Lessons From the Front Lines

Living in one of my mobile home parks for the past five months has taught me many things about the industry in terms of operations and tenant base. 

First, the negative stigma about the people and living conditions is largely a reflection of the management. Mobile home parks can be nice places to live. For instance, this month one of our parks will have a Christmas light contest for best decorated yard.

Treat people with dignity. I've tried many approaches with tenants and the most effective is to be calm, understanding, and respectful. I've evicted good-willed people out of their homes. It's not fun but a necessary part of the business. One woman even thanked me for working with her, even though she has an eviction on her record, because I tried to make it work. 

People will test your boundaries weekly. Appearance of yard is similar to the broken window theory. Enforce yard clean up to show order in the park. Even financially vulnerable people want clean and safe living environments. This is the first thing new prospects will notice. 

Rumors spread like wildfire. Word of mouth is a powerful force. Don't underestimate it. Encourage open communication with tenants so they know the truth. 

Mobile Home Parks Require Active Management

I've connected with several of the top 100 owners in the country. People usually correlate size with effectiveness and profitability. To my surprise, several 'sophisticated' owners are negligent in their operations.  Purchasing is the exciting part. Operating is where the money is made. Mobile home parks can be operationally less intensive than other real estate classes. However, it is still active management. I see many newcomers looking to collect rents and pay the water bill. While enticing, most parks don't operate this way. 

Here are a few ways to stay on top of multiple assets. 

- Visit your property once a quarter or so. In person visits are hard to replicate even with technology.   

- Have an open business line for tenants to reach out with concerns. Stand behind your manager but it's helpful to provide an outlet in the event the manager is slacking. 

- Communicate frequently with your manager. At times, it can be overwhelming.

- Monitor closely who rents in the park. Tenant screening is step one to eliminating headaches, but it isn't foolproof. It is an ongoing job. Yesterday, I confronted a meth addict who was renting from a owner's home. Even with strong systems, bad actors can slip in.

A Few Thoughts on 'Going All-in'

I jumped off full time into this business with no safety net.

At the time, I closed one deal and had one under contract. I made $4,500 in the first half of 2017. In a way, I got lucky. If it weren’t for one opportunity, I would have made less $10,000 this year. Every month, I met and speak with people looking to purchase mobile home parks. Some are even considering starting a fund. There are a ton of people doing the same thing. It would be hypocritical of me to suggest that these people shouldn’t do it.

I would just think through a few of the headwinds I’ve dealt with this past year.

How are you sourcing deals? Brokers alone will not get you to an “living salary”. It’s a seller’s marker. Don’t be reliant on one deal sourcing strategy. It took me over a year of mailing before a deal came through.

Mobile home park transactions are small relative to other forms of real estate. If you plan to finance and use capital partners, it will be sobering how little comes your way. Closing large transactions or several medium size deals is the only solution.

Financing can be tough. Would you be willing to go recourse for a good deal? Do you have capital partners that will as well?

Two Schools of Thoughts

Two schools of thought divide the mobile home park (MHP) industry.

One is to own only pads or, in other words, the tenants own their home. The MHP owner doesn’t pay home R&M. The downside is that rent is much lower.

The second is to own the homes called park-owned homes (POHs). This is essentially a horizontal apartment complex, since the MHP owner is responsible for home R&M and turnover. The increased rent should cover elevated expenses.

Both schools will ardently defend their model and claim more profitability than the other. I think the answer is more nuanced. Time may change my analysis. If you want massive scale, lot rent is easier to finance and manage. Also, the buyer pool is larger and deeper. In certain markets, lot rent is woefully behind apartment rents leaving a sizable delta between rents. In these cases, POHs seem to make a lot of sense. Age and upkeep of units will drastically sway expense ratios. HVAC costs alone can erase cash flow. Certain demographics make POHs easier to manage partially because number of tenants, leading to less wear and tear. Seniors seem to be a great tenant base for this.

For my vision, I gravitate towards a lot rental model but several local players find success in the POHs.

Quick Advice When in the Heat of a Deal

One invaluable piece of advice that a mentor told me: find ways to do the deal. If the numbers work, push it to the closing line. It's common to focus on small issues that don't matter. Put the ego on the sideline and find solutions to problems that inevitably arise in real estate transactions.

Deal Questions in a Frothy Market

Parks that never seemed attractive are fetching high valuations. Properties in small MSAs are being gobbled up. People are stretching their criteria to make deals happen.  One risk is when optimism fades away. Banks get choosy and investors flee to quality. People get caught in the changing of tides.  Investors can forget about the liquidity premium needed for small real estate transactions.

A few things I try to keep in mind as I value property:

- What is my price per pad? Does my overall basis feel right?

- How quickly can I push to mid teens unlevered returns? Do I get compensated for the lack of liquidity in real estate versus investing in a REIT?

- Would someone a few states away know the location or MSA I am investing in? How large is my buyer pool?

- What is the downside base case? Can I still service the debt if things don’t go according to plan?

Screen to Your Cash Flow Success

The quality of your cash flow is a reflection of your tenant base. Mobile home park operations is a collections business. Find and keep good tenants.

Here is a quick criteria of things to look for:

- No felonies in the past 10 years

- No evictions in the past 5 years

- No history of theft

- Gross monthly income should be at least three times monthly rent. Verify with pay stubs, bank statements, etc

- Analyzing the prospect's rent score to determine their ability to pay essential bills (utilities, car insurance, rent, etc.)

It isn't always clear if someone is on the fence. At which point, you can request several months in advance for rent or a strong co-signer. 

Relate On Their Terms

While technology aids the mobile home park business in numerous ways, one thing remains paramount - face to face interaction. This past Sunday I spent an hour or so with a older gentlemen looking to sell his park. He needs to money to move into a retirement home with his wife. We spoke on the phone multiple times but he repeatedly told me someone else was in line to purchase the park. I was second in line. Part way through our face-to-face conversation, he kept saying, "this is where your property line is". A shift happened once we met in person. 

With the older generation of owners, it's important to relate to them on their terms. A handful have mentioned that they don't use a computer and never open their email. When everyone around the country is calling their phone and sending them letter, you can easily differentiate by meeting face to face. It can close a deal. Not every deal is worth driving to before you have it under contract. But some might be the extra push you need to get the ink on the paper.