorable terms over the past 20 years boils down to one item: buying direct from moms and pops. These are the “greatest generation” of Americans, who literally built this country as it emerged from the Great Depression. Because they have owned these properties for such a long period of time, there are often new methods to increase net income significantly, such as raising rents, sub-metering water and filling vacant lots, that they have elected to abstain from. Since they have such a low basis in these properties, they have the ability to offer a win/win purchase.

Seller financing requires the property to be owned free and clear

In addition to often offering great pricing, moms and pops also frequently elect to carry the financing on the deals they sell. Why not? It makes complete sense given the current interest rate environment. We pay our sellers around 5% interest, which is around five times more than they would receive with a CD. The loan is collateralized by an asset that they built and know like the back of their hand, unlike a bond that is collateralized by a company that manufactures widgets. And they receive much better tax consequences, as they earn interest on money that would normally go to the IRS on day one.

These sellers are getting older every day

It is truly regrettable that the “greatest generation” is dwindling every day. These are the best folks that our country has ever produced. As we all age, we get hit with medical issues and sometimes just plain get tired of managing mobile home parks, and want to do something else in retirement. The number of sellers wanting or needing to sell their parks escalates daily. Just based on life expectancy, the pool of sellers is going to dwindle enormously within a decade.

Industry consolidation

Of course, the other force at play on the window of opportunity in buying mobile home parks is industry consolidation. The mobile home park sector is the lease consolidated of any real estate niche. Self-storage – which is 20 years younger than mobile home parks – is already 300% more consolidated. Since they are not making any more mobile home parks, once they’re gone, they’re gone.

Conclusion

The mobile home park “golden age of buying” probably has a decade left to go. It was 60 years in the making, and has entered the final period of the great transference from the “greatest generation” to the next wave of owners. If you miss it, it’s not coming back – ever.

Clayton Homes and 21st Mortgage have partnered together to bring a game changing new program to mobile home park owners. If you have any vacant lots in your mobile home park or in a park that you are looking to buy, then you definitely need to be aware of the CASH program to fill vacant lots with nearly zero capital out of your pocket.

For more information you can contact Lance Hull at 21st Mortgage. You can call him at 800-955-0021 ext.1218 or email him at [email protected]. You can also contact Aaron King at Clayton Homes. You can call him at 865.380.3000 Ext. 5164 or email him at [email protected]. To visit the Community Calculator website discussed in the webinar, click here.

Disclaimer: The materials and information available from this posting are for informational purposes only and not for the purpose of providing legal advice. The contents should not be construed as, and should not be relied upon for, legal advice in any particular circumstance or situation. Further, the information presented on this posting may not reflect the most current legal developments. An attorney should be contacted for advice on specific legal issues.

Disclaimer: The information in this posting is not for consumer use and is not an advertisement to extend consumer credit as defined by TILA Regulation Z.

Recent technology has made drastic improvements in your capability to manage your mobile home park. You don’t have to be Captain Spock to understand how to use these new inventions, and the impact on your management is as big as the “final frontier”.

Monthly video “drive through” of your park

To accomplish this, all you need is a Polaroid Cube HD video camera, with a suction-cup mount for the hood of the car, and two memory cards. You have your manager video your park monthly, and then detach the memory card and mail it to you. You can then download this memory card and watch every inch of your park in HD – just as though you’re driving through it yourself. From this video you can determine a number of important items, such as if the property is being properly mowed, if there are any non-running cars, debris in yards, and 1001 other observations. For the first time, this gives you the same level of comfort as flying or driving out to your park and driving through it every 30 days. Unlike the concept of installing stationary surveillance cameras in your park – which is extremely costly – the Polaroid Cube, including all accessories, is under $200. In addition, unlike stationary cameras, there are no “blind spots”; you see 100% of the property

Surprise audit using a smart phone

Almost as important as the ability to make phone calls, is the ability to send instant photos from a smartphone. You need to use this technology to your advantage. If you have any vacant homes in your park, then it’s a good idea to make sure that they are in “show ready” condition, both inside and out. So call up your manager and tell them they have 10 minutes to send you five photos of the interior and exterior of every vacant home. This makes sure that the homes are cleaned out, in good condition, and that the yard is mowed and weedeated and the skirting is on and looking good. You should also use the smartphone to get photos to evidence any repair work, or that rehab work has been completed on on a home. You may find that the photo capability of the smartphone is more important to you than the audio component.

Mystery shopping

This is not a great technological breakthrough, but you can remove your caller ID from any phone by dialing *67 before you begin to dial the number. This allows you to call your manager without him knowing that it’s you. You can then simply disguise your voice a little and ask “do you have any mobile homes for sale or rent?” As simple as this exercise is, it can pay huge dividends in making sure that your manager is actually answering the phone, giving a decent sales pitch and then striving to set up an appointment to show the home.

Conclusion

With these concepts, you can increase the control over your park enormously for under $200. And that’s permanently. Compare that to your current travel cost.

I found this catalog ad for National Trailer Sales at an antique store in Missouri. Look at the mobile home closely, and note how different the mobile home is compared to modern units. There was no date on the magazine, but I believe that it’s from the 1940s to 1950s. The first thing you notice is that all of the furniture is built in and firmly affixed to the floor. This was mandatory in that era, as the homes were built to be moved frequently, just like the modern RVs of today. Next, notice the many built-in cabinets. This was an era when mobile homes had real craftsmanship, and manufacturers were very focused on the details, as the buyers in the 1940s and 1950s were very upscale and discriminating. Finally, note the similarities to the interior of a yacht of that era. This was at a time when mobile home owners had very high demographics, and these homes were, in a word, “classy”. .

I wanted to share my recent experience with Mike Renz. Jeff and I needed a Phase I completed for a mobile home park purchase late last year. I shopped around, including Mike Renz as one of my quotes, and eventually chose a local consultant to perform the work. The savings was on the order of $300, and the local guy was "local"--meaning, he should be familiar with the area databases, industries, geology, etc.

In my initial conversation with Mr. Renz (and during every presentation he's given for you), he mentioned that regardless of who I chose, if I had questions, to call him. His advice would be free of charge.

The report I received from the local consultants was pretty bad. Being an engineering consultant in my prior life, I was expecting a much higher quality report. The local guys didn't really do any consulting, and worse, made blanket assumptions, suggested scientific theories that were incorrect with no supporting data, and worst of all, erroneously listed recognized environmental conditions (REC). I called Mr. Renz--he immediately/graciously reviewed the report, talked me through his major concerns, and provided a detailed email with a list of talking points that helped me discuss the report with the local consultant. With the talking points, I was able to reason with the local consultant. The final product was a Phase I report that I felt comfortable with, and more importantly, that the bank accepted.

Needless to say, next time Jeff and I need a Phase I, we're calling Mr. Renz.

As always, Jeff and I appreciate your help and advice and your willingness to share your experiences. After listening to Mr. Renz' presentation oat the Summit, I wanted to thank you again for bringing professionals like Mr. Renz to our attention.

-Jill S.

You can contact Mike Renz at (614) 538-0451.

There are two ways to get any repair or rehab accomplished: 1) using licensed, insured, professionals or 2) using hillbilly Bob in lot #12, who claims he can do anything for around $20. While Bob may seem like the right choice based on cost, the truth is that there’s more to the story than just the up-front price. Because Bob is going to do the job poorly, requiring it to be done again, and then probably break something else while he’s at it, costing even more money, and then adding on some liability, as well. So even though it sounds cheap on the front end, always remember that the pro is the better choice, as the job gets done correctly and on budget – and with no ancillary damage. Here’s the typical cost comparison of the pro and the schmo:

Project: To fix a leaking outdoor faucet.

The Pro: He comes out, replaces the washer, and bills you $75.

The Schmo: He comes out, breaks the faucet with his wrench, slips and falls in the resulting water pool, which then breaks his arm, in his excitement to drive to the hospital, crashes into the mobile home located behind his car, knocking it off its blocks. And the faucet is still not fixed, so now you call the Pro and he has to replace the whole broken thing for $200.

It’s your choice.

We did a lot of conduit loans -- and regular bank loans -- last year. A common feature of those loans was Security Mortgage Group. If you are buying or financing a mobile home park, let Security Mortgage Group get you the loan. They'll get you better terms than you'll ever be able to find on your own. That's why the win the industry mortgage broker award virtually every year from MHI. If you have any loans you need help on, you can reach Anthony or Gerry at (585) 423-0230.

We recently had the opportunity to interview Mark Bowersox from the Indiana Manufactured Housing Association. He had some great thoughts on the industry’s current challenges and solutions. Here were his observations.

The industry has a shortage of financing of homes for consumers

Since the industry had its “chattel crisis” in 2000, the lending for consumers has never really returned in a meaningful way. New concepts, such as 21st Mortage/Clayton’s CASH program, solve the problem from the park owner’s perspective, but what about the old fashioned dealer network, in which homes were sold without the park owner’s involvement. Mark made the observation that there are only two ways to energize home lending: 1) looser lending standards and 2) more qualified buyers. Since there’s no point to looser lending (that’s what caused the chattel crisis to begin with), Mark hopes that the more attractive product now being offered by manufacturers, coupled with the insane price of apartments will cause a new strata of customer to emerge.

The industry needs new blood

It comes as no shock to anyone who has ever attended an industry event that we are an industry of mostly older individuals. That’s great from the perspective that older folks often are smarter based on experience, but at some point your whole industry is in jeopardy of dying out. So we need young people to step up and start getting involved in the mobile home industry. How do you accomplish that? Mark’s opinion was that we need to change the impression and perception of the industry among young graduates, so that they consider a career in the mobile home sector. I also added that we need to start paying people more, so we can attract the “best and the brightest”. I noticed at the National Apartment Association convention in Las Vegas this year, that the apartment industry seems to have a great deal of younger talent. One reason may be that apartment owners pay higher salaries. They do that through rents that are about 400% higher than mobile home parks. That’s why Dave and I predict significantly higher lot rents going forward.

Legislators and regulators need to see mobile homes as a solution and not a problem

Mark sees the problem not being at the State and Federal level, but more at the local government level. We see that frequently, particular in the arena of “grandfathering”. Mark sees the solution to this issue being an enhancement in the image of the industry, so that local government does not see the mobile home park as a problem, but the solution to the affordable housing shortage. Dave and I have often held the feeling that Class B and C apartments are the worst things in the average community, certainly not the mobile home parks. We need to demonstrate more clearly the benefits that we have to offer.

The industry needs to work together and not at odds with one another

Dave and I know too well that the industry often wastes a lot of energy on such trivial items as whether out product is called “mobile home” or “manufactured home”. There are different associations and groups which seem more focused on fighting than working together. Mark sees the solution as acknowledging that the industry has a lot of talent, but that we need to break the boundaries and work together. He also noted that we need more industry leaders to push for changes, and not just a few folks.

Conclusion

We are members of every state Manufactured Housing Association that we own parks in. We encourage everyone to take a more active role in solving these problems. And we thank Mark for his input!