The Mechanics of Mobile Home Park Investing

Over the past 25 years, we have strived to bring science every piece of the mobile home park business model. We have created and tested a huge number of models and applications to maximize net income and mitigate risk. We have unlocked the mysteries of which mobile home parks have the raw material to be “investment grade” and which should be avoided. And, in doing so, we invented the standard playbook for the industry, one that most of the mobile home park investors in the U.S. have adopted. So what are the basic mechanics of mobile home park investing?

In this event we review the basic drivers to selecting a successful park, as well as to maximize its income and minimize the risks. Just as basic scientific fact makes a plane fly and an engine run, so too does a mobile home park have realities that govern their performance. It’s not just a matter of random luck when somebody makes money with a mobile home park – it’s just an application of the fundamentals.

The host for this event was Frank Rolfe who, with his partner Dave Reynolds, is the 5th largest owner of mobile home parks in the U.S. It is this vast network of properties that has created the basis for this discussion and will give you overwhelming statistics and facts regarding what works and what doesn’t.

If you want to learn more about mobile home park investing, take the Mobile Home Park Investor's Boot Camp. You'll learn how to identify, evaluate, negotiate, perform due diligence on, finance, turn-around and operate mobile home parks. The course is taught by Frank Rolfe who, with his partner Dave Reynolds, is one of the largest owners of mobile home parks in the U.S. To learn more, Click Here or call us at (855) 879-2738.

The Mechanics of Mobile Home Park Investing - Transcript

Welcome to another Lecture Series event. This is Frank Rolfe. Tonight, we're going to be talking about the mechanics of mobile home park investing. I think it's a topic that everyone has some interest in if you're going to be in the industry because we all want to depend on science, the science of business models and strategy, and not just be making our decisions based just on myths and legends, which, in our industry, happens all too often.

So let's jump right into it. First question, what is a mobile home park? If we're going to talk about the basic mechanics, that would be the starting spot. If we're going to talk about mobile home parks, what is a mobile home park? Well, mobile home park, by definition, is two or more mobile homes on one platted piece of property. So that means if you're driving down the highway and you see a farm, and on that farm, you've got farmer Jones and his son who each have mobile homes on that farm, that would technically be a mobile home park. But that certainly is not in any way what we will be talking about tonight or what you would want to invest in.

So instead, we're talking about a property that is being used with the sole intention of making money. An income property, that is creating this income by parking mobile homes on a platted piece of property. Two is not going to be enough, so for our discussion tonight, we'll be talking more in terms of I would say at least 10 homes and more, but the norm in the industry typically is a range in sizes from about 30 lots up to about a hundred lots. There are certainly large ones. We own one in Indiana that's 750 lots in size, which is gigantic. But there are some that are even over a thousand lots. But for the sake of tonight's discussion, we're going to assume the kind of mobile home park that we all see driving down the highway, driving down the surface street, there on the left or the right side, that's got typically about somewhere between 20, 30 and a hundred trailers in it.

So let's start off with the history of the business model because I think it's fascinating the way the business model originated, I think it's interesting how it has morphed and developed over time. So if you look back, and there's few books written on the history of the industry, and I bought all of them, all the ones I can find. I've also bought probably America's largest assortment of mobile home park ephemera over the years, postcards, letters, photographs.

So I think I have a pretty good handle on the history and what I see when I look at all that pile of stuff that I bought over time on eBay and Etsy, the trailer park really began in about the 1920s, 1930s era. That's the earliest signs I've seen of a mobile home park and back then they were filled with pride because the only people who had a trailer to park back then were rich people. Poor people might have a Model A Ford with a rumble seat and then when they stopped for the night, they'd sleep on the ground. But richer people had trailers they pulled behind their cars and when nighttime approached, they would pull over and hopefully park it in a mobile home park or trailer park, as they call them back then, and spend the night in utter luxury compared to all the other Americans who didn't have that kind of money.

And because cities were very envious of these travelers who had lots of money, which they could spend to not only eat or buy souvenirs, but most importantly back in the 1920s or '30s, as America was rapidly growing with industrialism, they might just stop and build their factory there. So cities liked it and so they were very proud in trailer parks back then, I have photos of trailer parks in which the word trailer park is featured prominently on a giant metal arching entrance because the city considered that back in that era the same as a private airport. But here's the problem, there was no business model then because in the 1920s, 1930s, they allowed you to park for free. So when you're talking business model of mobile home park, well, that was the initial start, but there wasn't any money in it.

Then you move on from there, the 1940s. I've got postcards and photographs from the 40s. And in the '40s, the industry now is morphing because it's no longer going to be just in these free trailer parks that cities were building. Now there were many more trailers on the road, many more people who needed to stop for the night and the city initial parks were relatively tiny. So people who had land who dealt in travelers started putting part of their land for people to pull in and park their trailers at the end of the day. And they were typically behind motels. So I have a lot of postcards of motels where it's the name of the motel and then underneath the motel sing is a little thing that said trailers welcome and then there'll be an arrow.

So then you had the initial business model, not the good one, of park behind my motel. That was the business model of the '40s. The parks themselves had almost no structure. They were literally just fields with a road, sometimes not even a road, just a gravel road. They had power connections most of the time, but not always. So now you're at least a model because you've got money coming in. I don't know what they charged back then for a nightly rent [inaudible 00:06:01] have been very much back in those days. But that was when money first got made, but not any real money in that.

So then the model morphed again in the 1950s and that's what I would call the golden age of mobile home parks. Why the golden age? Because that's when the industry was really riding high. That's when Elvis Presley lived in a mobile home park and not only two movies. It happened at the World's Fair in Speedway, but in his own real personal life back in Memphis. He had his own mobile home park that he developed out in the woods, far away from Graceland, and he loved to spend time in his mobile home park and everyone else in his little mobile home park we're all friends of his. And Priscilla Presley mentioned the mobile home park in her book, the biography of her, the autobiography of her that she actually had happier memories of Elvis in the mobile home park than she did in Graceland.

There was also during the period in which folks who lived in mobile homes at higher demographics than those higher educational status and higher income, mostly GIs returning from the war, having lived at mobile homes at war, and now on the GI bill, once you get introduced to mobile home living and they just liked it. Kind of carefree, kind of weird, kind of cutting edge. No different than people who like things today that are different, like Uber or tiny homes, that type of item. So that was the golden age.

And now there actually was a business model because back in the '50s and the '60s, you could take a piece of land, you could put in some roads, some parking pads, electricity, water, sewer, and now you actually had something where you could get some real rent. Now the rents back then were not in by in dollars of that era or today, seemingly huge. The typical rent back then was maybe... the really nicest parks were like $50 a month. But in today's dollars, that's like 500 a month. And the people who built the parks really cared a lot.

I've owned a couple very early parks. One, my first park Glen Haven. That guy had a lot of pride when he built it back in 1951, I believe. He named every street after a place in Scotland. And so Glen Haven was Scottish themed and it had a couple of nice laundry buildings. It didn't have an office or a pool, which is strange, but it did have a creek that ran through the back, so you had a picturesque green area there. I met someone who lived in Glen Haven back in the day, back in the '50s, and they told me it was a wonderful place. They had no complaints, very happy there. Everyone in there was a military person going to medical school or dental school. They all drove British sports cars. It was just like in the Elvis movie.

So that's to me when the business model really began because we went from the parking store park-behind-my-motel model, which made very little money, and then the early free trailer park, now people are building this to make money and it's actually become a business. So the guy that built Glen Haven, for example, to him, that was probably not his sole income, but a significant side income he had going on there. And then you went from the golden age and that's all mom and pop designed and mom and pop build. So the one thing about the golden age, the early golden age of the days of Elvis, even in the movies, there's not a whole lot of infrastructure, not a whole lot of glamor or expense put into them.

Then by the late '60s, you hit the HUD era. Now what happened in this late '60s was the US government stepped into the game and they decided that mobile homes, maybe this was an interesting model to create affordable housing. So they decided to get behind that model. And what they did was they put together a program. If you wanted to build a mobile home park in the late '60s, and if you went to HUD and signed all the papers, they would finance your part for you at insanely attractive terms, but you had to build it to their specs. And they used architects to design them, and they had them horribly overbuilt.

So if the concrete would normally be four inches thick, they would require it to be six inches thick. Every park they built required to have a clubhouse, and in the clubhouse, they even had specifications of what was to be inside. They had to have a pool table, and a pinball machine, and a ping pong table, and a seating area. It also had to have a commercial grade bathroom, his and hers, and additionally, it had to have a kitchen large enough to serve a communal meal to the entire park, and all kinds of conditions like that. They were trying to foster a sense of community, foster professionalism and in that moment, really upgraded the model.

So we went from the 1950s, '60s, which was very mom and pop oriented, to now late '60s, early '70s, HUD is involved. And now HUD is going to shepherd the way, they're going to steward the business model into something that is finally truly investment grade because now, they're providing institutional debt through HUD, big dollars involved, long amortizations. So now, it's become a business. So by the late '60s, to me, you've really become a business and you've got a model that's very professional.

Then what happens? Well, everyone just abandoned the thing. In the '70s, it just all fell apart. They were doing so good and then HUD took over home construction in the in '76. You could no longer build homes unless you were HUD licensed and HUD supervision and just killed it, to be honest with you. The models that came out in those factories were no longer the cool-looking models people had liked earlier, like the tiny homes. If you look at those 1960s, pre-HUD models, it typically had a story and a half ceilings in some areas or even a story and a half mobile home where there was like this den thing underneath where you could sit in there and drink Martinis and stuff.

But the industry hit the tubes in the '70s through the '80s. But people still occasionally built new parks when they had the opportunity and that, I would call, the modern era. So 1990s to current, these are things that look like high density subdivisions and expensive infrastructure normally always paved or concrete streets, parking pads, various items. So to me, those are the stages of the evolution of the model. You have the city sponsored trailer parks, '20s to '30s. Park behind my motel in the '40s. The golden age in the '50s to 60s. The HUD era in the late '60s to early '70s. And then finally, the modern era when you could occasionally build... there's very few parks built in the US in the modern era. They estimate 10 per year. Is it true? I don't know. That's one of those myths that the industry throws around. No one knows for sure. We do know there's more torn down each year than built. I'm pretty confident of that statement.

But those are the history of the business model. So, if you're looking today to then own an investment grade mobile home park, what raw material would you need to have? Well, first, infrastructure. What is a park today in terms of infrastructure? What is required? Well, you've got to have water, sewer, trash collection, electricity, gas, if you're particularly from the northern area, paved roads, parking pads, and, generally, a nice entrance.

And so you've got to have some infrastructure there and it's all expensive stuff. Roads are expensive. Parking pads, one to 2,000 per space. Water lines, sewer lines are expensive. Electricity is expensive sometimes to get it in there. Gas can be very expensive. Trash collection, not completely expensive, but still, it's part of the infrastructure. So that's the first thing you have to have. You have to have actual investment grade infrastructure. That can be really worn out. If you're looking for a park from the 1950s, that's sometimes 70-year-old infrastructure. So you'll have to work around the condition, but you can normally bring that back to life. So infrastructure is important, clearly.

Another item is density. In mobile home parks, there's every kind of density known out there based on how mom and pop built them based on the size of the trailers. Remember, the trailers are very small back in that golden age in the '50s and the '60s. So they were all eight feet wide in the '50s and then on length, a typical average I'd say it's probably about 32 feet, something like that. So back in that era, it was not uncommon for lots to be short, like 50 feet of depth was not uncommon. Now the good news is some of these early builders, they wanted to give people extra big yards that was a selling point. So to get that extra big yard, they, thank heavens, would build the extra big lot so that today you can still put modern homes in them, but some didn't. Some just made them where all you could fit was an eight-footer.

And the problem is, that's one thing you really can't fix if you're a buyer is the density. It is what it is. Now you might be able to get the city to allow you to remove homes out of the park and reconfigure it, maybe, but you'd still be losing a lot of spaces if you do that. Typically, on the density side, the space must fit a home that's about 14 feet wide by 48 feet deep because that's the minimum two-bedroom, one bath that they make. And you also have to meet the fire marshal's requirements of space in between the homes. So that's up to the local fire official, most 10 feet separation from wall of home to wall of home. But I have to let the fire person tell you that themselves because that's up to their opinion.

Finally, you got to have a location. Now, we would define a winning location in very general terms. There's lots of different locations that work out there that don't meet this exact profile. But in general, we want a metro location of about 100,000 or up, a single-family home price, so about $100,000 or up, and a three-bedroom apartment rent of about $1,000 a month and up. And then I want to have a diverse recession resistant employment base. Now, why is that important? Well, if people don't have jobs, they can't pay you rent. And yes, you might have some seniors, people who are retired, but even then, most of the properties that they live in are not senior designated. They're all age family and you've got to have the ability for jobs. And to be honest with you, I don't think seniors are going to want to stick around if a place is really getting Our three favorite employers and not just ours, all appraisers, all banks, everybody.

Health care, education, and government. Why? Because regardless of the economy, you just can't shut them down. So when you're having a bad year, you don't close a local hospital. When you're having a bad year, you don't probably not send your kid to college. We're having a bad year, the government never lays anybody off. So if the economy has a good percentage of health care, education, and government jobs, hundred thousand population up in the metro area, $100,000 single family home price and $1,000 a month three-bedroom, then that coupled with good density and good infrastructure, that's all the raw material you need. Those are the key items there.

Now, what additional item do you want to make the business model work? Well, that is what Warren Buffett calls the moat? What is a moat? Well, Warren Buffett describes a moat is that barrier to competition that protects your industry. And we all know what he's talking about. It doesn't have to be monopolistic, but you want something to stop other people from jumping into the business to compete with you. That just goes without saying. So our industry has an extremely attractive moat. Moat number one, there's no new parks or hardly any new parks built in America each year. So you do not have to worry about that same issue that killed storage, and retail, and office. This idea that someone could just build one down the street. So you can be minding your own business doing a great job with your asset that you bought properly and then someone builds one down the street and puts you out of business by undercutting your pricing and taking away your market share. That is not a very successful way to live.

Mobile home parks, because of city halls hating them from coast to coast, you don't have to worry about the building any new ones. And even though yes, I see the same articles where people have all these dreams that one day HUD will foster more mobile home parks, well, that is never going to happen. As someone who's been doing zoning cases for mobile home parks for 25 years now, that is never going to happen because HUD does not have any sway over local zoning and nobody in cities wants to have a mobile home park anywhere near their home. So I would give that about a 0% chance of probability.

The other moat is that homes can't move. I've been criticized for pointing this out to people now for about 25 years. But I'm sorry, it's a fact. Let's just break it down into bitesized pieces. If the home is built 1975 or older, it does not have a HUD seal. And because of the enactment of HUD, that home can now not be brought into any mobile home park in America and its power turned on. So those homes that are called pre-HUD, they can't move. So let's take them off the board, bam, set them aside.

Then you have your homes from 1976, which is when HUD began, which does have a HUD seal, all the way through the '80s, and here's the problem on those homes, if you take the homes during that era, and you jack them up in the air, and put wheels back on them, and take them down the highway at 55 miles an hour, that is a very scary idea because as you're going down the highway at 55, if there's any kind of wind out there, when you add the two together, it's like putting the thing in a hurricane. You're going to have wind velocities, which would equate to at 90 miles an hour on a home that's not really built well for that. And meanwhile, you're putting all kinds of stress on the frame and things that haven't had stress on them in 40 years. So again, it's really hard to do that and it's extremely expensive, about $5,000 to move a home from point A to point B. So the bottom line is the homes just don't move.

Now, that doesn't mean the customers are trapped. They're free to sell them. They're free to rent them. All the same freedom you have the stick-built home. But don't let the word mobile home confuse you. They're not mobile. And that's why they changed the name and '76 to manufactured home because they were trying to get rid of the moniker of mobile. Although in the end, it didn't stick. So most customers call these things mobile homes. Sure, they're mobile, you can put wheels on them and pull them down the road. But typically, you can only do that when they come out of the factory, not decades later.

Now let's talk about the profitability driver to the mobile home park business model. So how do you make money with these things? Well, several ways. The first thing you do with a mobile home park that has all the raw material is you can raise the rents. Once again, I get criticized about that statement all the time. Oh, isn't it evil to raise the rents? Well, let's see. I don't know why our industry is the only industry in America that gets criticized for raising rents, particularly when our existing rents are so insanely low. If you look at the typical mobile home lot rent in the United States, the average is roughly about $280 a month.

Let's do a flashback back to the '50s and the '60s, where the rents were $50 a month. If our resident inflation adjusted to current, they would be $500 a month or more. But yet, they're half of where they need to be because mom and pop never raised them in line with inflation. So when I buy a mobile home park with rents of $200 a month and the market rents are $500 a month, I'm not gouging people, I'm just trying to capture all that inflation that was missed. Often, the rents to be high enough to allow for professional management, and good capital expenditure to keep the park in good condition, they didn't need to be $500. I can tell you right now, that's where they're all going to end up. I've been writing articles on that for about 20 years now and, let's see, I was exactly correct.

If you look at many of your markets today, your larger metros, you'll see the rents are already $500 or even more. Denver's almost at 800 a month, it has no vacancy. And the reason is simple: people love the product. The price is still insanely cheap. If you look at a mobile home in Denver, Colorado, a three-bedroom, two-bath home on a lot, $800 a month, if you look at something comparable, which would be a three-bedroom, two-bath apartment in Denver, Colorado, you would not be able to find anything that could touch 800 a month. You'd be looking more along the lines of 1,500 a month in a lesser location where you don't have your own yard, where you have neighbors knocking on your walls and ceilings, and you can't park by your front door, and you have a very, very transient community of people who are only there for a brief moment and they leave. So raising rents in mobile home parks, absolutely a given, going to go up a lot, and, in many parks, that is the number one profit center.

The second one is cutting costs. What cost do you normally cut in a mobile home park? Well, the number one cost you cut typically is the manager. It is not uncommon when you buy a mobile home park to have the manager earning over $100,000 a year even though the park may only have 70, 80 lots in it. A park we bought in Kansas City once, the manager had at occupy lots and the manager was being paid about $104,000 a year. We asked mom and pop during due diligence, how in the world did the manager ever get to $104,000? Because bear in mind, the going industry rate for an '80s space park would be $800 a month plus free housing.

He told me, "Well, here's the deal, it wasn't like that years ago. See, when I hired the manager, I only paid him like 15, 16,000 bucks. But I gave him a raise every year, then I do one-time big adjustment for health care and they've been here for decades and so now it's grown to 104." He knew it was stupid. He knew that every time he was paid 104,000 a year, he could have replaced this manager easily and paid out maybe 20,000 or 25,000. So he was really just throwing down the drain $80,000 a year.

What did we do when we bought the park? You bet, the first thing we did, replace the manager. Saved about 80,000 bucks. Next thing you do as a profit driver is build back water and sewer. Why do we do that? Well, because water and sewer should never have been paid by the mobile home park. Every other rental property, every other income property in the world has independently build utilities. When you don't build back water sewer, what you've done to yourself is you don't foster conservation. People use water with complete abandon.

You go to a lot of mobile home parks that have water, sewer included in the rent, you will see virtually every hose in the park on full blast in the summer. People were out playing on the slip and slide and then they went in and they just leave it on all night, out washing their car, shooting in the air, shoot each other with the hose leave it on all night. That is not good for the world. We're supposed to be in the conservation thing right now. Wasting water like that is really not cool anymore.

You want to foster conservation by building back water sewer, by making people accountable for what they use, then basically the consumption drops. How much? Typically, 30% is our experience consumption drop when we make them pay it as to when we pay it. That is a lot of water. So building back water sewer is another profit driver because when you make them pay their own water and sewer, that is the single largest line item expense in a mobile home park, so it's a win-win, to be honest with you. Fostering conservation and saving was what your largest line item expense.

Next up the bat, profitability driver, filling lots. Now in this case, what you're doing is you're improving Americans affordable housing supply, so that's fantastic, but you're also making a lot of money for yourself. If you take a lot of these mobile home parks and you value what is an occupied lot worth versus a vacant lot, you'll see the differential is often 30 to $80,000. So if I go out and I buy three or four homes, and I put them in those lots, and I run the ads, and I sell those homes off, I've created an affordable housing opportunity for four different families. And if the lots are worth 50,000 occupied, I created $200,000 in value for the park. So filling lots is, again, a very important profitability driver.

Finally, just lowering the cap rate with better appearance and pride of ownership. Every time you buy an old, beat-up mobile home park and you bring it back to life, what happens is you lower, sometimes in a little way, sometimes in a big way, the cap because now your property has got a sense of pride, a sense of community, lenders like it better, it's got lower risk, and you're rewarded with a lower cap rate with your appraisal. So when the park is all beat up, the cap rate might have been 12 or 10%. But once I fix it up, now it drops down to maybe eight and a half or eight, maybe even lower. So improving the appearance, making it a better place to live, that's going to reward you with lower cap rate.

How do you supercharge those profit drivers? I mean, those are pretty good profit drivers, as we'll see in a minute when I give an example. But how do I supercharge that? Can I mount a supercharger on those? And the answer is yes, using one word called leverage. That's one of the beauty of real estate is the fact that you can put debt on it. Banks like real estate because they end up with what's called a first lien on a real estate secured note. So this is different. When a bank goes out and they make a business loan to somebody opening a restaurant in a shopping center, they don't have anything to back up that load. So they load the money, and they basically finish out the space, and open the restaurant and if they fail, you get nothing, all you got is a lease, which still costs money, on a failed restaurant in a strip center.

But when you have real estate and if you default, the bank can take the real estate and they can sell that off and so that makes them much, much happier. So what does leverage look like on a mobile home park? Well, typical structure is going to be about 20 to 30% down, so that's the norm. So as far as leverage goes, if you're buying something for half a million dollars, it's going to cost you about 100 to $150,000 of down payment. Now, there are some unique structures out there.

There's zero down deals. My partner, Dave, and I have done 12 of those so far. Those are amazing deals because when you do a true zero down, your rate of return is infinite. Another way that's unique is a cash out refinance. Now to do that, you'll have to get the value of the property up roughly 50%. And you'd also have to get it up large enough that you can tap into CMBS, which is a non-recourse style of debt because they will do cash out refinance, banks frequently will not. So if you can hit those structures, now your return rate of return will be infinite, which is pretty impressive.

Let's go over some of the typical rates and terms today on those bank loans. Let's start with seller. Seller financing right now is any interest rate you can negotiate. There's no laws on it. So I'd say right now with many sellers, their dream is to get four or 5%. Length of the loan, it's all over the map. Sellers sometimes will do five-year notes. Sometimes we'll go all the way to 30 years fully amortizing. Amortization length, typically around 30 years. The loan to value on those again, it can be anything. It could be anywhere from zero down up to... you never see [inaudible 00:29:53] typically about 20% down.

Then you've got your small town bank. This is a next thing up from seller financed. Small town bank would typically come into play when your loan is under $750,000. Small town banks right now, interest rate, again, it's flexible. It's whatever they can get. Maybe five, five and a half percent. The length of the loan, they typically don't like to go longer than five years. Some only want to go three years. You can sometimes cajole them into slightly longer, but typically, that's one of the drawbacks is how long the loans are. Amortization length, typically about 25 to 30 years. Loan to value, normally about 80%. So that's where small town banking goes.

Then you move up from there to a notch called CMBS, commercial mortgage-backed security. That's one of the favorite loan products in the industry because it's a non-recourse product. Fairly easy to get if you know what you're doing and you've got a decent property. What are their terms right now? Well, the interest rates on that, some of them are as low as something in threes. The loan to value 70%, loan based on appraisal. Length of those is typically about 25-year amortization. The term on those is typically 10 years and it is fixed rate. Then the next level up from that you have is agency debt. Agency debt, similar to see CMBS in many ways, except the interest rate's even lower. Some of those agency loans, Fannie Mae and Freddie Mac, now have a two on the front, two point something. Additionally, you've got a loan to value just like CMBS 70%, roughly. You've got a length of the loan that can go all the way up to 12 years, typically 10 to 12 years.

So the bottom line in all these, what they all share in common, they're allowing you to get some power, firepower behind your down payment because if you buy a mobile home park with all cash, your rate of return is simply the cap rate. If you buy it with leverage, then your rate of return is much higher because you have that spread between the cap rate and the interest rate on the loan that supercharges your rates of return. If you can get a three-point spread, it will roughly get you close to 20% cash on cash return. So that's how people even supercharge those profitability drivers.

Now, what are some deal killers that are out there? What would make a deal no good? We talked about things, the raw material that makes a part a good business model. What would make that a bad business model? Well, the first one, which would be an immediate killer to any deal, is if you have no permit. If you have no permit, what have you done yourself? Well, what you've done is you have no right to be there. So the city can pop up anytime and say, "Hey, you've got to go ahead and shut this mobile home park down because you have no right to be here," and that would be a terrible thing to have happen. So you've got to find out in due diligence, do I have a permit or do I not? Your permit may be grandfathered, that's the norm. Probably 80 to 90% of all mobile home parks in America are grandfathered, also known as legal non-conforming status. But you got to have a permit.

Another deal-killer is if the metro area is simply too small. That's what I would call a classical rural Park. Where do I get my data? Go to and enter the zip code, it'll tell you what your metro area is. So if your metro area isn't 100,000 people, but more like 10,000 people, not in all cases, but in most cases, you're too small. And the problem is when you're too small, you will not have enough demand to fill your homes and lots. You can test your theory with a test ad and see how that works, that's item number three, having low test ad results. So on the test ad, you run an ad in the classified paper and then you also do it on Craigslist and you see how many calls you get over a 10-day run. Good parks can get 20 to 30 and great parks and get up to 100. But if you're only getting two or three calls over 10 days, it's not enough demand, so you probably need to push the eject button on that deal.

Next, a failed phase one. Every property you need to do a phase one environmental survey just to make sure it's not contaminated. Why? Because if it is contaminated and you got to clean it, they're coming after you for the bill and they're going to blame you even though you didn't create the pollution. It's really very, very unfair. So to combat that unfairness, they allow you to get a phase one environmental done by an environmental engineer and the engineer goes out and tells you whether it has got pollution or does not. If it doesn't, you're free to go forward and you have pretty well, safety because if it turns out later, it does have it, you would fall back on the guy who did the reports insurance.

I've never seen them make a mistake. I've never seen or heard of a phase one that said it was clean when it was dirty. But if you don't do the phase one and you buy the property, once again, you are responsible to clean it even if you didn't cause the problem. Cleaning some of these properties with environmental contamination, that can easily be in the millions of dollars. It's very, very expensive.

Next up to bat, a failed survey. There are mobile home parks out there, I have seen with my own eyes. The park is not even located on the land that you think you're buying. So you got to make sure that the survey includes everything you think it includes and there's not some killer easement on it. I've seen mobile home parks where there's a easement that goes right through the middle of the park for a road project or something else and even though it's not been built, they have that right and it makes your property worthless because no one in the future would ever buy it from you.

Failed title. Obviously, that's a disaster if you think you're buying the property from the owner and it turns out you're buying it for someone who's not the owner, well, that's a killer. So if the title company cannot give you the guarantees that you own it, then that's not going to work for you at all. Private utilities, if they don't check out. There are a lot of private utilities in mobile home parks. We own many parks with private utilities, typically, water wells and then either septic or packaging plant sewer system. But you got to get those thoroughly checked out during diligence and if those don't work, then you can't buy it because without water sewer, it goes back to your infrastructure. You do not have the infrastructure for the business model, so it's not going to work.

Too many Lonnie deal homes with one person. Again, it's a threat to your business model. If one person has, I don't know, I've seen them as high as a hundred homes in one park. Let's assume you have one person who has 30 homes in a hundred-space park. What will you do if that guy pulls those homes out? You won't be able to pay your loan and the bank won't even make the loan because they know that you don't have that power anymore. Banks are very comfortable when everyone owns their own homes, so if you lose one customer, you lost maybe a percent of the revenue. They're not going to go with someone owning 30% of the revenue. Most of them like to cap it at 5%. But you got to make sure that you're not going to be controlled by a Lonnie dealer after closing.

Another killer is too many Park owned homes in poor condition and the problem is going to be there. You may be biting onto something that has a lot more capital required than you originally thought. To fix an old home, to bring it back to life can often be five to $10,000. If you bought a park with 50, poor quality park owned homes, every reason to believe, those 50 homes might cost you half a million dollars to bring back to life. That maybe more than you're paying for the entire park. So again, that will not work.

Finally, if the price is too high. Again, you're trying to make money, right? That's the whole point of the business model is for the mobile home park, to produce income because it's an income property. It's not something you do to talk about proudly at a cocktail party or to admire your work. You're in this for the money. If you pay too much, the problem is the return is too low based on what you paid. It's also very important when you come up with the price being too high, even if you think it's not too high, have you taken into account all of the capital expenditures needed to bring it back to life? And if the answer is no, I didn't, then you add those in and it's too high, then don't do it. Again, you're in this for the money. You've got to make a decent rate of return.

What are the cap rates right now? Well, the cap rates are all over the map because there's many things that influence the cap rate, not only what the park can produce now, but in many cases, you can raise the rents, fill the lots, cut the costs. So what a lot of people do is they look at the cap rate not at purchase, but the cap rate maybe three or four months into your ownership, at which time you've already enacted your cost cutting, you've already enacted your first rent increase in other items. So in that way, most people are striving to get a three-point spread between the interest rate and the cap rate.

So if you go back to what I said earlier, if you get a Fannie Mae, Freddie Mac loan 2.8, then a 5.8 cap would in fact get you in the right position. If you're at the highest rate, which would be probably with the small town bank, which might be five and a half, you'd have to get about eight and a half cap. But the cap rate is different because you have to factor in all kinds of variables such as Can you raise the rent, not raise the rent, can you fill the lots, can you cut the cost? Let's take all that into account. But the bottom line is when you take all that into account, don't give away the store. Again, the business model is all about trying to make money. If you pay too much, you can't make any money.

Now let's put this all together in an example of how these different drivers tie together to see how all that ends up. So let's assume you buy a mobile home park for $500,000 and an 8% cap rate with 20% down at a 5% interest rate on the note from a small bank or seller financing. So what we're doing here is we're going to buy a park, it's going to have 30 lots in it. We're going to pay half a million dollars with 8% cap rate, 20% down, so $100,000, and a 5% interest rate from the bank. So we've got 30-lot park. Now the net income, if we're buying it for half a million at an eight cap, then it means you have income of $40,000.

But in this case, let's assume the number of lots is 24 occupied out of the 30, the water sewer is paid by the park, and the lot rent is $225 a month. So those are our assumptions. Now we're going to take apart each piece of the profit drivers to see what they contributed. So if I fill the park to 30 occupied lot, so I go out there and I find and bring in six homes, either new or used, to fill those lots to 30, that increases my value by six lots times 225 monthly lot rent times 12 times point six, because the standard expense ratio on a park with water sewer paid by the park is 40%, gives me a net income of 9,720 and that gives me, based on my initial value of an 8% cap rate, I've increased the value by $121,500. So bringing in those six additional homes is made me $121,500 richer.

Okay, what else can I do with the park? Well, if I raised the rent from 225 to $300 per month, so let's assume I do that over let's say even just three years, right? So I'm trying to go up $75 in three years. I'm going to go $25 a year, that's not asking much. 30 lots times 75, that's the rent increase from 225, times 12, because there's no expenses on this. You've already covered the expenses on the front-end, so as you raise the rent, there's no variable expenses that change based on the amount of the lot rent. That gives you an NOI of $27,000 and if I kept that at 8%, that's 337,500. So that three-year odyssey of raising the rent up and it's still insanely cheap. At this point, we're not getting $300 a month. So crazy cheap, half of what it could be, ultimately, I raised the value by $337,500.

Now let's also assume that I make the residents pay their own water sewer at some point in the movie there. So then I have 30 occupied lots times 40, that's the normal water sewer cost in the US times 12, again, no expenses to take out 14,400 of net income. Increase the value by $180,000, she big impact there. And now, let's just say I stopped there. So I have increased my NOI, $51,120, by doing all those steps. And as a result, at an eight cap, my value of the property is now up in value by $639,000. So I have now created more value at $639,000 of value added than I paid for the entire park at $500,000. And those steps weren't that difficult. Building six lots is super simple. You should be able to do that within six months or less.

Raising the rent up $25 a year for three years, that is not going to cause any problems at all. Having the residents pay their own water sewer, it's the fair and justifiable way and fosters conservation. And those simple steps have made $639,000 of value. Now there's one last step to go. If by virtue of me filling the property, raising the rents making it nice, creating a sense of community and pride of ownership, now, if the appraiser looks at that and says, "Wow, this is a much nicer property than it looked before. I'm going to go ahead and drop my cap rate down from eight to seven," that differential, that one point differential cap rate gives me another $162,000 of value. So now when I add that on to the $639,000, I'm about $800,000 up in value. I've made nearly a million dollars in value off of the park that I buy for half a million dollars. So that's basically the business model.

The other way to look at that business model is if you go in there and you simply don't look at the value, but simply the cash flow, every step we just did, there's cash flow in your pocket. So if I fill the park, and I raised the rent, and I make the residents pay their own water sewer, that gives me, off those items, an additional $51,120 in my pocket, which is pretty darn impressive. Think of what you'd have to do as a regular day job to make $51,120 and that's straight cash in your pocket, which all goes to the bottom line, no expenses taken out of that, so I think that's pretty impressive.

Now let's also talk about some of the mega trend boosts that are going on in the industry and then also some of the dangers. So the first mega trend you have going on out there to push your sales forward is the demand for affordable housing. That is one of the biggest problems in America today, perhaps also the biggest opportunity. But there is not enough housing stock out there for those people who need a place they can afford. How did it get so screwed up? That is a good question. I'm not really sure. One time for fun, I looked at the ratio between income and house cost in various parts of America. So I looked at Missouri and in Missouri, the average house is about 160 grand, the average family's making about 50. So that's about a three for one, right? But then I found in some other markets, it was up to a 10 to one.

So perhaps one reason we have an affordable housing crisis is because people let it happen. People were just too willing to pay too much for their homes because you can't really make a lot of sense of it in some of these markets as far as what people pay for what they get for their money. But however it transpired, which I do not know, I know that's a problem that is not easy to solve. I went to a meeting, I heard a guy give a speech, I didn't even know there were colleges that have real estate professors. But this guy was a real estate professor, I believe at Texas A&M. He gave a speech on why homes can no longer be built affordably and I did not know this, but the reason is not home construction, it's the cost of lots. The average lot in a major metro in the US is $80,000. So speech was basically that there's no way they can build a home on that lot and not have an all-in price of 180,000. So his speech was that if people look to single family to provide affordable housing, it's impossible.

We all know, apartments equally can't because the cost of apartments has gone up so high anymore that you cannot make an apartment affordable. The only affordable apartments out there is section eight, which is a government subsidy. So we're the only game in town with mobile home parks. So as that demand keeps going up, well, we have virtually a monopoly on that whole idea of having an affordable detached dwelling with the yard. So that just makes the demand ever higher and as everyone knows, as demand goes up, and supply is capped, which it is, it just makes everything more valuable. So that's where we're at.

Another mega trend boost we're having is historically low interest rates, the lowest ever in American history. I was an economics major at Stanford. As I recall, the interest rate in the 1700s, during the American Revolution, was about 7%. That's always been our cycle. We had a range in America of interest rates of about seven down to maybe five, but nothing like they are today. We've seen rates during these cycles since the Great Recession go all the way down to nearly zero. Some predicted they would go into negative territory. These are very low interest rates because real estate's all about leverage. When you have very low interest rates, that's great for real estate because it makes your yields higher. That's another good mega trend boost.

The next mega trend boost we have is the aging of the US population. You've got several different tranches of population and they're all working our way. The first one is you have the greatest generation, which are the folks who mostly served in World War II, and the silent generation, which you were born during the Depression, so about 1930 through 1945. Those trenches of people are aging to the point they want to sell their mobile home park, so as they age, they want to sell. So that's positive if you want to get in the business because you have a lot of people who are wanting to sell because of their age.

The next statistic is you've got 10,000 baby boomers retiring per day with a very large number of those downsizing. Why? Because the average Social security check in America is only $1,200 per person. So when you give up your normal job, your normal household income making $60,000 or something, and you drop the Social Security, it's a big drop. So many people then take their stick-built home and they sell it so they can get the money back out of it and they buy a mobile home at a lot lower cost, with a lot lower monthly cost, and it means you have, again, a lot of demand coming from that segment. If you look at a lot of mobile home parks, you'll see that about half of all residents are retired. So it's definitely a big part of our business.

But then you also have the new millennials who are the biggest segment now of the US population. So millennials are the big one now, no longer the boomers. The millennials are all forming households like crazy right now. That's why Zillow calls the great reshuffling, it was already starting to happen, basically. People living in urban markets who now are starting to develop families and they want more space, and they want to move out to the suburbs like former generations did. So they're leaving. There's a mass exodus out of urban areas where people are living in apartments and high-density buildings and moving out into suburban and exurban areas. And, again, that's great for our industry because that's a big portion of who we serve as we serve in affordable housing front a lot of seniors, but then a lot of young household formation, so that's a positive for us.

Another item is the aging of class B, C, and D apartments. They're just becoming really lousy product. We talk to people all the time that buy mobile homes from us and we asked them, "Why did you want to buy it? What was the big driver?" All the time, it's all about how bad apartments are. So they'll say I hated my apartment. It was a complete dump. It was scary. It was dangerous, it was poorly maintained. What's going on there? Well, if you really look at it, what's happening is a lot of those apartments are being sold by big companies back to moms and pops, so you don't have the capital to fix them. So over time, their product gets bad. And on top of that, a lot of product, they just getting really dated. How many of those apartments do you drive by even when they have a banner with the price on them, do you say yourself, "I would never live there at that price"? They're just a really lousy value. And as all those apartments get older, and more beat up, and more undesirable, that pushes people into our product line.

Next, the great reshuffling, we already talked about it, but you have like never before, an exodus of people out of urban areas. Where are they going? Well, they're going to suburban areas and exurban areas. And guess what? That's where almost all the mobile home parks are. There are virtually no mobile home parks in urban areas. You can't just pop into downtown Chicago and Michigan Avenue and say, "Oh, look at that trailer park." No, they're not there. But if you go out in the suburbs, you can sure find them. So you got this great reshuffling going on, which definitely helps mobile home parks, mobile home park owners.

Finally, you have this mega trend right now, which is getting a lot of discussion. My gosh, the articles are all over the internet about this issue of raising minimum wage. Seven and a quarter right now in America, but already some states have already raised it's like $11 or more. But the question is, is there actual fervor to raise it up? Well, there may be, but I can tell you what are the big winners will be if they raise the minimum wage. That'll be anyone who serves that income tranche that houses people with minimum wage or sells the products. There'll be a huge windfall for them. So if minimum wage was to go from 7.25 to $10 an hour, it'd absolutely fantastic for park owners because now our residents would have more money, more disposable income, so they can be sure and pay the rent. And on top of that, they can make very much needed household repairs to their homes, and beautification projects in their yard, and buy nicer cars to park out front. So those are all great mega trend boosts.

Now, what about mega trend dangers to the business model? What is there out there that could cause the model harm? So if we have all those big, mega trends that are propelling our ship forward, what is there out there that might throw a torpedo at us? Well, the first one, and this is very geographically centric, would be more severe weather. We are definitely seeing more severe weather patterns, it seems, every year, and if you're looking at a park in a coastal hurricane zone, that's scary. A lot of people figured this out years ago. We ourselves will not buy in hurricane zones because we cannot stand the terror of every year, having five or 10 or 20 hurricanes building offshore worrying it's going to hit our park. And I looked at a park down in Biloxi before Hurricane Katrina and that part got wiped off the map. Ma'am, am I glad I didn't buy that one.

Next issue you have with more severe weather is, in the southwest, regarding well water. Well water in many areas is no big deal. The water tables are relatively high. If you've got a water well in the Midwest, for example, I guarantee you will always have water to extract. But in some areas of the Southwest where we've had huge droughts, that table keeps going lower and lower and it is possible, mathematically, that they ultimately run out of water and I find that terrifying. So if you're in an area where that could happen, where it's possible that the water table gets so low you can no longer extract, that would be a very scary moment.

And then of course, out in the West right now where you've had all those fires recently, and it seems like there's fires every year. Again, if you had a mobile home park in those areas that burn, I would find that terrifying because again, you're doing your business model perfectly, and everything's going good, and then suddenly, park gets burned out in a fire. So that would be a terrible mega trend issue in certain geographic areas.

Another one is rent control. That's typically going to be a blue state issue, but a lot of states have turned purple now, so that element of risk is there in many, many states. Where has it happened? Well, just recently, you had the State of New York and that statewide rent control. State of Oregon did rent control. It was discussed in other states though and they're probably always a point of discussion going forward. I think it's died out now. There was a lot of enthusiasm for it over the last few years, but never went anywhere. So I think people are probably now going to move on to topics that they think they can get past. I mean, most of them didn't even get close to being passed. But he goes in circles, it goes in cycles, and it's very possible that mega trend will come back at some point with cities discussing and states discuss IE rent control and that's not good for landlords, not just mobile home park landlords, but really any landlord in general. So that would be a scary mega trend.

Then this next one is again completely geographic, but if we're saying the population is moving into places and out of places, and into some states that have some states, that could be a mega trend danger for your park. So if you're in an area that it seems everyone is moving away and nobody is moving in, and you can see these maps, if you go online, you can look at these maps, most of them are produced by U-Haul. U-Haul tracks where people place their orders, or someone tracks it, of where people are moving from point A to point B, then someone where they drop that thing that gets moved somewhere else. But when you look at those maps with all these little marks of orange and blue, you can see definite trends around certain areas, cities, and states that are losing population in a big way. So you can see that and that couldn't be impact your business model. If you were heavy into some area that's losing population quick, well, the problem would be, do you have people who want to live in your mobile home park anymore? So that could be a real issue.

Also, the escalating cost of new homes to fill vacant lots. This has become a real big issue during COVID-19. Everything was very steady and stable with new home manufacturing and many Park owners, including ourselves, were buying a whole lot of new homes to fill our vacant lots because we had huge demand for it. We had relatively easy financing for the customers to buy them. But we didn't predict COVID-19 would surface and when it happened, what happened is we had supply chain disruption, a really bad supply chain disruption. As a result, the factories can't get the parts they need to build the homes, predominately lumber. Additionally, you had a lot of factories that had to shut down because they had to quarantine the people in the factory because of COVID. So a lot of homes out there have jumped up enormously in price, maybe as much as $10,000 in price.

Meanwhile, the delivery timing has become much slower. So whereas it might take you 60 days in the old days pre-COVID to get your home, now it might take you five months. Now I think that's probably a fad, but I don't know for sure. So I had to list that as a mega trend danger because I honestly don't know if it will come back to how it was prior to COVID and with prices decreasing and times being faster.

But there's certainly one mega trend danger that I don't have to worry about at all, and that you probably don't have to worry about, and no one has had to worry about since the 1960s and that's mass prosperity. If you look back at all those postcards and photos I have and books about the industry and you talk to the old timers as I have, what really killed the industry was when people got wealthy and they didn't want to live in mobile homes, they want to live in larger homes and subdivisions. You've seen the old black and white pictures of a view out of suburban street where it's filled with beacons and Mayflower moving trucks and it seems like everyone's moving out on the same day and it's not staged. Those are actual legitimate pictures. That was the mass exodus you had from mobile home parks in some of those pictures into stick-built subdivisions.

And the reason was, again, during the golden age, people were all aspiring doctors, and lawyers, and dentists and as their practices got off the ground, they had more money, and so they then moved into suburbia. Nothing wrong with that, but I don't see that happening again, I don't see a return to a mass prosperity event. Remember that America, post-World War II, had a lot of great things going on. We became huge and many parts of manufacturing. Everything was going great there for the longest time. So the question is, is that going to happen again? I don't see it. I mean, I know we've had little blips of light where people said, "Oh, things are great now. We have the .com boom and we had the single family, zero down, no income documentation boom." But those aren't industries and those don't really impact our customers.

So really, when you talk about mass prosperity, mass prosperity to our customer would be much more than minimum wage going up from 7.25 to $10. It would have to be all kinds of new employment horizons of really well-paying jobs and I don't see it. The other thing I don't see is, you're going to have a lot of endless supply of boomers, in which I'm a boomer. Anyone born between 1946 and 1964 is a baby boomer. And as those baby boomers age, and they're the second largest slice of the American population, and it's 10,000 a day, they're dropping out of the labor force. There will not be a mass prosperity event for them. It isn't going to happen. So again, that's the one danger. If people say, "Well, gee, what has caused the most harm to our industry and our business model since formation," well, that's it. Mass prosperity. But I don't think there's a chance of that returning, so that's one mega trend danger I don't think any of us have to worry about.

All right, I'm now going to put the phones on Q&A format for questions, so hold on here...If you have a question, all you have to do is push *7 to be magically unmuted. Are there any questions out there?...