Mobile Home Park Investing Newsletter

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January 1st, 2015

Memo From Frank & Dave

Have you made your New Year’s Resolutions? Do you have a budget set up for 2015, and a master plan of how to hit those goals? We spend a considerable amount of time around the Christmas holidays planning out the New Year. And we heartily recommend that everyone do the same. It’s impossible to get to your ultimate destination if you don’t have a roadmap in the form of goals and budgets. Here’s an interesting quote from Mark Twain on the subject:

“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor.”

We initially started with the goal of buying one mobile home park. Today, we have over 140 of them. We would never have been able to attain that size without goals and budgets. If you ask us what the most important first step is to any endeavor, we’d say that it’s having a thorough plan of action, with every risk identified and hedged.

And while you’re busy putting together your plan, we extend our best wished of a Happy New Year!

Why Smart Investors In Other Real Estate Sectors Have Trouble In
Mobile Home Parks - And How You Can Learn From Their Example

Mobile home parks have some unique attributes. Unique enough that many seasoned investors have failed to grasp the fact that they need some re-tooling if they are going to do well in this sector. We buy REO parks all the time from apartment, retail, office, and industrial investors who think they are smart enough to jump in without any instruction, and end up overpaying and running the park into the ground. So what makes mobile home parks so different?

Ugly parks are more profitable than pretty parks, in most cases

This ruins investors on a continual basis. In most other real estate classes, the best properties are those that are the newest and most attractive. That’s because there’s a correlation in rents and appearance, and the cost of operating is roughly equivalent. Mobile home parks are entirely different, however, because we own the land and not the homes. So fancy homes simply mean more financially encumbered tenants who have less money to pay in lot rent. In addition, pricey park amenities simply mean higher expense ratio and lower net income. In hotels, a Ritz Carlton will traditionally have an EBITDA significantly higher than a Holiday Inn Express. But not in mobile home parks. The general rule in thumb with mobile home parks is that ugly parks make all the money. Of course, there are limitations and parameters to what the limits on ugly are. But the parks that have made us the most money are definitely not what a typical real estate investor would consider attractive. And that’s hard for many outsiders to grasp.

The customer is always right, but only if asking if they need to pay their rent

Many investors from other real estate niches are focused on customer service. They believe that the duty of any real estate owner is to ensure a positive customer experience. If you own an office building, and the fountain pump goes out in front of the building, you will go to any lengths to get it back on immediately so the law firm in Suite 500 does not make a fuss. However, mobile home park tenants do not warrant the same level of service due to the fact that they pay very small amounts of rent (relative to other housing types) and concierge service is not part of their rental agreement. It’s like the difference between the First Class and coach sections on an airplane: one is paying a higher fee to get higher service. There is no First Class in a mobile home park. Yet some real estate investors do not realize this and way overspend trying to please their tenants, by adding expensive landscaping and amenities, and even offering payment plans and perks just for living there. You don’t have to be rude to your customers to succeed in mobile home parks, but you certainly have to be strict and understand that you have a simply relationship: they pay you rent, and you let them live on your land.

You have to keep costs low, and leave your corporate jet in the hangar

The great historic failures in this industry, such as ARC, have some similar traits -- namely, a complete absence of prudent fiscal policy. They all blimp up overhead to a level that no park can support. ARC often used to insert a plug number of $100,000 in corporate overhead into each park’s budget. This literally went for such items as a corporate jet, not to mention a floor of a Class A office building in Denver and high-paid executives. Smart park owners keep overhead to a minimum. Our corporate office is behind a thrift store in downtown Cedaredge, Colorado – you can’t get much more miserly than that. If you own a park, and you want a corporate jet, then it better just be a model one you can put on your desk.

Conclusion

It takes some effort to adapt to owning and operating mobile home parks. It’s no different than wearing a swimsuit to go snowboarding – you have to match your knowledge and training with the product. Anyone can learn how to be a good park owner/operator. But you have to throw off your prior real estate expectations and mannerisms to succeed.

One Of Conrad Hilton’s Best Quotes Is A Good Life Lesson

book cover photo

If you’ve ever read a biography on Conrad Hilton, the founder of the largest U.S. hotel chain, you know the quote “to launch big ships, you have to go where the water is deep”. This is what Hilton’s mother told him when he felt that he had fallen into a rut of operating a tiny hotel in a tiny west Texas town with little future to it. And this quote is a good theme for anyone looking at buying a mobile home park.

You have to be in a big market

Hilton’s first hotel was in Cisco, Texas, and is called the Mobley Hotel. It’s still there, now serving as the office for the Chamber of Commerce. The first thing you notice about Cisco is that it’s a dump of a town. Always has been. Hilton bought the hotel in 1919, and the population was around 4,000. Today, the population is still around 4,000. You are in the middle of nowhere, with no appreciable employment base of reason to stop by. Hilton’s mother was a great forecaster of population trends apparently, as she recognized that Cisco was dead end even back in the 1920’s. By the term “the water’s deep” she meant that Hilton needed to find a market with a bigger population and a bigger future than little Cisco had to offer. And the same is true of mobile home parks. Successful mobile home parks traditionally are located in markets large enough to have a diverse employment base and high housing costs.

You have to have a larger park

When Hilton’s mother said “big ships”, she meant larger properties. The Mobley Hotel only has about 20 rooms. That’s not a large enough hotel to make any real money, which she knew. By comparison, Hilton’s second hotel was 14 stories in heights and had 325 guest rooms, located in Dallas. The same is true with mobile home parks. To hit sufficient scale to make a mobile home park work effectively, you need at least 25 lots or more, and around 100+ works even better.

You have to take some risk

Hilton’s mother’s comment of “the water’s deep” also refers to risk. You can’t drown in shallow water, but you can in deep water. So she meant that he had to take some risk if he wanted to make big money. Up until that time, Hilton had bought his little hotel with mostly cash – and not much of it. He had a pretty low-stress existence, but it was not exciting or satisfying for him. Hilton’s mother encouraged him to stick his neck out a little more, and that’s what lead to the Hilton hotel empire. With mobile home parks, the same holds true. You can buy that little 10-space park for $50,000, but is that really what you want out of your life? Or should you leave your comfort zone for a bigger opportunity?

You have to understand and succeed at financial leverage

Here’s one area that you can do a better job of than Hilton did. When Hilton started “launching big ships” he did so with incredibly risky leverage. Rather than buy existing hotels at cheap prices, he elected to build super-expensive hotels from scratch, and to pile on debt. As a result, he lost everything during the Great Depression. From that experience, he formed his own quote for his new empire “never build anything new, just wait until a depression and buy it for a penny on the dollar”, which is exactly what he did, buying back his own hotels – and many others – during the Depression for a fraction of what they cost to build. Any good mobile home park owner needs to understand the risk of excess leverage, as well as the skill to obtain decent loans. You can’t launch big ships with cash only, but you also need to understand how to do it so the ship does not sink.

Hilton’s career should be an example to everyone

If you’ve never read Hilton’s biography, I heartily recommend it to anyone. What makes the story so interesting is the surprise ending: how we lost everything during the Depression and then pulled out of his slump and built the largest hotel empire in the U.S. through skill and tenacity. He learned the importance of buying great assets cheap as turnarounds – something we have always been huge advocates of as a business model.

New Parks for Sale on MobileHomeParkStore.com

Why Mobile Home Tenants Can’t Even Successfully Cause You Problems

holes in mobile home wall

Do you remember the software engineer who became so irate at the IRS demanding that he pay up on old taxes that he deliberately crashed his private plane into the IRS office in Austin, only to find that they were closed and there was nobody there? Well, mobile home park tenants are not much better at inflicting vengeance on their landlord. The most common theme of the angry tenant retribution is knocking a hole in the wall. That must seem really macho to a trailer park tenant, but the pain and agony of punching a wall with your first does not exactly equate to supreme revenge. The typical mobile home park owner will simply replace that section of paneling, or even just patch it or hang a mirror over it. The net effect financially is maybe $100. Not a huge blow. An angry tenant could damage the furnace somehow, and that would really hurt. But mobile home park tenants are not very smart when it comes to such things. And that’s good news for all park owners.

Mobile Insurance Is Our Insurance Expert!

Whether you are simply in need of an insurance quote or you have the unfortunate, yet common task of filing a claim, Mobile Insurance is ready and waiting to take your call.

They offer you the best mobile home park insurance coverage when you need it. Being able to contact them when you need them is just as important. Shopping for insurance or setting the wheels in motion to get your damaged home or your business back on track is not easy. At Mobile Insurance, they work to make the whole process easier with greater value for your money. Call them at 800 458-4320 or email [email protected]

Little Things Mean A Lot

It’s amazing how a perfectly good mobile home park can be ruined Here’s part of a story from MSN on how to retire well:

"As the old saying goes: The early bird catches the worm…or, in this case, gets to retire in style. The sooner you put your money to work, the more time it has to grow. Earning a paycheck, whether you are self-employed or work for a company, means the opportunity to contribute to an IRA, which you should seize ASAP. If you’re fortunate enough to get a job with a company that offers a matching contribution to their retirement plan, you need to make it a priority to enroll in the plan as soon as you are eligible. It can be the difference between retiring early and never retiring.""

This all sounds fine as long as you want to leave basic math out of it. But the fact is that you can never retire based on stocks, bonds and other traditional investment offerings. If you amassed a $1 million portfolio of stocks over your lifetime (good luck on that if you didn’t invest during the stock market’s once-in-a-lifetime bull market run which appears to be ending), and assuming a 4% annual withdrawal rate to pay your bills (that’s based on most retirement plan books), you’d have $40,000 per year in income. If you currently are living nicely on $100,000 per year, that just isn’t going to work.

However, a single mobile home park, properly bought, can make you $100,000 per year. And you can withdraw 100% of the cash flow each year, as there’s always next year’s cash flow to spend. And that does not even count the fact that, when you die, you can leave your heirs the park, as opposed to $20 in your ransacked stock portfolio.

The future of American investing is “alternative investments”. Stocks, bonds and the like are old news and no longer relevant if you’re trying to create wealth. It’s insulting to our intelligence to think that the old concept of IRA contributions is going to pay your bills someday. Of course, it will pay your stock broker’s bills – and he’ll be long gone by the time you figure out you’ve been had.

Renz And Associates Is Our Official Phase 1 Expert

We have used many different Phase I providers over the years. But some recent events have changed our opinion on who the best Phase I provider is, and we want to spotlight some “beyond the call of duty assignments” that have saved the day on some deals recently. One of the most important occurred on a property we were buying in Indiana. The park already had a Phase I that had been done when the owner purchased it and financed it with a well-known bank. However, at the final hours when the deal was to close and be financed by a new lender, a Phase I issue popped up that we had never seen before. A disgruntled former manager of the park had called the EPA and claimed that the park was operating an illegal landfill, in which entire trailers were demolished and buried near a barn. Although the report was suspicious, it had to be substantiated before the deal could close. So Mike Renz immediately went to the subject area and, using a device that he developed, was able to do immediate boring and testing to prove that the claim was a lie. There’s probably no other Phase I provider in America who could do that work, or do it that fast, or do such a good job of it. As a result, we are now using Renz and Associates as our exclusive Phase I provider, and we suggest you look into using them, as well. You can contact Renz at (614) 538-0451.

Keep it Simple

Housing is a simple business swamped in complexity by a lack of leadership and direction. No one is in charge. Every participant at every level heads off in a different direction, leaving government agencies to sort it all out. The blind leading the lost, scattering opportunities along their messy path.

Tenants Are Just People - So Are Landlords

Housing is a business in which those who can manage to own or build homes help out those who can’t by selling or renting them shelter. It so happens there are far more of the latter than of the former, with the main difference being gumption—a mixture of horse sense and courage. In most aspects of real estate, most of the competition comes from amateurs, while most of the professionals wax fat and happy in good times and fail in bad. It’s an easy field to enter. Easy to prosper and easy to screw up. That’s especially true of mobile home parks, as Frank and Dave so frequently note. A dollop of management goes a lot further when one invests well in properties that are out of favor for all the wrong reasons. Opportunities abound.

Another Simple Business

For the first time in the history of mobile home manufacturing, a few manufacturers dominate the industry. It’s not because they’re so big, but because the industry has become so small. Only the strong (or smart) survive. As with mobile home parks, one small manufacturer with just one factory, having good management, can go toe-to-toe with Clayton in the right circumstances. A mobile home is a low-tech item.

And Others

Supplying those manufacturers (and park operators for that matter), is also simple for those having skill and focus. Same goes for dealerships. Finance? Same deal. Money is available; the trick is to place it well and manage the process. Historically—and even today—mobe financing can be—should be—the most profitable part of the industry. Just ask Warren Buffett.

And Yet...

The entire industry is in turmoil, with wailing, gnashing of teeth and folks looking for a solution from Washington. What went wrong? How did this nifty industry that produced so much good low cost housing while making dandy profits along the way get so screwed up? Simple:

Lack of Direction

A great handicap of the entire housing industry has always been a startling lack of leadership. Whether bare bones or all dressed up, housing has no place to go. Nobody is in charge. The associations are in chaos, and government is much worse. Everybody is pointing left as their pants descend around their ankles. The greatest opportunity ever to industrialize the housing process has been wasted in bickering and blind alleys. It is this chaos, so very reminiscent of the fifties, in which we find ourselves.

We Find Simple Opportunities...

...plenty of opportunities for those with a bit of gumption, who can buy good housing by the single unit or by the hundreds, at bargain basement prices. That’s the niche Frank and Dave discovered and are sharing so generously. A wonderful window of opportunity created by chuckleheads thrashing around turning a much needed product into a housing pariah that nobody wants except those who live in them. And those smart enough to sniff out the opportunity.

Can the Opportunity Last?

Two ways: If no one provides industry direction and leadership, the current quagmire will roll on indefinitely with niche opportunities abounding. If, on the other hand, leadership emerges and factory-built housing once more surges toward its potential, those who got in early will be on the ground floor of an opportunity with endless potential. Gee, I wish I was young again!

Written By
Bob Vahsholtz

Filling Your Vacant Lots Just Got Easier With The Legacy Park Finance Program

Legacy Mobile Homes

Most mobile home park operators have vacant lots to fill in their parks. They know they have the demand to fill the homes, and they know that they can get enough in rent to cover the costs. But the problem is financing – nobody carries the paper on the homes so you have to come out of pocket 100%, right? Well, that’s not the case anymore. Legacy Homes has brought out a new Park Finance Program that allows you to buy homes to fill your lots directly from Legacy, and they’ll finance 70% of the cost of the home including installation. We think that this will be a game changer for many operators, as they have been dreaming of a dependable financing source for their home purchases. And the Legacy product is outstanding as a home – nice floor plans, attractive colors, and great low pricing. We have been customers of this program from day one, and are excited that Legacy is now offering this program to all park owners, large and small. If you are interested in it, call Mark Ledet at Legacy at (786) 785- 9827, or contact us for a reference. We’re one of their largest customers.

Security Mortgage Group Is Our Banking VIP

We did a lot of conduit loans -- and regular bank loans -- in 2013. 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.

The Market Report

Mobile Home Park Stocks

Equity Lifestyle Properties - 70.27

Sun Communities - 74.03

UMH Properties - 13.26


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