The Science Of Mobile Home Park Investing

If you are considering a mobile home park, then it is imperative that you recognize the fact that you make or lose money on the front end, when you buy the property. Over the years, a playbook has been established on what works and what doesn’t – a set of stats and assumptions proven by actual park performance. In this event, we discuss the science that we have learned over the past 25 years of buying and operating mobile home parks. It encompasses both parks and markets, as well as the industry itself.

If you want to learn the deeper science behind buying and operating mobile home parks, consider attending our 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 Science Of Mobile Home Park Investing - Transcript

Welcome to tonight's lecture series events. This is Frank Rolfe and we're going to be describing E=MHC2, the science of mobile home park investing.

Now, of course this is a play on words of Albert Einstein's 1915 formula, E=MC2, which is also known as the theory of relativity. But maybe they're not that different because back when Einstein wrote his theory he was trying to make this giant nebulous thing of the galaxy, the cosmos and to point it down to some kind of mathematical term.

Also, we're doing the same with mobile home parks. We're taking those big old nebulous trailer parks and trying to figure out what scientifically makes them work? What makes them successful and what makes them fail.

Now when Dave and I got back into the industry back in the 1990s, there was absolutely no scientific knowledge at that time on what made mobile home parks work. There was only one book available back then if you went out to search for a book on gee, I'm buying a mobile home park, what do I do? It was 1955's, How to Build and Operate a Mobile-home Park, which I still have a copy. And I feature sometimes little glimpses and photos of that book in the newsletter that I do every month.

But basically over the last 25 years we've been able to refine the numbers, the theories of what makes parks work into bite sized pieces that we can all use.

So, let's just jump right into the science of mobile home park investing. Now let's start off with the definition of what is a mobile home park. Now, if you look it up on Wikipedia, the sheer definition is two homes on one plated tract of land.

But the problem with that is that that's really not a mobile home park per se because you can always have farmer Jones in a mobile home on his farm and then his daughter lives on the farm in another mobile home, and bingo, two mobile homes, one piece of property, then he calls it a mobile home park. But clearly that's not what we're really talking about tonight.

So, my definition of mobile home park is a little different. That means I want the mobile home park to really be designed for the purpose of being a residential use with one piece of land with a design and parking pads and utilities and an entry. Something you can make it investment quality.

So I'm not, when I talk tonight, talking about the good old farmer Jones on one tract of land mobile home park. I'm talking about stuff that you actually would invest your money in.

So let's first talk about the size of the market scientifically for our industry. Now we know there are about 44,000 parks in the US or actually the reason I can say that it is we do actually know. We had two people spend two years building that list and that's what it came out to. It was a little over 44,000 parks.

We know according to the United States government that there are roughly 4.2 million mobile home park sites in the US. Now where they got their stats, I have absolutely no idea. If you believe their stats then that would suggest there are about 100 lots on average in all mobile home parks. Now would I stand behind that number? No. I kind of find it a little hard to believe that it's true that the average mobile home park is 100 lots, and I don't have a lot of confidence in the government statistics because I'm sure they didn't go out in hand and count them.

But I think it's safe to say we know there's 44,000 parks, that's for sure. And it's possible there are 4.2 million sites. I'm not really sure. But it's generally correct. Now let's look at then how that breaks down per state because that's kind of interesting, right? There are some states in there you would not expect to be large bastions of mobile home parks, yet they are.

The number one state in the US for parks is Texas. It has 5,176 mobile home parks. And it is by far the champion. It is the head of all of the next larger state by 30%.

The next largest is California, which comes in at 4,000 mobile home parks followed very closely by Florida at 3,785. So those are the big three of the industry, Texas, California, and Florida.

But the number fourth one seems shocking, it doesn't seem possible. Kentucky. How could Kentucky be that high up the rankings? Kentucky has 2,099 mobile home parks.

Then we jump to the state of Washington. How odd is that? 2,074 mobile home parks. Back to Ohio then at 1,940. Georgia at 1,757. Pennsylvania at 1,505. Oregon at 1,417. Indiana at 1,193. New York, 1,099. Michigan at 1,069. South Carolina at 1,067. And those parks in South Carolina get a lot of usage because 16% of everyone in South Carolina lives in a mobile home.

Minnesota, 1,049. Illinois, 1,041. Nevada 1,040. Arizona, 1,026. Missouri, my home state, 951. Colorado, 942. So who would expect that? Who would expect that Missouri would have more mobile home parks than Colorado.

Tennessee at 800. Oklahoma at 704. Louisiana at 694. Virginia at 667. Kansas 642. Maine, 604. Alabama 597. Wisconsin, 551. Nebraska, 512. Arkansas, 478. Mississippi, 470. Iowa, 457. Idaho, 400. Wyoming, 347. South Dakota, 343. New Mexico, 267, not many at all. Delaware, 260. Vermont, 239. Maryland, 234. West Virginia, 220. Montana, 200.

Then we're dropping to the states that have so few mobile home parks. New Jersey has 179. Utah only has 165. North Dakota only has 163. New Hampshire, 104.

Then we drop down again. These are the states that have so few mobile home parks it's hard to imagine they can even have a state association because who's paying the dues. I think that would be a legitimate question.

Massachusetts only has 85 mobile home parks. That's an insanely low number. Alaska only 70. Rhode Island, only 48. Then the winner of the lowest number of mobile home parks in America, Connecticut, at 44.

Now actually you're saying wait, what about Hawaii? Well you're right. Okay. Technically Hawaii comes in last because Hawaii had no mobile home parks until about two years ago when the state of Hawaii actually build a mobile home park in an attempt to try and foster affordable housing. It was a total failure because when you have a state build something by committee and bureaucracy and bad shopping, they spend about $330,000 per space building the mobile home parks.

So it was hardly the solution to affordable housing. So, what are the stats that we know as far as just the general size of the market itself? We know according to the census they believe there to be around 22 million people living in mobile homes.

So, what does it all mean? Well we have about 300 million people in the US roughly. That's where that stat comes out that roughly 8% of Americans live in mobile homes. We don't know out of that 8%, however, how many actually live in mobile home parks and how many live in just regular mobile homes on land. So, that's a number we will probably never know. But that gives you just some overarching macro 5,000 foot elevation ideas on how big the industry is by itself.

So now let's talk about the players of the industry. Who are the big people of the industry? Well, if you go on, if you just Google up MHU top 100, that's the list that Brandon maintains for our website. It shows you who the top 100 owners are at this given moment in history. Actually it extends a little bit beyond 100. Last time I looked at it I think it shows the top 106.

This is a weird statistic for you. If you take that list, and you go to the middle, to the 50th person in the list, you'll see they own a roughly 20 parks. So, if you just take and say, all right, well 20 seems to be about the middle, so let's just take the full 100 and multiply that by 20. What do you get? Well you get 2,000 parks.

If, however, you say well, but we have some big players at the upper end, right? You've got ELS, and you've got Sun. Although even though they have a very impressive lot count, they don't own that many parks. ELS owns somewhere in the 400 to 500 number. Sun in the 300 to 400 number.

So, no matter how liberal you are with the numbers and just want to throw all kinds of wild assumptions on them, you will be hard making the case that there's more than 4,000 mobile home parks that are owned by the top 100 owners.

Bare in mind, to make that list of the top 100 you only have to have 600 lots. So, that means it's roughly six parks. So what does it all mean? It means our industry is insanely unconsolidated. So the first observation you would have as far as the players of our industry is my gosh, how in the world could it be this fragmented?

Let's look at other industries as an example. My old industry, the billboard industry 80% of every billboard in the US is owned by three companies. Just three companies own 80% of all the billboards in the US.

The cruise line industry. Almost the entire cruise line industry in the world is owned by roughly five companies. But here in our industry with 44,000 mobile home parks only roughly 4,000 or a little less than 10% of the total universe of parks is owned institutionally. That's got to be the most disjointed, unaggregated industry in the United States today. I have trouble believing that anybody else could state that.

The trucking industry, for example, I am certain that the big truck lines own a bigger concentration than 10% of all the trucks on the road. I know the self-storage industry right now is three times more consolidated than we are.

But what the heck is up with our industry? Are the most unconsolidated thing I've ever seen. There's another scientific fact for you. There's 44,000 parks, effectively 40,000 of those are still owned by the original mom-and-pop builders or their subsequent heirs.

Now let's turn for a minute as we talk on the front end of just getting an idea of the industry itself scientifically, what about mobile homes themselves? Those actual boxes that stick on those lots that people live in. What do we know about those?

Well let's talk about that for a minute. Let's talk first about how many mobile homes have been built in the United States historically. You'll find that when you start looking at manufacturing the stats are much more visible because MHI, the overarching lobby for the industry never really tracked mobile home park data. In fact, I'm not sure they still are.

But they track shipment data very precisely going back to when HUD started taking over manufacturing. So here is what the stats are. Let's start back in 1976. That was the year that HUD began. In 1976 there were 246,120 mobile homes built and shipped in the US. Pretty impressive number except you have to realize that people were building and selling mobile homes all the way back into the '40s.

So the industry had about a 30 year ramp up period to get towards that very first year under HUD, they sold 246,120. Then let's look for the peak year. What was the highest production year ever for mobile homes? The answer 1998. Yes, I remember it well. I bought my first park in '96. In '96 the stats were very impressive. They were also in the 300,000s. But by 1998 we topped out as an industry at 372,843.

I recall I once got a telephone call at my house from someone in my neighborhood who was a fairly successful stock broker, and he was wondering if he should quit his job and become a mobile home sales person because he was running the portfolios for some sales people at mobile home sales lots, and they were making twice what he was making in commissions.

I properly and intelligently advised him not to do it. It had to be a bubble that would blow, and I was exactly correct. The year the bubble burst, 2000. Sales plummeted in 2000 down to 250,550. But that was only the start of the plunge. People thought, well that's bad, but it will pop right back up, and it never did. It went down more every single year consequently till you get down to 2009.

So 11 years later sales had plummeted from 372,843 units down to a measly 49,789, pretty depressing. The next year they barely bounced at all, 50,000 to 46,000 in 2010. 2011 only 51,606.

So where are they today, you might ask, how are we doing now? Well here's the stat. 2018 we're at 96,540. What's scary is if you look at that stat, never in American history was that stat anywhere near replicated that pathetic a number all the way to where the measurements were first done.

The lowest number prior to that year was in the year of 1991 at 170,713. So roughly 100% higher than we are today. So it's safe to say that the manufacturing, the shipments in the industry are kind of sadly pathetic based on where they could be and probably should be. Plus there are 124 plants in production today. It's a fraction of what they used to be in the olden days.

If you go to one of our manufacturing industries, in fact you'll wonder why are they only doing an eight-hour shift? Well, the answer is there simply isn't the demand towards them having them to operate three shifts and having to pay all that extra payroll. They're able to happily adapt to the current demand just in the eight-hour day because once you have a big plant like that, right, you would think you would run the thing 24 hours a day. Instead of producing 10 homes a day you could produce 30 a day by having three shifts. But there's not enough demand to even do that.

Let's talk about new home pricing for a minute. Maybe in some ways that is the reason those plants aren't as busy, you might say. Maybe that's the problem. Maybe things are just too expensive anymore.

Well actually before we jump into that, I have another big data I found that I printed off. Let's go over this for a minute. It's also interesting. It will only take a second. And this is where did those homes go? Right? We went over how many are produced, it's not that many, but where did they go.

Well this is kind of interesting. In 2018, the winner of where all those homes went was Texas. Texas is 18,632 of that total. But you'll say now wait a minute here. You're saying that the total sold in 2018 was 96,540. So you're saying that Texas is almost 20% of our entire national total? And the answer is yes. Why would that be? Well two reasons. Number one, Texas has the most parks. But the other reason is Texas always has a very vast and growing economy and a huge demand for affordable housing. Also, it has high lot rents so people bringing in their homes there to capture those high lot rents. That's why Texas is so strong.

Based on the strength of Texas, the west, south, central region of the US is number one in where homes go. 27,329. Now what's the number two position? It's called the South Atlantic District. Now what's making that work? Well, another of the biggies, Florida. Florida is 7,322 of the 22,112 that are being shipped.

Next in that area, North Carolina at 4,439. In South Carolina at 4,035. Then Georgia at 3,503. So that little section there, basically North Carolina, South Carolina, Georgia, and Florida are propping up at the South Atlantic. They sure are not coming out of Delaware District of Columbia to come in at the second position.

Now the third position, and people may find this a little shocking, the East, South, Central area. Alabama, Kentucky, Mississippi and Tennessee, 13,893 of total homes shipped. The biggest of those Alabama, 4,807.

Now you'll say well, what the heck? Why not Kentucky? Kentucky, as you recall, has the fourth largest number of mobile home parks in the US. Well clearly it may have a lot of parks, but the park owners there are not really buying many homes. It's probably because there's not many larger owners in Kentucky.

If I was to guess which states are the most non-consolidated, definitely Kentucky would be in that list. I know of very few owners who have parks in Kentucky.

Now the final reason that's doing decently on the home shipments was called the East, North, Central. That's Illinois, Indiana, Michigan, Ohio, and Wisconsin. But now here's the crazy stat for you. Think about this one. Michigan is the leader of that group at 4,467. In fact, Michigan is only behind at the following folks. It's only behind Alabama, Florida, and Texas.

Now what the heck, you're going to say. Why is Michigan so strong? Well I can tell you from our own experience Michigan has been our number one state for selling homes now for two years in a row. Why can that be?

Well, the owners there are getting good rents, which makes them want to buy homes. The demand is extremely high. There's a lot of good things going on in Michigan. Now you'll say, wait a minute here, though. I've heard for years from you guys Detroit has had economic problems.

Yes, Detroit does have economic problems. The entire state of Michigan is not defined by the city of Detroit. There's Ann Arbor. There's other places that people never think about.

So those are some stats. Now let's move on to the pricing because the pricing is kind of interesting. It's interesting how wrong the government is when they give out pricing data. How you can really skew things.

So, here's a sheet that's created I think kind of as a tandem of MHI and possible the US government. What it's showing is that the average cost of a single wide, $44.43 per square foot in 2017. That's the last year that they have data from.

The double line came in at 53,000.55, right? Now meanwhile the singe family home, if I'm reading this properly, came in at about a little over double that, $86.30. No, I'm sorry, I'm reading the wrong stat. There's so many stats on here. $111.05 is the average cost per square foot for a site built home.

So let's compare those two. What that says is that the mobile home is less than half the cost of the stick built. Is it true? No, not at all. Not in the least. Give me a break. If you look at most of your mobile homes in your mobile home parks that I see every day, and those little for sale signs in the windows in the yards, they're simply for sale for 5,000 bucks, 10,000 bucks. 10,000 would be actually a big price on those homes.

Yet if you're using the stats here based on current manufacturing and even then not the ones that go into parks, they're using the middle of the park. So this does include farmer Jones and his daughter selection of their homes. So clearly those numbers are completely erroneous, laughably bad.

Now another stat, which is interesting is the actual then cost of goods sold. That site build home that they build for $111 per square foot at 2,643 is the average number of square feet, that's selling in the US for $384,900. But that single section mobile home is selling for 46,305. So it's about a 90% off sale.

So obviously the price level of these homes is usually competitive. Very, very compelling arguments for why people would want to live in mobile home parks.

So now let's jump over and start talking about parks themselves. We've gone over the universe of how many parks there are, who the owners are, the manufacturing data, now let's go over to what the meat and potatoes, which is okay tell me about the mobile home parks.

All right. Well start with the cap rate. Now the cap rates on mobile home parks in America are all over the map. I would say that the lowest I see actually that people pitch to Dave and I is 4%. Does it make any sense? No, probably not. But 4% in some states like California, Washington State, maybe some of the better parts of Florida, maybe right around New York, 4%, the argument by the broker is sure it's 4%. But gosh darn it, you can borrow the money in about 4% when you buy it. Then all you have to do is push the rents up. In some cases that's true, you can do that.

The other end of the cap rate is the most common high end I see is the 12% part. That's typically a part that's the turnaround. It may even have some nasty problems like private water, private sewer. So that's kind of the cap rate range in America I would say, it's 4 to 12. It's a giant stretch, right? That's an 8 point stretch from low to high.

What's the apartment industry look like by comparison? Maybe a 2 point stretch, maybe a 3. So we're probably about three times more in our industry than most normal real estate sectors.

Also, don't forget that to hit these desired 20% cash on cash return that most buyers are seeking, you have to have a 3 point spread. 3 points between the interest rates on your loan and your cap rate in the space survey. 70% to 80% loan to value.

So what it tells you is our industry is actually pretty healthy on the cap rates because based on financing rates, which we'll go over in a minute, that means you have to be able to find deals at cap rates of about 7% to 9.5% to meet those minimum thresholds of 3 points over the prevailing interest rates, and our industry provides that.

So you could actually ... You can still make those spreads. Can you do it in any other sector of real estate? Not that I'm aware of. We're kind of the last of the frontier for that.

So let's jump over then to financing rates. So if we know roughly where cap rates are at, or our financing rates are. Well seller financing right now, if I was on the game show, I would guess you're probably going to pay about 5%. You might get away with less. People have.

I don't think you get under 4%. Sometimes a seller wants even more. They're greedy, and they want more for carrying the paper. So, it might go up to six. I've not seen any deals in recent times above six. I haven't seen any deals lower than four. So, I would say it's a fairly safe bet the average is about 5%.

Now what about bank financing? When I say bank financing I'm really talking recourse debt. That's probably the best way to look at it. This is typically a situation where the bank is going to say, yeah, we'll make the loan, but we want you to also sign on that loan on a recourse basis so we know when we get paid back.

Let's say your bank loans right now are running at about 5% to 5.5%. The highest I've seen is 6. The lowest I've heard of is a little under 5, like 4.8. But I think it's safe to say 5 to 5.5 is about the prevailing interest rate on recourse bank debts.

Then we look at conduit. Conduit is also known as CMBS debt, commercial mortgage-backed security. Yes I know, that's the thing that tanked America in 2007 with a single family mortgage crash. But nevertheless, the commercial section of CMBS has always behaved itself pretty well.

The interest rates on conduit debt or CMBS right now they're right about 4% to 4.5%. I've seen a little lower. I know people have done loans recently with interest rates down a tad. It may be as low as 3.8, but that's kind of the range about 4 to 4.5, and it's also the same as agency debt. Agency debt is Fannie Mae and Freddie Mac. This is all part of the government's new enthusiastically deployed duty to serve law under congress. You may have seen the hearings on C-SPAN two, three years ago.

Basically what happened is the government wasn't doing a darn thing to help people in the affordable housing sector, and they knew that. They didn't want even to act with it. They didn't think there was any money in it. It wasn't glamorous. But they kind of got caught, because they're supposed to.

So what they did as punishment is they made them refocus their efforts on making loans to mobile home parks, that's phase one. Phase two is making them get involved in financing and securitizing mobile home debt itself. Don't know how that all turned out. That's supposed to start this year in a very, very small way. I think only $10 million or $20 million worth.

But on the park side right now 50% by dollar volume of every loan in the United States that's made this year from mobile home parks is done through agency debt. Agency, again, about 4% to 4.5%. So in three of those four banking styles, your non-recourse and you're running right now at a range of about 4% to 5%.

Now let's talk for a minute about note rates, as long as we're talking about finance. So what do we see in there? Well on seller debt we're seeing anywhere from 5 years to as much as 30 fully advertising. It seems crazy, and I'll be the first to admit that an elderly mom-and-pop who might be 80 years old would agree to a note that's sometimes 20 and 30 years of length.

But I think this is how they look at it. Number one, you never know how old you'll live. I have many family members in my family tree that lived well over 100. I know I met one that's back in the '70s. One of my aunts was born in the 1800s prior to the invention of everything even including the automobile.

So, some moms-and-pops think well I could live to be 100. So possibly that 20 year note they're still rocking on. So then beyond that you also have the fact that a lot of sellers are thinking well you know what, I'm going to go ahead and do this longer note because if I die, because everyone knows they will ultimately die in the end unless medical science does something amazing, then what they're going to do is they're going to have something that they can leave their heirs. So they can't go out and just blow on something, right? They're going to get them a monthly income.

It gives them a while to get on their feet. Maybe they're hoping that actually it will take them many, many years before the note ends, and they get their money then blow it on something. So seller debt is really all over the map.

Now on the bank side, the notes are typically three to seven years with the average of five. So three is a really short note. We don't really advocate doing three year banking, that's a little scary. But five years is okay. That's one presidential term in a year. Seven years is almost two presidential terms.

It seems like life is all about four year segments, right? High school is four years, college is four years, presidential terms are four years. So five year to seven year notes are fine, but that's where banks are. They're not super long term.

Now, conduit is different. The conduit norm is a 10-year note. That's really lengthy. 10 years is a decade. So much happens in a decade. Think about on the decade. Think how different the '60s were from the '70s, how different the '70s were from the '80s. So basically 10 years is a long time. Two and a half presidential terms, so that's a pretty long period.

Then the longest of all agency debt, which is rating right now an average of 12 years. They do have some other alternatives. You can do a 10 year if you want but why would you? Most people are doing a 12 year agency note.

As far as the amortization it's ranging from about 25 to 30 years across the board. But some of your banks they want to do 20 year amortization, I'm not exactly sure why.

Now let's move on to mobile home parks themselves. Let's start with the revenue side. These are some scientific facts we know about mobile home parks. Number one, real property is lot rent. Personal property is mobile home rent. Real property is any stick built thing on that park. Mom-and-pops house, apartments, those kind of items, those are real property.

Personal property are things like the mobile homes vending machines, that kind of income. That's not real income. You can only cap the real property income. So not to depress people who own lots and lots of park owned homes out there, but you can't use the home portion of the rent in your numbers that are then applied with the cap rate. Not my law, it's the law of the banking industry, appraisers, everybody. Only the most unsophisticated lender that has never read or heard about the industry would tap the home income.

So right off the bat, the real property, the lot rent, that's where the money is. When you consider the fact that the cap rates today as we've already discussed are a range of all the way down to 4 up to 12. It's roughly let's say at least 10 times the money. But the homes being personal property, the applicable cap rate on those would be maybe 30% to 50%.

So clearly if you want to make money you focus completely on the lot rent. What about the expense side? Well the standard industry ratio is 30% to 40% of expenses. 30% of the tenants pay their own water and sewer. And 40% of the park pays the water and sewer. What we know then is water and sewer is a big deal. That's one of the most important attributes to it.

So what does it say? It says that your typical park you're going to look at, your cost is going to be 30 to 40 cents of every dollar. That will be your expenses. So if you take your lot rent, your real property income, you should be netting 60 to 70 cents per dollar of revenue.

Now, can you get any lower than that? I get asked that all the time. Can you break under 30%. Sometimes people will call me and say, hey I got this hot deal. Mom-and-pop says their expense ratio is 7%. No, the answer is you cannot. We have one mobile home park where the city owns the streets. They own the water. They own the sewer. They run the lines. They build the residence. We have nothing in this entire park. We don't have any common area, so to speak. We have a tiny little patch of grass with our sign in it, and then we have the world's smallest office/club house. Hardly even would count. It would be like the size of the world's smallest double wide. That's all we have in there.

So you might say, wow, if you don't have to maintain the streets or the water or the sewer or bill anything back, my gosh, you must be down to what? 5%. No. Sadly the answer is still about 20% because a lot of your large costs, manager, property tax, insurance, those aren't going to be there based on the fact of who owns the roads and the water and the sewer lines. But what it does tell you is you'll never get your cost structure in life any lower than 20%.

So, when you see those deals where mom-and-pop claim they're down to the single digits, you can forget that. I will also add that these expense ratios are not just the derivative of Dave and I, I will say we've learned this from overtime, but these are what the appraisers in the banks all commonly use today.

So you have a tough time selling any sophisticated lender or appraiser who have a lower expense ratio than 30% to 40% because that's what they've all be trained is the norm.

Let's move on to due diligence now. Here are some things we learn from due diligence on successful parts. Number one, the test ad I should pull about 30 or so calls in a 10 day run. We run a test ad in the classified sections of the newspaper. Also, on Craigslist we run it for 10 days. We stick it through a grasshopper, or a Google disposable number. At the end of the 10 day run we take out all duplicates and add them together, and we hopefully get about 30.

Now if you got 20 it might still work. Normally the way it works is you got 30 calls, or you get one. So it's very rare that you ever have to stand back and ponder I don't know is the demand there or not. So that's how we track indiligency if the demand is there.

Now the other thing we do is we take in our due diligence, and we build a giant three-ring binder book. So we take everything from diligence, and this is a lengthy list, certificate of zoning, discussions and texts by everyone from an electrician to a plumber on how it's built. Obviously the financials. We build this giant book into a binder.

Then we stand back and look at it simply scientifically. We put no emotion in it at all. We don't really care if we buy it or not. That isn't the consideration here. It's not oh gosh, I really like this park because it's so much fun to visit it. No, no, that's not how you do it.

You look at it very scientifically just like Einstein with his theory of relativity you stand back and you look and you say well is this really a successful deal or is this not. Now one of the things in due diligence that would make us freak out and maybe walk the deal, number one, not having a valid permit to operate, an illegal park, it happens all the time. So right off the bat would that sour the deal? Absolutely, you bet it would.

What else could make me not want to buy the deal? Well I could tell you one and that's going to be private utilities. Now water wells we've kind of got used to that over the years. One thing about water wells are when they go bad it's normally not that expensive to put them back. So water wells not typically a deal killer for some people. Some people might say no, I don't want to do a water well, and I wouldn't blame you.

But for most people water well isn't the killer. The real killers come on these sewage side, the things as lagoons and packaging plants. Very large capital, very scary item in the form of a lagoon. Very large capital item and that scariest part is performance on the packaging plant.

The other two are master metered gas and master metered electric. All you do in that case is you become a gas company, and a power company when you buy the park. But who wants to be a power company, and a gas company in a litigious America? And the answer is nearly nobody.

So what you do is you build your diligence. You watch out for private utilities that will sink you. Lagoon, packaging plant potentially, master metered gas potentially, master metered electric potentially. Lack of a legal operating permit completely.

Of course the other part in due diligence that will also impact you is when you get the reality of the numbers. Sometimes mom-and-pop lied about how many are occupied. Sometimes they lied about what their lot rent is. You ran your numbers on the back of an envelope and then you come to find out the lot rent is half of what you thought it was.

So there's many things that will derail you with diligence, but those are basically the big ones that we found scientifically over time.

Now what about the markets themselves? What would derail you from wanting to buy into a market? Well here are some of the things we've learned over the last 25 years about markets. Number one, you want a metro market of about 100,000 people and plus. Now you don't have to be as big as some people think. Some people think oh well I need to have a million people in the market to make it worthwhile because that's what all the apartment guys say.

Well in the apartment world maybe you do. Maybe it's just so competitive you have to have a non-stop supply of people moving about. But in mobile home parks it's a fairly stable. You don't really have to have that big a market.

At 100,000 you're going to have every big box retailer known to man. You're going to have Loaves, Home Depot, Walmart of course, McDonalds, Orbeez, everybody. So that 100,000 person market is really pretty darn strong.

If you look at some of your big markets, like just take Dallas for our worst part example. If I look at an area of Dallas per worth, what do I notice? Well you've got Dallas, all right. Dallas is about Dallas proper, a little less than a million people.

But what aggregates to that big $6 million, $7 million population is a bunch of these smaller cities that all have a population of about 100,000, 200,000. Grand Perry and Arlington and DeSoto and Lancaster. All these kind of cities and none of them are really massively big on their own. Only Dallas and Fort Worth proper are really big.

The stuff that fills in the gaps though and gets the metro where it is, bear in mind the Dallas worth metro, I think it's about seven million but only about a million and a half of that is actual Dallas and Fort Worth true population. So what does it mean? It means those are pretty big cities. They just happen to all be sitting near each other to get that giant metro. But I think we have to say a city of 100,000 is a major city.

Another item in a single family home cost we would like it to be 100,000 and up, why? Because we want people to be having to spend a lot for a house, so that makes us look so much more desirable.

Two bedroom apartment rent of about $1,000 and up, we like that. Vacant housing rate at the market at 12% or less. Why? Because vacant housing is more important than almost any other stat. If you have a city which has a vacant housing rate of 30% or 40% it means that people are abandoning that city in drones and there's so few people they can't even fill out the houses.

As long as you have your vacant housing rate of the national average, which I think is 12.45 or lower, what it means is that people, if you have a lower declining population, which you do in some states, what's going on there is you set fewer people per home. The home that used to have three people in it has dropped down to two. The ones that had two only have one. So, that's okay.

Now another part of the market that makes us want to go to there or not is in fact the employment situation. We learned from the great recession in 2007, I think all Americans did, that not all cities are created equal. Some cities have employers that are subject to live in the building, right? Sometimes you just have one giant plant, one giant factory. But look right now at the factory, there's a Scheperle plant, I forgot the name of it. I want to say like around Michigan or Ohio, I'm not sure where it is.

They shut that one plant down it just really skewered the market, right? All over America there are these giant plants that often control entire cities, and they're so big and massive in their population and everything in the city stems from that one giant employer. But what happens when they shut? What happens when they move to another country? Well, then you have a real problem on your hands.

So, we prefer markets that are called what we call recession resistance. The way we look at it is there's only three employers out there who are not subject to laying people off, shutting down or moving countries. One of them government.

Government never does much. Now you probably read in the news right now they're trying to move some division of the government to Kansas city from D.C.. It's not a huge number of people, but they are fighting tooth and nail they don't want to leave. So government jobs pretty much they don't move around much. It's very, very rare to have any change. So, that's a pretty safe employer.

Another one is education. Even in the great recession people still send their kids to college. I've never heard of a college ever in my lifetime that has moved locales. I can't even fathom Harvard one day saying you know what? We've really enjoyed the Boston area. But effective immediately we are moving to Little Rock, Arkansas. I don't think it could happen. I don't think the alumni would stand for it. So colleges they don't move nor do they lay off.

The final one is healthcare. Healthcare is so pervasive in our society. It's one of the largest cost centers we have. One of the big issues is we have the baby boomers, of which, I am a member of, are aging leaving more and more medical care, more, more very costly medical care. You can't lay off or have recessions in hospitals. The demand is too high, number one.

The other item is you just have to have it. When the city's coffers decline they don't make cut backs at hospitals. They cut other things. They may cut out, if they're going to have three softball leagues this year at city park. But they're not going to cut back on the hospital. So we love healthcare, education and government employers.

If you look at the stats, if you look historically at what happened after the 2007 great recession, you'll see the areas that are strong in those three never had a recession. In Iowa, for example, many of your major Iowa markets were running in this 3.7%, 3.8% unemployment rate when the US was at 10. So there definitely is a difference. Not all markets are created equally. We prefer recession resistant employers.

Moving on to the policies in the park that work in the work that we've learned scientifically. Simple. Basically two items. The first Barry, no pay no stay. Pay your rent or out you go. We do not allow people to make payment plans nor do we allow them to live there for free. So, if you don't pay your rent you got to go.

Is it a cruel system? No, it's not a cruel system. It's a fair system. It's not fair to have people who are shoulder to shoulder those paying rent and those who don't pay rent. How do you explain that to those who do pay rent? Oh yeah, well that guy doesn't pay rent but we never evict him. That doesn't make any sense to anyone. So you got to have a situation where all the customers are treated equally. They have to pay the rent or they have to be evicted.

The next issue is called no play no stay. Now we're referring to the rules themselves. So if you don't want to play by the rules that's okay but not in our mobile home parks. You know most mobile home parks rules are really not that tough. We ask a bare minimum that people can live side by side and side and get along happily.

However, some residents don't want to live like that. They want to live in a society of no rules. Often when you buy a mobile home park you'll see that one resident who's got four non-running cars and three pitbulls in the yard. Well that person can't go on like that. Think how that ruins the quality of life of everyone around them.

So, if they don't play by the rules they have to go. It's that simple. Well that's just rules of enforcement, no pay, no stay. Pay or leave. Or no play, no stay, don't play by the rules and you have to go.

How do we do a lot of that from afar? Well, we do a liberal amount of HD Polaroid cube films. It's a very simple HD camera you can buy. It's about 150 bucks for the sunction amount. You put it on the roof of your car, you aim it at forward and you push the button and you have the manager drive the park from outside the park, all the way through every street, take out the chip, mail it to you, you download it and now you're looking at the park as though you were right there in your car.

You can in fact get in the car with the manager. You go to a GoToMeeting Webinar format, you can ride in the car with them, which is awesome. So, that's important. Where technology has really helped mobile home park owners.

Let's move on to sales and rentals, the science of that. We have a formula for that called 9-3-1. For every three calls we should get one showing. For every three shows we should get one sale or rental. It's a very simple formula. It makes complete sense.

Most mobile home parks if you watch the count of how many calls they get, every nine calls on a good well run park you'll see suddenly one sale or one rental. Now how can you track that data? Take the phone number for your mobile home park and forward it through who's calling or a similar service. We do it through Void as part of our red manager software.

What it does is it records all incoming calls. It tracks the phone numbers. It allows you at the end of the week to see precisely how many people called the mobile home park, and from there you can figure out how they did as far as that 9-3-1 formula.

On top of that, it captures the phone number you can ask the call and actually interview people to see what actually happened when they came in.

Another thing we've learned on sales or rentals are when you buy mobile home park often it comes with a rental homes and you want to convert those renters into owners. It's very difficult to do that unless there's a $100 discount for owning rather than renting.

The hardest thing in the world is when you try and sell mobile homes where the person by taking possession of the home it doesn't reduce their cost structure. Everyone knows that it costs money to repair a home. Pay taxes and insurance so people demand about $100 per month to make that tie together.

Now let's move on to the scientific management gauges of a mobile home park. There's basically five. Number one, your collections meter. It's very important. You've got to know where you are on money because, again, this is affordable housing typically. You've got to make sure you're hitting your budgets that you're collecting your money in.

Number two, occupancy. You want to make sure that your occupancy is always advancing. It should not be ever going down. Your water sewer. You want to make sure the bills are similar between this month and this same month last year. You're constantly looking for water leaks. Why? Because water sewerage it's the single biggest cost line item in a mobile home park yet we're ever vigilant on your water sewer cost.

Next after that property condition. Why is that so vital? Why do you have to have great property condition? Well, let's see. If you have bad property condition you will scare off the residents. You'll make the city very irritated. You may flunk your lender inspection. If you then or at the same time trying to buy the park or refine it or sell it, you won't get a very good appraisal and you certainly won't get a very good buyer. So property condition is extremely important.

Finally, there's a meter we call BAD, budget actual difference. This is like your GPS system on your car only mobile home park variety. So under the BAD every month you take the budgets. When you bought the park you had a budget. You look at the actual performance. You compare the two and you'll highlight any category that you did poorly on and that's your difference and you're focus on the ones you highlighted that you did poorly on and you try to figure out how to fix them.

Now let's talk about how to increase value in mobile home parks scientifically. This one is fairly easy. There's basically five ways I can take a mobile home park and make it make more money. The first one is to raise rents. Now I know I get perpetually criticized by virtually everyone that I must be an evil person, an opportunist because all I ever talk about is raising rent. Well that's BS.

Why doesn't everyone go talk to Charles Becker, the Economist from Duke University, who as soon as people start talking about it he I think is perhaps hiding from the story because nobody wants to be sucked into this strange agenda in American politics today.

But the bottom line is our lot rents don't make any economic sense. How can I say that? What am I talking about? Well the fellow over there at Duke what he did was he just did some regression analysis and those kinds of things that economists do and he found that if you really look at price per square foot given all of the different variables of apartments and class A and class B and you name it, our rents in America are roughly about 50% to 100% too low.

What's example B? Go to talk to someone who owned a mobile home park back in the '60s and ask them what the rent was. Most of the rents back in the '60s were about 60 bucks a month. Today's dollar that's about 500 a month. You know our US average is at 280.

In most the markets we serve, the cost differential between a three-bedroom apartment rent and our mobile home park lot rent is $1,000 a month. Why? I think most people prefer not having a neighbor knocking down their walls and ceilings, having their own yard, parking by their front door and having a nice stable evasive neighbors.

Why do we have to be $1,000 a month less? The answer is we don't. Look at Denver, Colorado as a market for example. Denver's average lot rent is now about $750 per month. Not too long ago it was about 350 to 400. Why so much higher? Well because Denver is in a unique position. Denver is where most of the mobile home park owners in America are based. All the bigger portfolio owners. The only spot bigger, Chicago.

So let's go over to Denver. What they've been doing is they've been buying up all the parks. Why not? They're in the business. They drive by them every day. They'd like to have something to show the banks, something to show their investors. They buy them all up. These investors are not hamstrung by mom-and-pop's thoughts on where pricing should be. They look at it purely economically and they decided the rents were ridiculous. They raised them to 750, and here's the crazy part, the parks are completely full.

If they were anywhere near top, they'd have a vacancy. They don't have any. So where are the rents going to go from here? Obviously they'll continue to go up. Why? Are people opportunistic? Are they just bashing on people who cannot afford those higher rents? Are they gouging? No that's absurd. No that's not what's going on at all. The problem is the rents were insanely low to begin with. Why? We called mom-and-pop quantities in. Mom and pops for whatever reason they didn't want to raise the rents to market. They let them slide. If you talk to the moms and pops, hey, why didn't you raise for 20 straight years? Well I don't know. I paid off the note and I didn't think I needed to because I already paid my note off.

Well it was some basic economics. It wasn't well I couldn't because you see I did all the market coms and the apartments at that time were at 725 and the single family was this or that. No, it's not based on any science. There's no E=MHC2 of the way that mom-and-pop set their rent. They just set them insanely low to begin with and never raised them after inflation.

Today, modern owners are having to undue 20, 30 year of deferred inflation in one whack. It's all that's going on. There's no gauging involved. It's just simple math, simple economics.

Another way to increase the value of your park is the sub meter water and sewer. Why not? All of America today is based on the idea of conversation. Studies have shown that when people don't have to pay their own water and sewer use, they use about 30% more.

So sub metering makes complete sense. And since water sewer is your single largest line item, it also makes complete sense, it's a great way to raise the value of the net income of the park.

The third item is filling vacancy. We already talked about all those homes being shipped, right? That 100,000 being shipped each year. Gee, I wonder where those are going? I wonder what's going on there. Well I guess you already probably figured it out.

Those were all park owners buying those homes. They're buying the homes and they're bringing them in to fill their vacant lots and that's why there's a tie in between certain states, certain markets and certain numbers of parks, and that's where all the homes are going.

So, what does it all mean? It means that's a great way for you to increase your net income is simply buying homes, going to the manufacturers and bringing them in and putting them on your vacant lots.

Fourth item, cutting costs. Typically, a lot of mobile home parks that are owned and operated by moms and pops have fundamental flaws in the expense structure. The single largest one typically the manager. You have managers out there that are making in some parts $100,000 a year when the going rate is 30. How is this possible? How could a little mobile park, it seem so small, 65 lot park with $100,000 year a manager. The manager in fact was making more than the owner of the park was. How? Why? How is that work?

Well if you talk to the mom-and-pop what happened was they hired the manager at $20,000 at one time but they kept doing the annual increases and kept compounding. Then somewhere in the middle the manager says, wait a minute now, I need health coverage. Then that health coverage goes way, way up in cost. That's how he ended up with 100,000. It doesn't make any sense now. And they didn't have the heart to go and replace the manager, so they just keep on paying them even though sometimes they're making more money than the park owner themselves are making.

Finally, just making the park a nicer place to live. When you go to sell your park down the road even though making it a nicer place to live may not get you a single cent, although it probably will. You probably can get higher rents. But if it wasn't true, what happens is when you go at the very end of the movie and you go with salary, finance the park, your big report card as an owner is the cap rate the appraiser uses. He's going to use a lower cap rate based on how nice the park is. It's just human nature.

You can have the same park with the same economics. One's super nice, well green, beautiful entry, well mowed. And the other one is the reverse. It's weed growing everywhere, out in the cubs, out in the streets, sign fell down. But the economics are identical nevertheless.

Part number one, it's a nice park. The appraiser may say, well ah, this park is about a seven cap. But the nasty park he may appraise it to a nine. If you take the difference in money of the value of the seven to the nine, it's enormous. In some parks it might be as much as a million bucks. If you take that and divide that through the years of ownership that's a giant boom to your return.

So that's the fifth way is just to make the park nicer so you get that better appraisal cap rate at the end.

Now let's move on to the science of selling the park. Now you've held the park for a number of years, five years, seven years, whatever the case it may be. And now what do you do with it?

Well here's the science of that. There are basically four things you can do with the park. Number one, just keep it and refinance it. A huge number of people what they do is they simply refinance the same park over and over and over. Why the heck wouldn't you? Here's how it works. If you go and refinance your park and let's say it's large enough to go through a conduit loan or an agency loan, they're going to appraise it and they're going to give you a loan of 70% of the appraisal amount.

So let's just look at this in dollars and cents. It appraises for $3 million, they'll do a 70% loan. So I'm going to give you $2.1 million on it. I'm using the case the fact you would have no existing debt. If you went and sold the park, yeah you'd get $3 million but you have to pay tax on it, based on capital gains and the appreciation recaptured and your state income tax. It might be as much as 30%.

So wait, you're getting the same amount of money. You're getting $2.1 million into the conduit loan and you're getting $2.1 million after tax by selling for cash.

But here's another wrinkle. The conduit loan money they give you is not taxable because that's in the form of a loan. So you actually end up with the same amount of money in your hand at closing another reply as you do on the sale.

But here's the weird ending. You sit on the park and let the park pay its own bills. Just go on down the road and 25 years later the park is pretty and clear again and you can do it again. When you sell it, you can only sell it once. So often for people, refinancing, keeping the park is a good angle.

Now, another thing you can do with your park is you can always sell it and carry the note yourself. That would give you an above market interest rate. It might also give you some tax advantages. If you don't pay income tax on the sale only till it's received in your hand. So, that's another option you have.

But further people will say I just want to sell the thing and just get my cash and maybe 1031 another mobile park or maybe just retire. In that case, the two main ways people do that is they list it with a broker. There's a lot of great brokerages that deal at our industry. Marcus & Millichap, Sunstone, and many others, and they're also approved on mobile home parks store.

It's amazing how much interest and hits you get on mobile home park stores. It's been true for about 20 years now. It's Dave psych, he built it from scratch. He bought it from a minister for $1,000 back when the internet was just forming and today it's become so beloved with moms and pops that it's where a lot of people to go buy and sell their parks. So those are the two mains ways you would then go to sell it.

So we're about to wrap up and go into the Q&A format for tonight. But in summary I like to say that Einstein would have loved mobile home parks because they're really simple to understand and they're managed basically using basic math.

The late Steven Hawking might have used his theories on time to go back in time to the 1950s and buy up every park in California, and you certainly couldn't blame him. Mobile home parks are not just the random investment some people think. Some people think there's no structure. It's just a bunch of old trailers in the field. How in the world can you make any sense of that? How can you ascertain whether that investment will succeed or not?

The truth is scientifically the science is there for those who want to learn the science, yes. It isn't just what the untrained dices of random luck where someone buys a mobile home park and does well with it. It's actually much more to do with math, science and skill.