A common question we receive is “What would it take to replace my salary with a mobile home park?” We’ll be answering that question on this event titled “Swapping Your Salary With Spaces”. We go over the mathematics of how to replace $50,000, $100,000, $250,000 and $500,000 salary ranges with a comparable income from mobile home park investing, including what the playbook would look like.
At a time in which the U.S. has never been more unstable, it’s a very reasonable goal to find an alternative income source to meet your household needs that does not rely upon a corporate America. And, as you’ll see, the potential with mobile home park investing can be easily quantified using just a few assumptions.
Following the lecture there was several hours of Q&A with no topic taboo, so be sure and to learn from other attendees questions!
Frank Rolfe was the host of this event – the same guy the New York Times describes as “the human encyclopedia of all things mobile home park”. But he’s also the person who, with his partner Dave Reynolds, built the 5th largest mobile home park portfolio in the U.S. from scratch, so he can give pretty good guidance on the mechanics of constructing winning deals that target different levels of income.
Swapping Your Salary With Spaces - Transcript
Welcome to our next lecture series event called Swapping Your Salary with Spaces. This is Frank Rolfe with MHU.com. Before we start, let me remind everyone I'm just trying to unlock the science of how this would work. I have no intention of making this a promotional tour of how anyone can safely and easily just jump right in there and replace their income with mobile home parks. Obviously there's work involved, there's decisions involved, there's knowledge involved, many aspects. But I get this more than any other question from people and it's a perfectly reasonable question given the general anarchy of America today of how people can replace basically their income, whatever they do, with mobile home parks so I thought we'd just go through the science of it. I think it'll be interesting. You'll find there's all different kinds of avenues and assumptions we're going to use here.
So we're going to break it up into different tranches. First how to replace $50,000 of income with mobile home parks. Then how to replace $100,000 with mobile home parks. Then $250,000 and then finally $500,000. So those will be the four areas we focus on. There will be some basic assumptions in our discussion. First off, we're going to assume that the parks in question that you would be buying are just your good old, average, all aged family park with municipal water and sewer, with paved roads, parking pads, on street parking if you don't have parking pads, in average condition, the very things that lenders of course want to see. Because as I've noted many times, all of us are at the mercy of the lending community so since we don't buy parks for cash, we buy parks using debt, using leverage, we have to buy things that lenders want.
Number two, I'm going to assume an average market with a 100,000 person or more metro, with home prices of $100,000 or more, three bedroom apartment rents of $1,000 per month or more, and a 12.2% market housing vacancy rate or less. That's simply because I want to make sure we're focusing on healthy markets in this discussion. Clearly, we're not going to be talking about parks in areas that won't meet the mechanics and metrics of what we'll be talking about as far as creating this income.
Number three, we're going to talk about parks with a loan to value of 70%. Now, why did I choose that? Well, it's not to say that all parks require 30% down. Many banks only require 20% down. In seller financing, you can often get as low in cases that Dave and I have done 0% down, but I wanted to make it reasonable. I wanted to put some fluff in there so that we all understand that this is a model I'm trying to give you that's based on reality and not some fictional amount. Sure, I could say yeah the assumption here is 0% down but that wouldn't be truthful. Dave and I have done over 400 transactions and we only have 12 0% down, so clearly that's a much more rare construction so I'm not using that as an assumption.
So let's first start off with replacing $50,000 per year of salary. So the way you would do that with mobile home parks is you would buy a 40 space park with 100% occupancy with rents of around $100 a month below market, and whatever price you could pay for the park simply to cover the mortgage. So if I can cover that mortgage, principal and interest payments, based on a 7 CAP in this example, then 7 CAP so be it, because that's not where I'm making the money. That's not the important part of the plan here. Now, I'm not including in these numbers that I'm going to give you that portion, and that definitely needs to be noted. There's two things in our discussion tonight that I am not using which I could to great inflate and increase the actual return, one of which as I'm making that mortgage payment of principal and interest, the principal portion is clearly profit. So it's a cash flow consideration when you look at the payment after principal and interest, but truly only the interest is expensed. The principal portion is basically what some banks call enforcement savings. It's your money, you get it at the end, but they put it in the account for you kind of like your parents might have done with your money you received growing up. Maybe you put it in a savings account of some type.
I'm also not assuming any increase in the value of the park, and that's a very important item. As we talk about increasing rents, moving water/sewer expenses to the residents, and these are the items that all create value. With mobile home parks you basically get paid twice, once on the front end on the regular monthly recurring cash flow. You also get that kicker at the end based on the enhancement of value. I'm not including that in these numbers. I'm assuming what we're talking about here is swapping an income for an income stream, not just raw numbers. I'm not including that either, so there's a little bit of fluff… well, a lot of fluff there that's not being used.
All right, so if I buy this 40 space park that's got 40 occupied lots, with rents that are $100 a month below market, let's assume that park costs $1 million, $25,000 a space, then the payment is $300,000 based on 70% LTV. Now, if I just raised the rents $33 annually for three years, I now have a cash flow of $4,000 per month. 40 x 100, right? So there, I did it. I solved it. But again, the cash on cash is even higher. I'm not even including the principal pay down of that mortgage payment. So that is to me the easiest business model in the United States. It just is. I don't know any other form of real estate or any other business you can buy, whether you buy from a business broker or start a franchise or whatever the case may be, nothing out there that you can do to provide steady, stable stream of income as simplistic as the model that we just described.
But there's some other options there. Let's assume I buy a 40 space mobile home park. This time it's only at half occupancy in a good market, with full market rents on the current occupied lots. So in this case, I'll be paying half of the million from the earlier assumption, $500,000 with $150,000 down. Then I fill those 20 vacant lots with homes, whether new or used, it doesn't matter. Assuming the lot rents are $300 per month in this park, that's another $48,000 a year in cash flow assuming my full expense ratio of 30% on each lot that I occupy. I'm not even including the annual rent increases in that example. In the first example, I was getting my $4,000 a month off raising rents alone. In the second example, I'm not getting my $4,000 off raising rents, I am simply getting it off of filling vacant lots.
Now there's a big difference between those two, right, because obviously raising rents is infinitely easier than filling lots. If I have to fill lots, I have to go find homes to put on those lots. If I'm in a HUD state and they're new homes, I have to do all kinds of expensive site preparation to those homes. I have to apply to financing sources on those homes unless I want to eat up an enormous amount of capital. So if I had to fill 20 lots out of pocket in a northern state with full HUD installation standards, filling those 20 lots, that may well cost me $1 million. So I'd have more money in the homes than I would in the park. Those are the two basic models that people use to, in this example, replace their roughly $50,000 a year of salary - raising the rents and filling lots.
But now there's other options. I could also theoretically buy, using those same metrics, a 20 space park on 100% occupancy with lot rents that are $200 per month below market, and I could buy that park for $400,000 with $120,000 down, and then I could raise the rents $50 a year for four years, and bingo bongo I've done it again. Now I'm also back to my $48,000 per year in cash flow. Now that model is going to take longer to accomplish, because in that model I can only raise the rent so much per year and make it a good value for my residents and have it where they're going to want to stay. So that would take probably roughly twice as long as our first example. Our first example we were going up $33 once a year for three years, and that example based on those metrics it would take you six years to hit that target.
Now there's some other assumptions I left off the model that can make your numbers even better that we need to go over. Number one, if I can do this utilizing small town debt or seller financing at 20% down then the amount I required to get into the movie here, remember in example one we were seeing $300,000 to get there, but if I can reduce that down, that reduces that number down substantially. I can get it down for 20% down in a typical small town bank, $200,000 capital needed to get in the movie there. If I can get seller financing and 10% down, $100,000, 15% then $150,000. Also, I left off of those examples another form of raising the net income, which is sub metering water and sewer. Why did I leave that off? Well, because not all parks can you sub-meter water/sewer. Let's say you're buying a park that has private utilities. You can't sub-meter private utilities in most states. I don't know even how you would in some cases, so I left that off but that's definitely something you could do. Now if you did that, go back to our earlier examples, that would really kind of quite the same ending as raising rent. Typical lot in the United States in a mobile home park uses roughly about $40 per month in water and sewer costs, so if I make them pay their own water and sewer, consequently it's kind of like me raising the rent for $40 but I don't have any cost in doing so. If I sub-meter water/sewer I've got to install water meters, I now have to read them I have to bill them. If there's a problem I have to fix them. So clearly I'm probably better off raising the rent than that, and that's why I did put it here as an example.
I also didn't put any benefit of course of the value of the park at the end from all these things I've raised. Let's be honest here, if I can raise the park where it's making $4,000 a month of extra cash flow, and then 10 CAP I've increased the park's value by $480,000. At a 5 CAP I'm almost $1 million. I didn't include any of that in this. Of course that would be the final calculation. If you held the park forever and your heirs sold it when you died, then the overall value you'd have to add that back in, so it would actually be greater. But I did not use any of that in here.
I also left off any benefits of cutting costs. Because a lot of these mobile home parks you bring back to life, there are substantial costs that you can cut, ridiculous costs that don't make any sense. One of the classics was a park we bought in Kansas City. It was an 80 or so space park, maybe 85 spaces. It was not full. It only had probably occupied 60 lots, and the manager was making about $108,000 a year managing this park. Now you say how is that even possible? Well, what happened was the owner paid a reasonable amount when she started oh 30 years earlier, but then he gave her a raise every year, and then he ultimately agreed to give her health insurance. You know how those premiums went up over time. Next thing you know, he's paying $108,000 in a park where the going rate for a manager of a park of that size is closer to maybe $15-20,000 a year. In that case, you can make the entire amount of your goal just off replacing the manager with one that's more reasonably priced. But I left that completely off of what we're doing here.
Of course I also left any benefits or tax benefits regarding anything to do with taxes on this. We depreciate parks. That depreciation needs to be counted because it's something you get that's a benefit of owning, but I left those off. I also left off any benefit you would have if you did a 1031 exchange at the end with it, which is a tax deferral program mainly because for all we know they're going to end 1031's in the future. I didn't see any reason to do that.
Now let's jump right to the reaction of anyone listening, which 'm sure is going to be all right, I don't like the way you started this thing off because raising rents is evil. It's an evil business model. Well, I don't think that's the case and let me explain to you why I don't think that any business model based on raising rents to reasonable levels is inherently evil. First off, our rents in our industry are crazy, stupid, unsupportably, ridiculously low. It makes absolutely no sense. Anyone who thinks our rents make sense knows nothing about mobile home parks or the real estate industry in general. There's an economist from Duke University name Charles Becker. He's kind of gone undercover. I haven't seen him do anything with the industry in years. He probably had to for his own survival in our strange cancel culture that we're in. But before he kind of went underground he did an analysis of why mobile home park lot rents were so low. He thought it was an interesting topic, so he had a graduate student and he ran the numbers. He took some areas of America and they compared the rents, and they compared them to apartments, single family, and all kinds of items. In the end he found that our rents were half of where they're supposed to be, that the $250 lot rent should have been $500. That's where it reasonably would be.
Now then he wanted to know why, why are the rents so low, why are the rents $250 when they should be $500 based on economics. And he found the same recurring theme over and over: mom and pop, quantitative easing. They just never raised the rents. Why didn't they raise them? Well they didn't raise them because they didn't see themselves as a business. They often just saw themselves almost as a nonprofit, so they thought well if my bills don't go up, if my mortgage is paid off, why should I raise the rents? The problem is if you look at those parks and you map out the rents, what you found was when they were built back in the 60s and the 70s, the going rent was about $50 a month. That's what most park residents paid. But if you with inflation adjust that to today, it's about $500 a month. So what they did was they started off correctly when they built them and they had to, that's how their mortgage began, but they never ever used regular annual CPI increases. So the modern owner, when they're buying these parks, they have to catch up with literally decades of inflation adjustment. We have bought parks from sellers who had not raised the rents often in a decade or in two decades. That's clearly impossible. There's no other form of real estate on earth, other than a large shopping mall with a main anchor tenant on a 30 year lease, that would ever have something that doesn't have regular annual inflation adjustments.
Right off the bat, you can look up the report, it's online from Charles Becker at Duke University. Our rents are in fact insupportably, based on economics, ridiculously stupidly low. Now, even if you raised the rent they're still stupidly low. Becker simply looked at where he thought the rents could be, and he thought $500 seemed to be that's where they should be. But bear in mind, $500 is still very, very low for housing in America today. Many of the markets we're in, the rent on the three bedroom apartment is $1,500 a month, a full $1,000 a month more than what we're charging. It hardly seems fair. Now, some people would then say well but you're cheating in your analysis. The apartment comes with the dwelling, ready to go, and your mobile home lot rent is just the lot and doesn’t include the mobile home. Well, that might be true except if you looked around you'd see that roughly about 80% or more of all mobile homes in mobile home parks are paid for, so in fact we're not cheating here. They're paying the same amount for that home and land as they would pay in the apartment, the main difference being that the home in this case is already paid for so they don't have any cost on that. Even if it's not their home that they've paid off over time, mobile homes in mobile home parks constantly trade hands at insanely low amounts of money.
If you saw that National Geographic Episode that I was on, you'll see in there that the camera man and the MC of that show could not possibly comprehend how I was trying to sell the mobile home that we were standing in doing the interview. It was very bizarre. Just randomly while we were in there with National Geographic, a customer pulls up in a car, barges on in, and says, "Hey, is this home for sale?" And so the National Geographic people said, "Go ahead and talk to him. This will be great on camera," and so I said, "Yeah, the home is for sale." He goes, "How much?" I said, "$500." He's like, "Oh man, that's awesome. Let me go tell my wife. Then the guy said, "I think we misunderstood that. So it's $500 a month for how many months?" I said, "No, no, no, it's $500 total for this home." The guy said, "How can you do that?" As you see on the National geographic Episode, I said, "Well because the home is worth… this lot is worth nothing with this home vacant, but with somebody in it it's worth $10-, $20-, $30-, $40-, $50,000." So a lot of times these homes sell for very, very small amounts of money, particularly the older houses in stock.
Also, our product is frankly better. We offer the things that now all Americans learned after COVID they cherish: their detached dwellings. There's no neighbors knocking on your walls and ceilings. A lot easier to be doing your business from home on a Zoom call without your neighbor playing loud 70s rock up against your wall. On top of that you have a yard. Everyone learned in COVID, they re-found their love of nature, and mobile home parks allow that because it's all about nature. Parks are always, they are almost a country, rural feel to them even in the big city, and they have a yard. You can go outside and you don't have to be around people so that's a big deal. Also, you get to park by your front door. That's very important to a lot of people. They hate that whole apartment communal parking thing where they have to park a million miles away in the rain, try to carry in their groceries, whatever the case may be. So we think there's no reason for our product to be so insanely cheap compared to its competitors, the main peer being the apartment. There's no reason we need to be sitting there at $1,000 less to something we're actually better than.
Also, there's just nothing wrong with spotting an opportunity and taking advantage of it. You'll be a smart business person and every other business in the United States is celebrated, but for some reason in our industry when we're just good business people offering a great product, we're criticized as being evil for raising our rents any amount. Now, you can buy a single family home for $100,000, you can remodel it for $50,000, you can then sell it for $300,000 and you get so much admiration they put you on a TV show on HGTV. The channel is filled with that exact business model. But park owners, for some reason, are thought that we're supposed to be non-profits which is not a narrative that makes any sense. I don't know why people would think that. We are a business.
Then pretty much the CDC evictions debacle pretty much clarified the simple fact that the nation is at war with landlords. Doesn't care anything about us at all. So we need to simply look after our own interests going forward. I think that relationship between the government and landlords has probably been permanently disabled now. I don't know if the trust will ever return. They still won't call off the CDC even though it's been ruled unconstitutional in I think no less than three federal courts. It's a horrible act of bath faith and I think it sends a clear message, you need to just watch out for yourself. If your rent is ridiculously low, if it is still a great value to raise it then you should probably go ahead and raise it. On the note of value, it has to be a good value. You cannot have the customers stay in that mobile home park, nor can you attract people to move into your mobile home park, if you do not offer a good value.
I know people often in our industry like to chastise us that somehow our residents are stuck with what we do. People always throw out my Waffle House quote I gave Bloomberg years ago. They never want to give the back story of it, and it's been published many times. I was trying to explain to the news person, who was a younger person out of college writing the article, and I said, "One of the benefits of parks is we have such a low loan default rate." And they said, "Why would that be?" And I said, "Well let me give you an example. The highest loan default rate are restaurants." They said, "Okay." I said, "Right. So restaurants have a high loan default rate because every day you open the doors and you don't know who will come in. so let's say you were a waffle house and you open up your doors and nobody came in that day. Then you'd go bankrupt. But a mobile home park is like a waffle house where the customers are chained to the booths." I didn't mean they were physically chained to the booths. I was trying to give them the example that when you know every day your customer count, that makes you a more stable investment. The writer never assumed I meant physically chaining people to booths. They got it, but apparently later people who were not business oriented didn't get it. But the truth is no, no one is locked into anything. If you raise the rents in that park and someone doesn't want to pay the higher rent, they can sell their home, they could rent their home out. Another park down the street would probably agree to move them for free. So when we're talking about raising rents, it's based on the assumption that the higher rent is still a terrifically great value, which in fact it typically is.
Now let's move on to replacing $100,000 of salary. So what we do now is we just take the earlier model which we already went over. Buy a park, any park that can cover the mortgage, principal and interest, even if it doesn't have a penny of cash flow beyond that, and then buy things that are below market rents, simply raise the rents. Or buy things that have vacancy and fill the vacancy, or possibly you can do both. While we're at it, we can cut the costs. Many ways we can do it. But based on basic math, based on our target example, if you're now raising and ramping up from 40 to an 80 space park, based on loan to value, you would need somewhere based on the earlier examples $240,000, the $600,000 of capital, to do your down payment. That's kind of the budget you have to have to really feel like you've got a shot, although we're going to come up with some other ideas here in a minute. But you need about a quarter of a million dollars to twice that to replace that $100,000 of salary given the mathematic assumptions we did earlier.
Now what's crazy is this is an easier business model, the $50,000 versions, and that's because the park is costing $1 million and as a result I can get people to get the loan for me. That's an important thing to talk about. When you by that smaller park that we went over, you're going to have to find a lender on your own. You're going to have to find a small town bank or a willing mom and pop, but that's about all you have that you can use. When your park hits $1 million then you have a new option and that's what are called mobile home loan broker. Now what is a mobile home loan broker? Well, that is somebody who basically will build your loan package. They'll go out to the industry at large. They'll say, "Hey, I've got this deal," and give them all the numbers. They'll go out and find the lender for you, come back to you and say, "Here are the lenders, here are the options. Here are their terms, their interest rates," the whole deal, and then they'll say, "I think you should go with this lender." You say, "Okay." They go back to the lender and they set everything up, and they basically hold your hand all the way through closing. It's the easiest arrangement you've ever known.
The problem is they don't do that, they don't start that, until you have a loan that is at least $750,000 or more. On our first example of replacing $4,000 a month income, that park sadly will never qualify for that. However, you try to replace $100,000 of income now the park you're looking at will qualify. You will also qualify for an additional loan product which is known as CMBS. It stands for Commercial Mortgage Backed Security. That's the very loans that took down America in 2008 on single family homes. They've never had a problem with mobile home parks. Mobile home parks always have among the lowest default rates in America so they love this the whole time. The one time we had for a while they went away after 2008, they vanished until about 2010 because America was in such a terrible hole they didn't want to make any loans until it had stabilized. But they've always loved our product a whole lot. So basically when you're trying to do the $100,000 annual income, so now you're dealing in a bigger park potentially, then what is going to happen is you're going to have access to this better loan product. So that's one of the main changes. So it actually is probably In some ways easier to do the $100,000 income than the $50,000 for some people, because small town lending is pain. You have to find the bank, do the package, and all that whereas if you can get up a notch then that can be done for you. So that's obviously definitely an improvement.
Another item that makes it different when you're doing that larger park example is it may be an easier business model for you because now you have enough volume of lots to have a better quality manager. If you listen to our lecture series, and they're all recorded from the past, we like to interview park owners, some who have a lot of parks and some that have just a few. But if you listen you'll hear when I ask them how much time do you spend on your park, they typically all say, "I spend about four hours a week." That seems to be the norm. But the four hours a week that you spend are a lot more pleasant when your manager out in the field is a higher quality manager. Now, you don't always get a higher quality manager when you get to 100 lots, but you definitely get somebody that you can rely on to do more work than you can at the smaller. Because typically the smaller park is smaller pay, fewer hours you can work them. Some things you just can't get done in that allotted amount of time. But on the 100 lots, now you're getting into the range that you can actually have a real full time manager, or a very well paid part time manager.
So because of financing and because of management, the $100,000 replacement of salary may just be functionally easier. So why doesn't everybody jump into that? Well it's capital. Not everyone is sitting around there with $250,000 or $500,000 in the bank. However, if you've got that and you can enter the space with that, then you pick up that cool item of loan brokers and loan products, non recourse loan products, and easier management.
So now let's go up again from there, let's go up another octave from that. Now we're going to talk about trying to replace the $250,000 annual salary. Right, well first off don't think that the key to this one is to double the size of the park yet again. Remember, we started off with this with a 40 space park to get to the $4,000 a month. Then we segued to the 80 space park, raising the rents $100 or cutting the costs, whatever you need to do to get that extra $100 that got you to the $8,000 a month category. But now we're trying to double that. But the problem is if you try and double that, now you're looking at buying a 160 space park, and that comes with some additional complications, the first being now you're in competition with some much larger companies, namely the REITs, or the private REITs, or individuals who typically have been around longer and have more capital or want to buy at a lower amount. They're not trying to replace the salary often. Often they're trying to get initial management fees by growing their portfolio. So breaking that 100 lot barrier, that could be a stretch for a lot of people. In fact I'm not even sure it's a more profitable stretch for many people.
So instead what I propose is you do the same thing we already talked about, you just do extra ones. Maybe you do two of the 80's, maybe you do four of the 40's, doesn't really much matter. The example still holds together regardless of what you do. Now of course you'll have a lot easier time if you do two 80 space parks because again you can get nonrecourse conduit debt if you're good enough to get it, and you can use a loan broker, and you can typically have a better manager. But maybe you can't find two decent 80 space and you end up with one 80 and two 40, or four 40, it doesn't much matter. The key is I'm not really certain that you want to go with that higher lot count because your returns may be tougher. It may be harder to find parks in that category. Remember, there's a lot of people who enter the industry and they always say, "I want to buy 100 lots and bigger." It's one of the craziest comments you can make. Why 100 lots? What is so magical about 100 lots? Is it the financing? No, not really, you can get the same financing with an 80 space park as 100. Is it you get a better manager? Nope, you get about the same manager with an 80 space as 100.
It's just something that people just kind of invented and by word of mouth, like some kind of mythical legend of King Arthur, everyone is stuck with and said, "Oh that must be what you do." They were saying that back in the mid 90s when I got in the business, people were like, "Oh, Glenhaven, your first park, that's a piece of crap. That's only got 83 lots. Many, you want 100 space or more." I don't know where that came from. Just some kind of urban legend, but it's not necessarily true.
Now, there's also some other things we should discuss now that we're talking about buying a congregation of parks. So in our first two we were talking one single purchase. 40 space on the $4,000, and 80 space on the $8,000. But now we may be talking having several parks, so let's talk about some of the aspects you need to know on that.
Number one is geography. Now you're talking about not possibly having parks all in the same spot. Before, you were in one spot. Now, you're going to be more than one spot so the question is where do those need to be? Do they need to be in the same city, the same town, down the street? And the answer is no, that would be in fact a bad idea. Because now that we're going to have more than one park there's two ways to look at it. One, portfolio diversity which would mean you don't want the parks in the same market. But that is then bad management efficiency. So you've got to weigh these two. Now, there's some markets that you would want as many parks as you could stack in that market. If you were looking to buy a park or looking at parks or investing in parks for example in Austin, San Antonio, Dallas, or Houston if you were in the Texas market, you could pop as many parks onto your pallet in those areas and you would still be fine because those markets are so diverse and so strong they will carry the debt. But if you're looking at buying in some market that is very slim on the employment front, one big employer, I think it's risky.
We've always said we like to be around employers that specialize in three areas: education, government, and healthcare. Things like college towns, big hospitals, a prison, something that they can't lay anybody off. In many markets, it's all private sector and the scariest is when you have one giant private sector employer. Many examples of this, the most painful was Dave's park in Plainview, Texas. He bought it because it had one giant employer he thought was bulletproof, a giant meat packing plant. You can look this thing up on Wikipedia. What happened? It was a brand new giant meat packing plant, had thousands of employees. Texas went into a horrific drought cycle and without water you can't run a meat packing plant. You've got to have the water to feed the cattle as they're staged at the meat packing plant. So they didn't want to, they just built it, but the company came in and closed it. The town went into complete freefall. That is why you would not want to have obviously all your eggs in the basket of just one private employer town.
At the same time, you feel like it would be efficiency to having them in the same town, so a lot of this is going to depend on how confident you are in the market. If it's a market that has a whole lot of healthcare, government, and education jobs and you want to stack both of your parks in that market, well then you're probably fine. I would have no fear, for example, of a park… we have many parks in Kansas City. Kansas City is a perfect example. Look at the Kansas City construction of the economy. It's really amazing. Kansas City has more government jobs than anywhere in America outside of Washington D.C. First time I saw that stat it blew me away. How in the world is this possible? Then I read up on the history of Kansas City and it truly was the gateway to the west at one time. That's kind of where America saw the stepping off point to the great unknown, the vast prairies, and so the government put a lot of stuff there. That's how they took control over the western part of America. Those offices which were established there have remained there to this day. So that's one interesting item.
Then you'll see Kansas City has an insane number of colleges in it and hospitals. I think because the government had such an installation there that it's where they consequently put all the other regional stuff. So if you're in a market like Kansas City, sure, I'll put all my parks in Kansas City. I've got no problem with that. But if you're talking about a market where you find a really good deal on a park and maybe the employment market is a little sketchy but you still say no, this park is so good I'm going to buy it, but I would not necessarily then buy another one in that same market. You might say no, that's too much risk, I'm going to put it somewhere else.
Also, now that we're talking replacing $250,000 of salary, we're talking a bigger volume of lots. You now may be able to do the thing that changed my life, which was to hire the first person ever to manage the managers. You have to have enough scale to pay for that. Now back when I got in the business, when lot rents were so very much lower back in the mid 90s, I couldn't get my first shock absorber person until I got up to about 400 lots. Today, it's different. Today with much higher lot rents, you can go with a fewer number of lots to make the numbers tie. There's nothing more refreshing than having your managers and your residents contact another person other than you with whatever problem they may have. So when I got that person, her name was Dee, it was an absolute upgrade to my quality of life like you would never know. Prior to that, any problem that happened interesting he park that the manager didn't know what to do with, they would call me. It was always at the worst possible moment. The phone would ring, I'd see it's the manager, and I would be like oh man, are you serious? Call me up like Sunday at 6 a.m., call me on Thanksgiving because Thanksgiving is the one day of the year where typically everyone cooks at home and normally messes up the sewer line. So when I was able to get somebody to answer those phones and not me, and then they only called m e to debrief me on what was going on, it was great. As you get enough volume you also get into that possibility. That's exciting.
Now of course the other problem is now that we're talking replacing $250,000 of salary, the CAP requirement has grown enormously. So now we're talking you have to have about a half million dollars to $1 million if you're going to be able to grow to a $250,000 replacement. Now again, these are based on the assumptions made on the front end. You could do better than that. You could get a lower loan to value if you can find properties with more room to push through. I'm just trying to be reasonable for people here. Also, now that we're in larger park plan, you have another big benefit because now your park is valuable enough you can step up one notch from CMBS debt into Fannie Mae, Freddy Mac, agency debt.
Now what's agency debt you might say? Well that's the debt created by the government under the Fannie Mae and Freddy Mac program, and this is wonderful stuff. This is nonrecourse debt. That's always good. You can get a 10 year or even a 12 year note. That's fantastic, having a fixed interest rate in today's world that lengthy, that's great. And Fannie Mae/Freddy Mac gives you the ability to resize your loan annually. What does that mean? It means if I raise the rent, I increase the value, I can go in and refi the park again. Don't really need to refi your park with another lender because you're refinancing the park internally as frequently as you desire. You have to pay a fee to do that but by heavens you don't have that option ever in a CMBS loan. Never is that on the table. So that is a huge plus once you get into bigger park world.
Now let's jump up the top of our discussion and that's the $500,000 of salary. Let's first all embrace the fact that $500,000 is a lot of money. The average doctor in America, last time I looked, was making $140,000 and if you're making $500,000 you're definitely in the pinnacle of America. In Missouri, you'd be in the top 1% easily making that. That's kind of rarified. Probably not a lot of people are looking to replace that amount. But let's talk about how that would work. First off, there's no way these examples to hit that number that you would want to do, the obvious choice which would be one 400 space park. Why not? Well, the competition for those parks is insanely fierce. Those are the kinds of parks that the private REITs desire. So those are not only more sought after, but there's just fewer of them in the US. Many mom and pops never had the money, never had the guts or the desire to build a park that big. As big as our portfolio is, we only have in the 400 plus department I don't know maybe 10 to 20 parks if we even have that many, so it's very, very rare you'll find a park of that size that you can take down with the mechanics in our assumptions to actually get where you want to be.
The other problem you would have is if you bought a giant 400 space park, if you bet the ranch on that one property you would have no portfolio diversity whatsoever. Now, you've taken on a really huge loan although probably nonrecourse, but never the less you didn't get into this industry to fail. You got into this industry to make money and you have no diversity. Let's look at the most obvious example the last few years. Let's assume you bought that park in New York, and New York suddenly activated rent control. In our assumptions here, the assumption was we're going to be pushing the rents up significantly over time and now I can't. in New York, if I understand the law correctly, I can only raise it roughly 3% a year. That does not meet the metrics of the example of the assumptions that we started with, so as a result, I'm never going to hit my dream. I'm never going to be able to get any big cash flow and I bet the bank on this adventure, and that's a big, big problem.
So what do you do instead? Well again, you want to build a diversified park but still with an eye towards management efficiency. So I have to have diversification in this case because of that size, my lack of diversity I would be worried about everything occurring. Not just business events, not just the big employers shutting down like in Plainview. Now I'm terrified of weather events. I'm terrified of flooding. I'm terrified of a freakish Tornado that hits the park. Anything could happen. You could have a fire, who knows. And yes you could have insurance on the park but bear in mind the park isn't going to burn down. The park isn't going to blow away; the homes are. Many times, those are privately owned and you don't know if they have insurance or not. Typically they do not.
Now in the case of tornadoes, typically FEMA or the Red Cross repopulates your park by giving people in the town who don't have homes, who don't have insurance, typically $30,000 cash to go buy a home and bring it into your park. We've had this happen multiple times. However, if you're talking a hurricane event like Hurricane Harvey, well forget it. The government doesn't have nearly enough money to handle that. Hurricane Harvey had if I recall $200 billion of losses and only $20 billion was insured were the ending numbers. That's sure not going to put mobile homes back on your property. Before you go betting the farm on a 400 space park, you've got to understand the downside to that is. If it works out great, terrific, how simple, you only have one manager. You only have to visit one property. The ultimate in efficiency, but is the risk worth that much issues of efficiency? The answer may well be no, I can't sleep at night like that, I've got to have a little more diversity in my life to feel good about it.
Now let's talk about also some other options you can do. The first one is you can just keep your day job. So somebody is listening to this and saying, "Well, you know what it would be great having that extra stream of income but gosh darn it, I love what I do." Well that's fine. Most park owners don't quit the day job. If you look at when these parks were built to begin with, talk to a guy, interviewed a guy recently and he had built a park from scratch and he was a postman basically. Every day he went to the post office, he delivered mail, and then he came home and he'd work on the park. And on weekends he might go out and mow it, but he never gave up his day job. That was the hands on, hardscrabble guy who built the crazy thing. He went out there and literally hand built it. He rented equipment and he graded it, he built the roads, he put in the water and sewer himself. So if he could do that with a really hard day job, then there's no reason why you can't.
Some people, the main thing they're wanting is to have some safe second income stream because they're concerned about what is going on in America today, and how could you not be concerned. Anyone who just lived through 2020 is going to be forever scarred. You may have lucked out, you may have been in an essential industry but you might have been in a non-essential industry. You might have had a wonderful chain of tasty Italian restaurants wiped out because the powers that be said you can't have your restaurant open anymore, we won't allow it. The government basically chose favorites. They labeled some businesses essential and others not essential, even though they were kind of the same thing. Hobby Lobby non-essential, Home Depot essential. Kind of hard to fully understand how all that worked, but all of us know that there's things even beyond our control out there that can have a huge impact on whatever our careers may be. But if you want to keep your job and own a mobile home park, well there's no problem with that.
Again, the average park owner spends roughly four hours a week on their park. That isn't that much time. And there's nothing that ever happens in a mobile home park you have to do during regular business hours. Let's say you want to visit your park, well you can visit your park only on weekends. That's the best time to do it anyway. You'll see your residents more, you'll see what goes on in the park, way better to do on a weekend than a week day. So why would you ever need to do anything during the week day? Well, let's say you want to talk to a contractor and he's closed on weekends, well you can easily fit that call in couldn't you? Could you maybe go out, step outside during lunch and call that person? So there really is not one reason that you could not hold a great career and still own mobile home parks. I know tons of people who do. I know tons of medical doctors, for example, who own mobile home parks. They like having that extra income stream but they don't want to abandon their practice because they're doing too well with it, and they spent all that time learning how to do it. So you don't have to choose. You don't have to be well, I don't know, I'm not sure I want to be in the park business. I kind of like my job. Well then keep your job. You don’t' have to quit that to be in the park business. Most people do not.
Also let's talk about if you don't have as much capital as we've talked about so far. Well, there's other ways you can get in the business with not a lot of capital. First thing you can do is just literally get in with not a little capital, buying from moms and pops in very small amounts down. Everyone knows my story. I bought Glenhaven with $10,000 down on a $400,000 purchase. My second park, $5,000 down on a $65000 purchase. The ability to buy parks with little or no money to me was one of the biggest attractions to this sector. I'd never seen it before. When I was in the billboard business, everything was cash and carry. There was no seller financing at all. If I wanted to buy a billboard from another company and it was $100,000 I had to get a bank loan for $100,000. No one even would consider carrying paper. But in this industry, that exists.
But what else you can do? You can't always find sellers who will take small amounts down, so what other options are there that you might be able to find more frequently? One is to find deals that are in absolutely terrible cosmetic condition. These are things that just show horribly. As a result, you can buy these things really, really, really cheap because the seller has lost all faith in it. They just give it up. Perfect example was Spring Manor, one of my early parks, 24 space park. Beautiful location on the side of a lake, horrible dump of a park. Built by an elderly engineer. His wife had died, he was not in good health. I don't think he cared any more. He just didn't care. He pretty much stayed in his house. This thing, just to give you one immediate tip off we have a problem here, it had a tree growing through an abandoned home, and I mean a giant tree. It takes years to grow a giant tree. It isn't like he hadn't mowed the thing in a couple of years. For that tree to grow as big as that tree was it had taken many, many years of growth.
I met with him and he told me off the front end the story: "The park used to be very nice. I totally let it go down the drain. It's embarrassingly horrible. I just thing someone needs to take it over for the good of the people who still live in it, to bring it back to life. Just give me like…" I can't remember if it was $80,000 or $100,000 but it was ridiculously cheap because it showed so terribly. If you go around and look for those opportunities of parks that are in terrible cosmetic condition, I mean hurt your vision, aesthetically challenged like no other, sometimes you can find deals that are really, really cheap. They're in the same categories of what we talked about. You might find a 40 space park, you might even find an 80 space park amidst those banners, but it could be a real dump. You'd have to really bootstrap it back into existence. You're going to have to go out and get a lender who believes in it, and it may be hard. The lenders may only believe in it because you're buying it so cheap, they think there's no way you can go wrong.
Another option would be to do a master lease with option. Let me explain what that is. It's such a strange construction that if I don't explain it no one will understand it at all. So what the construction is you have an asset that's been run into the ground. Mom and pop didn't know what they were doing at all and so now the price they want is not supportable by an appraisal. In the case of the one I bought in Oklahoma City, he had to have $850,000. That wasn't negotiable, but it wouldn't appraise at $850,000 it was way too screwed up. So I pitched the idea of let me go into the park, take it over, fix it, fix the income, season the income so I can get a loan. You're never going to be able to sell it. For you get $850,000, it's impossible. That's how those work. You then go in as the manager. You're not the owner, you have a master lease, so you're basically renting the whole property from the owner and raise rents, fix things, do everything you can. Now you have an option during this agreement, typically five years but I've also seen three years, at a predetermined price.
So for example on the deal I did in Oklahoma City the price was $850,000. I could buy it at any time under the master lease for $850,000 but not a penny less. So I went into it. I found that the manager was embezzling like crazy. I found all kinds of terrible stuff. I shut all that stuff off and suddenly the park was fixed, now it would appraise. So now I can go ahead and exercise my option to buy the mobile home park but I could also, if you don't have a lot of capital, I could just as easily exercise my option after I find someone who wants to buy it and do a simultaneous closing on it. So master lease with option is something you can get in to many deals for no capital because you're not really buying it. You're buying the option to buy it but it's one way you can get in the door. Now again, that construction typically only works on parks where the seller wants more than it is seemingly worth with an appraisal, and of course there's a problem there because you have to make sure you're not getting into something that after you put a little thought and strategy in still isn't worth what the appraisal says. But it's another option to get in with not a lot of money.
Another one is to do deal assignments. To do a deal assignment what you do is the same thing we just talked about, you find a mobile home park, you tie it up under an and/or assigned agreement, that's almost all of them are anymore, but an and/or assigned agreement allows you to also assign that contract to somebody else. So in those cases you can tie up the park and then sell it to somebody else. Sell the assignment of your deal. Those deals typically pay anywhere from 5-10% of the face value of the contract so it's a lot of money. A $1 million deal, the assigned would be $50,000 to $100,000. Greatest most profitable hobby on earth. The only problem with it, well you still don't own a park but you can get the capital to buy a park doing that. That's an option.
Another would be to find a capital partner who lets you do the work and they provide the financing. It's very, very common in our industry. A lot of people out there, particularly right now, are completely bamboozled about how to make any kind of return on their investment. In a world where CDs or anything that's conservative, anything that's reasonable pays so very little, a fraction of a percent in the case of many bank CDs. Sure, you can throw it all into the stock market. "Hey, let's all go out and buy a bunch of GameStop" but rational investors aren't going to play that game. They know that doesn't work. Look at the price to earnings ratio in the stock market today. It's pathetic. It's not supportable, it makes no sense. I know people are still trying to claim we're in a new world in which these nearly zero or negative number PE ratios are going to work, but we all know that they really won't long-term. So many people are interested in putting their capital into anything that's legitimate income producing that can pay a good rate of return, and mobile home parks meet that qualification.
You may have friends and family, or someone that you know who would say you know what if you could find a good mobile home park deal I'll put up the money to buy it, and that would then be your capital source. Let's also talk about some other related topic I wanted to address.
Number one, the impact of inflation on the business model we've just described. Back when I was an economics major at Stanford, reading all the different textbooks and stuff, trying to be an intelligent person coming out of college as an economics major, one thing I remember, in fact I still have the sheet, I Xeroxed it and highlighted it, it had a template of what works well in different times of economic trauma. It had one that was titled inflation, and there were only two things on the chart that worked well in inflation. One of them real estate, the other one gold, hard assets like that. So if we do enter a time of higher inflation, we're all seeing in the headlines that right now, mobile home parks do well in inflation. Not only are we a hard asset or an income property, we have the ability to raise the rents as much as we really want. Most of these mobile home leases are month to month. We only raise the rents typically once a year because we think that's the responsible thing to do as a property owner. If we entered a hyper inflation like Berlin, then I imagine every product would be going up so fast and furious it would be hard to figure out. You've seen photos of back in the era of Germany where people were carrying around wheelbarrows of cash to buy basic staples of bread and milk. In that event, mobile home parks would be your friend because they perform well in inflation.
What about the evictions moratorium? That's something that everyone talks about. I talk about it perhaps too much. It still irks me that the government singled out landlords for some reason as for who had to foot the bill for the pandemic, or a big part of it. It seems strange to me that suddenly people who didn't pay their rent you couldn't evict, but people who didn't pay for food went to jail. Didn't pay for their car got their car repossessed. So why were we chosen? I guess because we were the biggest ticket item, and I guess because Americans don’t' care much about landlords. In fact, they hate them so they thought it was easy because no one would care about the plight of the landlord. Not really very fair. I read an article in the New York Times, a post on MSN recently, about somebody very hard working person, who trying to become a residential landlord buying single family homes and they lost them all because even though there was a moratorium on them paying rent it didn't moratorium his bills, so he ultimately lost this all thanks to the US government. We'll never get a penny back for them of course for any of that going on.
The good news is that the evictions moratorium appears to be coming to an end. Not only have you had the federal courts say it's unconstitutional. Of course the government appealed that in the Supreme Court because it's the last thing they want to hear. Optics are bad, costs a lot of money. They even brought up their subsidy programs to subsidize landlords who hadn't been paid. Of course they all knew it was a joke when they brought it out. The whole thing was wiped out within like five seconds of being opened because the amount of past due rent was many, many, many times the amount that they budgeted for this supposed help out the landlord fund.
Another problem is most of America has reopened. I'm here in Missouri and we don't wear masks to anything. Virtually nothing. I have to go to the big city to find someone wearing a mask, and even then it's few and far between. There's no way you can now say, the CDC can no longer say, that evicting people from their homes is going to add to the infection of COVID. They can't use the excuse, "Well, it's economically hard on people." No, no, no, that wasn't the original drill. The original drill was the only reason the CDC could issue the order is they claim it spread COVID. Maybe it did back in March or April of 2020, they can't use the argument anymore. You can't have the restaurants and everything wide open and then say that applies, so I think it's going to end. It's supposed to end at the end of June. It'll be interesting to see what happens. I think they're actually trying to lay the groundwork for ending because I know it's a lot of very liberal publications are producing articles talking about the end of it, so I think they're floating that to people, starting to create to their audience that, "Hey, you know what, sadly this is going to come to an end." So I'm not really that worried about that continuing on finally. It's been way overdue that it would end. You're talking a year and three months in most cases.
Next the potential elimination of capital gains tax in country one exchanges. In this lecture we've been talking about buying things for the income, so those won't apply. So yes, I think there's every reason to believe it's very possible that our wonderful bureaucracy of America would undo two of the big tax options for those in real estate that have been wonderful things in the name. That's why people invest in real estate, because of capital gains tax. They're making a horrible foolish move. I think almost every economist supports what I'm saying. If you get rid of capital gains tax and you treat all income the same, people aren't going to make big, long-term investments anymore. Why? Because they're riskier. They're not going to do it. I'm sure it'll be repealed ultimately, another administration from now or so, I'm sure it will come back. But for the what we talked about side it doesn't matter anyway because you, in this example, are trying to build an income. You would never sell it nor would you do a 1031 exchange on it.
Then you have higher interest rates. Now, higher interest rates, those are going to impact everyone in everything. If you have higher interest rates you're going to find mortgages on single family homes significantly higher payments and therefore the demand significantly lower, and that's to make the prices of homes go down for sure. You're going to watch stocks collapse because what has fueled a lot of these stock gains has been very cheap debt. Debt isn't cheap anymore, then a lot of money that the company currently makes we're going to pay greater interest so those get slammed. And in the case of parks, the only way you're going to get harmed by the interest rate is if at that very moment that the rates go up that you've got to get a loan. So you don't want to have your loan come due accept when the rates are comparatively low. If you have a park right now and rents are coming due, your loan is coming due in the next year or two, you better refinance it now because none of us really know, but if we have higher inflation the expectation would be higher rates.
Now I will tell you from experience, having been through many cycles and just watching what's going on here, I don't think you're going to see the rates go up a whole lot. I don't know personally anyone, and I talk to banks all the time, I don't know anyone projecting rates to go up more than a point or two, and there's good reason for that. That's because our country is completely broke. We are almost $30 trillion in debt. When Regan took the rates up to save us from Jimmy Carter's stagnation back in the 80s, we only had a national debt of less than $1 trillion. I think it was about $800 billion back then, so he could take the shot. And I was there. I lived that nightmare of interest rates going as high as 17% on commercial loans. It was a calculated gamble. It's like giving somebody some kind of shock treatment to bring them back to life who had a heart attack. Shocks the body real bad, hurts a whole lot, but at the end of the day it could save things. It did probably save the nation by doing that. You can't do that today. If you took our crazy federal deficit of $30 trillion and you applied 17% to that, well the whole country would be gone. We would be a hunter/gatherer society, that would be the end of it. So the government will fight like a caged animal to keep the rates as low as they humanly can. Can they control everything? No, they can't. So they may have to raise them a point or two just to attract people to invest in a currency that's getting wrecked by inflation. But I don't think it'll go a lot more than that.
Now the good news is in most parks your whole goal to buy the park is dramatically and on a continual basis boosting the net income, which builds you a fire wall between the rising interest rates and the value of the park. Let's be honest, interest rates and CAP rates go hand in hand. However, I don't see it going back to what it has been in the past. It's just not survivable. If we go back to that template of our typical historical interest rates in the United States and you overlay our current deficit on it, it's not survivable. Will we ever have a lower deficit? I remember during the days of Clinton of all people we had a surplus. We were paying down the deficit. There were articles written, I remember reading them, that we would soon be a debt free country. Well, in the long run it didn't end up that way. Because of that, you're going to see quantitative easing going on for quite a long time now.
Now we've done many lecture series events in which we talk with owners of parks who have swapped their day jobs for park ownership. You can go back and look at some of them from the past. Eddie Beller, David Gortag, or recent Life of Ryan lecture, and I really suggest you go back and listen to their stories. It's one thing to hear me talk about the concept, it's entirely different if we let somebody else tell you their experiences. I'm a huge believer that the best way you can learn about anything is to talk to the people who have done it. So I highly urge you to go back and review all those different lecture series interviews that we have done with different folks who have in fact swapped their salary for spaces. Now I'm going to go ahead and set it on Q &A. We're going to answer as many questions as we can humanly answer here, so let me set the phones. Hold on here.