The Mobile Home Park Capital Road Map


The Mobile Home Park Capital Road Map is a discussion of the issues and opportunities that should be considered based on whether you’re investing $0, $50,000, $100,000, $200,000 or $1 million in capital. As you’ll see, the path changes based on the amount you invest. It’s a great chance to learn more about mobile home park investing strategies.

If you want to learn skills to succeed with mobile home parks and make your own zero down deals, 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 Mobile Home Park Capital Road Map Transcript

Welcome to a special MHU.com event. This is Frank Rolfe. I'm glad everyone's here. As part of our lecture series tonight, we're going to be talking about the capital roadmap to mobile home park investing. It's a question we receive all the time from people who say, "What should I do looking for a park with X amount of dollars to invest?" I wanted to go over the different tranches. We're going to break it up into zero or near zero, $50 to $100,000, $200,000 to $500,000 and then, $1 million+. I'm going to go over the different kind of deals you would look for, how you would source them. The different strategies involved. I have a huge amount of material.

Following that, we're going to go into a Q&A format. We're going to pretty much keep it completely limitless, although, the phone lines will automatically shut off at the end of four hours. That's our one hard deadline and that's not our doings. That's the teleconference service doings. We're going to talk tonight about the fact the matter that you have to invest, it really does have an impact on how you approach investing in the sector. It definitely creates different strategies for success. As you'll see as we progress there really is a difference in what you should be doing, what you should be looking for based on how much that you want to invest.

We're going to start off. The first tranche we're going to talk about is zero or near zero capital. When I say zero, it doesn't have to be zero. It could be $5000, it could be $10,000 but something that's nearing zero in amount. Your anticipated deal size when you have zero or near zero, and I'm going to give you on each of these tranches roughly what we would estimate the deal size to be, but in this case, there really is no limitation. It could be a deal it's ten lots, it can be deal that's 50 lots. It could be a deal that's 100 lots, 200 lots.

Again, there's no real capital constraint because it's not going back to you having to finance it as we'll talk about in a minute. When you're doing a zero or near zero down deal the assumption is that on the lending side you've got limited funds and perhaps who knows even limited credit to get a traditional loan so there really is no limitation on the size of the deal you would be seeking. The basic theme of this first section is basically turning lemons into lemonade. Taking properties that are in very poor condition and not working well at all and making them into something that's income producing, and therefore, valuable.

Now, there are three main options when you're trying to get into the industry with zero down. You have three shots at it. We'll go over what each of these three shots are and how they work. The first shot you've got is seller carry with nothing down. Basically, you're going to buy the mobile home park, the current owner is going to create a first lien mortgage and you're going to step into their shoes with virtually nothing down.

Now, we've done it 12 times to date ourselves. I did it a lot when I was starting out and people still do it frequently. It is out there, but that's the basic construction. The seller carries a first lien note and you put down zero.

Now, the next option you have of zero or near zero capital situation is a master lease with option to purchase. How does that work? What happens there is you master lease the property from the seller and you operate it and you fix it and you put in the sweat equity to make it function properly, and then, you have an exercise price, it might be three years out or five years out and you have the right during that master lease at any time to go ahead and trigger your option to buy it.

Now, at that time, you obviously, would have to obtain financing. Although, in some sellers cases, like a deal that I did in Oklahoma, the seller carried upon exercising the option. I couldn't actually buy it day one because it was negatively cash flowing so the deal was I would master lease it to where it had enough positive cash flow for the seller to finance it, but that's a master lease with option to purchase.

Now, master leases are a little funky. They're often not even allowed under some people's loan documents but in this case I'm assuming the preponderance of deals would be where the seller owns it free and clear, and therefore, have the right to do whatever he likes and otherwise if it's against the guys loan documents, well, that's not your problem that you didn't sign the loan documents that's the sellers problem, however, remember that since it does not meet perhaps the sellers requirements, what you're going to have happened is the possibility that the bank will call the note if they find out and you would, therefore, lose your down payment. On a master lease with the option, you really can't put much money if any money into it.

The third option is selling an assignment of the contract. How does that work? What happens is you sign up the property even though you know on the front end, you don't have the capital to buy it. Then, you sell that assignment to somebody who does have the capital that hasn't found a deal to buy. We ourselves spend a huge amount of money a year buying assignments but almost everybody in the industry buys assignments. There are people out there who all they do is tie things up to sell them on an assignment.

They sometimes own no properties, they have no interest in even owning a property. They prefer the business model of just tying stuff up, and then, reselling it. Those are your three main options, seller carry with zero down, master leased with option to purchase with zero down, or selling an assignment of the contract, which is always zero down.

Now, let's go over how all of this works and some considerations you need to have in buying a deal for zero down. The first one, which I think is pretty obvious is you've got to focus on really, really ugly deals. These are parks that are cosmetically hideous, although, hopefully, not physically it is. They just don't have mowed grass, they're a pit. There's no pride of ownership.

There's junk everywhere, non-running cars, all kinds of problems like that because the park has to be so ugly that no normal buyer would buy the property for this to work. If the property isn't that ugly then the seller doesn't need you with zero down. They can just sell to a regular buyer, get their normal 20% down or if the buyer can go to a bank, get all cash. The only reason they need you in this scenario is it's so screwed up, it's so ugly that a normal buyer just won't touch it.

The second neat thing you need to remember is you have to find deals that don't require a lot of capital to fix. Just a lot of knowledge or sweat equity or something that is not capital intensive. If you've got to do $100,000 of repairs then you've defeated the whole purpose. You bought the park for zero down but then you had to come up with $100,000, which you don't have, and therefore, it's not working for you. You've got to find things that are not really expensive to fix.

Again, cosmetic issues are awesome. It's so inexpensive to fix cosmetic issues in mobile home parks, unlike apartments and other forms of real estate, but at the same time, it can't be things that are costing lots of money. If you had a mobile home park and it was piped in Orangeburg sewer pipe, which is not really sewer pipe by definition today because it's almost completely dissolved so your sewage is only traveling through the earth and that cavity like the hyperloop but with no piping around it that's very expensive to fix. It could cost you hundreds of thousands of dollars to repipe that park in the correct sewage line. Tying that property up to zero down you didn't really accomplish a thing, but if you can find deals that just are hideous but are not that expensive to fix that's what you want to be looking for.

The next thing is you can't be too picky when you're looking for zero down deals or deals that require very little capital because you don't have that much skin in the game. If the seller has got a park that looks atrocious that also has well water or also has septic, you're going to have to accept that because, again, you have to find properties that fit your profile, which there's not a ton of them that are going to. You have no skin in the game. If the well goes bad, what could you do? Well, if it would cost $100,000 to fix you could just walk the property, and give it back to the seller. You can do that under any of those three scenarios on the seller carry deal with zero down, you hand them the keys the car back, you just basically under your note, which would have to be a non-recourse note, you should never sign a recourse seller carry note.

You could just give it right back to the seller. Really no implication on to you. On the master lease scenario, you could just cancel your master lease not exercise your option. Selling with the assignment, again, that would probably fall to the person who is buying it from you doing their due diligence, but nevertheless, you can survive things that you typically would not bank on if you had more skin in the game. If you actually put down significant money or got a significantly large loan. You can overlook some of the things you typically could not overlook before.

Now, there are some things you just can't overlook period. One would be if the park is, in fact, illegal and has no operating permit. I wouldn't touch that. You're wasting your time. It's basically a liquid. Another issue would be if there's something really, really horrible like it has a lagoon, lagoon is malfunctioning. Again, I don't think I would want to get involved in that. There might be litigation involved in that so I don't think I would want to do that. But typically, the things that might scare people off in buying it, you can handle because you just don't have much capital involved.

Number four, you're not going to be able to go find these deals through brokers because brokers like to get paid in cash and under all three scenarios, except the assignment, in which they would get paid, you're not going to be putting cash in, and therefore, there's no cash for the broker. Most sellers don’t like putting out cash to the broker unless they get at least that much cash back from the buyer. I would not think you're going to find these deals through brokers.

Now, there are special situations. We have found deals at zero down through brokers in the past and the only reason the broker was involved in it is they might have sold another property for this person or they've already told the seller on the front end that the park is a complete catastrophe but we'll try to find a buyer to take it off their hands only if they get paid in cash, and the seller is already mentally ready for that. Most of these deals are found not through brokers, but they're found through cold calling, direct mailing, and driving by. Again, on this tranche brokers are not typically the answer.

The next item is these type of deals need to be within about four to five hours of your house as you're going to have to go out there frequently at the beginning while you try and turn the park around to take it from the hideous non-income producing pig that it is into something that is much more attractive and sustainable in creating a positive cash flow. This is a situation where you can't buy on the other coast because you have to go out there so frequently and you'll lose so much control it probably will not work out successfully or you will just totally spend a fortune on travel. Again, that defeats the whole purpose of the zero down deal. The final item is you've got to work harder than anybody else in the sector. If you are looking to do deals at zero down, you have to acknowledge on the front end that as part of the plan, you will have to work harder than other buyers. You're going to have to find deals that are really tough and you're going to have to work really hard to fix them. You're going to have to basically work like a maniac unless you get very lucky. There's a guy in Pennsylvania that owns some parks that we know, he went to boot camp, named Sean. He's done a phenomenal job of building a portfolio, a very successful mobile home parks, but he's hard scrambled from nearly nothing. Now, why is that? Because he works like a maniac. He goes out to his park and he, every weekend on the front end is out there painting homes, and fixing stuff like crazy. That's the personality you have to have to really do well on zero down deals.

Now, the exception to that is if you just want to sell assignments because if you sell an assignment obviously you're not going to put out any physical work whatsoever. The only labor you're putting out is finding deals to begin with and those deals don't have to meet the criteria of a zero down deal. That's the one wildcard from what I've described. If you say, "Well, I don't want to buy a mobile home park and go out there on a Saturday and paint homes or Weed Eater the grass or whatever.

Well, then the avenue you should take is just selling assignments because it's lucrative, it doesn't require any physical labor at all, it's just simply strategy, and its hard work as far as making the calls and direct mails to talk to people. It requires some degree of people skills and striking deals but it doesn't require first-hand work, but otherwise, if it's not, if it's going to be seller carry with zero down or master lease with option you're going to have to get out there and really work hard to make it happen.

Let me give you some examples of each of these options in real life so we're not just talking purely theoretically here. Glen Haven, my first park would have totally qualified as a near zero down deal, $400,000, $10,000 down, $390,000 first lien note to the seller. Park when I started it off, when I bought it, it was losing about $2000 a month and it was beyond a pigsty. It was so bad that in the back corner of the property they had erected a wrestling ring and they were having unofficial Saturday night wrestling matches and even had concession stands they built out of old pieces of plywood.

It was a horrible, horrible place. Now, I went out and self-managed that for the first year so went out to park from nine to five every day, which is beyond what most people on this call would want to even do, but I was able to do it. I just sold my billboard business, but it was a hardscrabble turnaround. Every single thing in the park was broken but it was almost all cosmetic. There was no mowing, it was screwed up, just every crazy thing. We had a lot of demolition, wrestling ring had to go down, a lot of old sheds, people had built fences out of old rotted plywood had all had to go to make it presentable enough to continue as an ideal mobile home park.

Glen Haven, my very first deal would have totally qualified for zero or near zero down deal. It took a lot more work to fix Glen Haven than it would have if it had already been turned around. My second or third deal was the park I had over in Lake Worth that I bought for $65,000. I recall with $5000 down and it was so screwed up it didn't even have a rent-roll, didn't have any P&Ls, it had nothing, but that's how those deals work.

You're making a choice on the front end that, hey, I am going to hardscrabble my mobile home park portfolio from a pile of junk and make it into something, but that's the attitude you have to have. Now, an example of a master lease with option would go to the property I bought in Oklahoma, in Oklahoma City years ago called City View. This property was so screwed up that it had no real cash flow. There was no way to even buy it and even with a seller noted at zero down because it didn't make any money to service any kind of note and the seller knew this.

Here he had this giant property, 199 lots, it was netting $500 per month total. That was not even with all the expenses you would. For example, he had no insurance. He had stopped paying insurance so that isn't going to work. Any sane person would look at that and it's negative. I did a master lease on that. I had as I recall a five-year window to exercise my option, turn the park around, and then, financed it and in this case, the seller financed it for, as I recall, zero down on $850,000. I basically fixed it up enough to cover the payment and then exercise the option.

It was a very, very hardscrabble park. When I first showed up at the property I was blown away. There were people living in school buses, they're living in vans, and there was one family of four living in a pop-up camper off of a pickup truck. They've taken it off the pickup truck and put it on cinder blocks and that's what they were living in. I asked the woman, who was standing there by the pop-up, "How do you do that because you don't even have a bathroom?" She said, "Oh, it's no problem. We used the bathroom at the McDonald's." "How do you take a bath?" She said, "We do it at McDonald's." I said, "How do you, there's no showers at McDonald's?" She said, "No. We just basically take paper towels, get it water, water from the sink and rub ourselves down with that."

It was definitely out of The Grapes of Wrath but nevertheless, it was worth it to me to give it a shot to turn it around. Again, a deal that was constructed properly, zero down but takes a lot of effort to do. Now an example of an assignment and we've got lots of those examples but I'll take one of someone to actually went to boot camp and tied up a property in Missouri that we've bought the assignment from them for $100,000 so there you have it. There's an assignment in action. They typically always have a happy ending because you don't have any physical money in it. That's the zero to near zero down tranche.

Now, we'll move the next tranche. The next tranche is the $50,000 to $100,000 of capital. Again, these are ballpark numbers so if you have $42,000 this could be the same thing if you've got $34,000 it could be the same thing. Some people are going to find that they follow somewhere in the tranche where maybe they're in the first and second tranche, but let's just run with $50,000 to $100,000 of capital.

Your anticipated deal size in this scenario unlike the first round where it was zero down where it's limitless because if you had a 300 space park that's a complete anarchy, you can purchase that with zero down but in this case we're assuming you're going up a notch and going to require actual debt. The anticipated deal size for 50 to $100,000 is $250,000 to $500,000 in deal size, which is as you already guessed five times your capital. Assuming that your capital is your down payment at roughly 20% and if you work backwards from that it means the price you're looking at will range between 25 to 50 lots in size. That's roughly what we're talking about.

The theme of this tranche is turning clunkers into investment grade deals because you're still trying to find things that are broken, you're still trying to find stuff you can buy really cheap and that you can now turn it around and make it into something that's bankable for the next buyer. What are the options here? What do you do if you've got 50 to $100,000 in capital? Well, obviously, all of the above. The same deals apply, zero down, seller carry, master lease with options, selling an assignment. Those are true those are on the table for all of these different tranches, but now you have some additional things.

One smaller underperforming deals with good upside, so basically, a part that's there and unlike the zero down deals, it's not hideous. Obviously, is not perfectly managed but it's not horrible looking. It isn't going to require you to go out there and paint doors and walls and things like that. Another option is seller financing in small-town bank debt that you do not have possible in the first tranche. Some sellers won't do zero down deals, but they will seller finance they just want you to have some skin in the game.

Also, when you get into this tranche it opens up the door to small-town bank lending, which means you can finally for the first time not be out there trying to convince the seller to carry paper but you can actually pay them off. That opens a lot of additional doors from people who don't want to carry paper but do want to sell. What are the unique features of this tranche?

Well, the first is if you're going to get into the financing arena, you've got to find deals that are stabilized so they truly are bankable because if you're going to do a traditional seller note with say 20% down or a traditional banknote with 20% down, you have to make the payments or the bank is going to vet your capability by having you do an appraisal. They're going to really look at the numbers with a micro-planning glass here.

You've got to have decent occupancy, you better have a very presentable appearance that will be embraced by the appraiser and the bankers. It's very different scenario than the first one of zero down. Now, you're looking for things that have to be a little bit better, a little bit better looking because getting a note is part of the equation.

Number two, you still want deals that are horribly managed like insanely bad managed but not like the first tranche. In the first tranche, they're so badly managed or sometimes just abandoned. I'll never forget a park I went out to look at that the seller was willing to do a seller finance zero down deal on it and they elected not to mow the grass for the last two years. Picture that, you just make a conscious decision I'm not going to mow the park and you let it grow wildly for two years.

That stuff's hard to sell a bank on. If you have the bag go out and show it, you'd want to mow it before the bank showed up. The situation is like that where the seller has just shot themselves in the foot with a 12-gauge shotgun. Those aren't really bankable. You need things that are horribly mismanaged but not to the point of abandonment. It has to be a little bit better managed than that.

You're going to have to have for example financials, the bank is going to require, they're going to ask to see three years of financials, you got to have some form of records. It can't be like the deal I bought in Lake Worth where they didn't even have a rent-roll. They're going to have to have a rent-roll. Again, it has to be up a notch as far as its mismanagement. Still, you want it to be bad but reasonably bad.

Next, you can relax a little on the distance from your home based on the deal because, again, we're not trying to buy parks that are spinning wildly out of control. We're now looking for parks instead that actually have their act together just not all the way together so because you buy stuff that's a little better grade now you have a little more freedom on where you can go.

Now, that being said you're probably still going to want to remain for most people four to five hours from your house so because you want that control feature to be able to go out there and check on it and you don't have a lot of capital for travel. For most people, you still want it to be somewhat nearby, but nevertheless, you don't have to go out there as much because it's not as screwed up as the first tranche.

Next, you want to turn it up upside and pushing rents, cutting costs, and sub-metering the water. You've got to demand that because if you're trying to make big money on $50,000 to $100,000 of capital, you've got to have some parks that are not just base hits that are doubles and triples and even home runs. You want to have things that have lots and lots of upside.

Again, what kind of upside are you looking for? Pushing rents, cutting costs, sub-metering water, however, filling lots is not the kind of park you're looking for at this tranche of capital because filling lots is very capital intensive. If you have to go out there and fill lots what's going to happen is even though you didn't spend a lot on the park, you'll be spending a lot of money on houses and bringing houses in, and so, you again defeat the purpose. Filling lots is not the kind of turnaround model you would want at this tranche.

Probably, utilities are again a no-no here, a big no-no. The biggest no-no of any of the tranches we're going to discuss because you don't have a lot of capital to fix them and it costs just as much to fix or replace a lift station on a park of 20 lots as it does 1 of 100 lots. You just can't really get involved in private utilities. The only exception would be if that private utility if you diced and spliced that, you have the absolute master of knowledge on it and you're 100% sure that it is fine.

That's the only way I would do it. If you have a septic field and you've demonstrated or it's demonstrated through 50 years of operation that it's just fine and dandy then, okay, maybe you could do it but if there's any sketchiness at all on the private utilities then I would abandon ship simply because you just do not have the capability to deal with that from a capital perspective.

Next one is you've got a huge value-add on these properties, when you can get them to a level where they can achieve real hardcore bank lending, and by that I mean when you can get it where the loan is large enough to attract a loan broker, large enough to attract slightly larger banks, you created a lot of value because when you're using that small-town bank with a seller note the buyer pool is somewhat limited but if you can get it bigger and more valuable then you've really accomplished something.

Then, you'll say, "Well, how big?" Well, you're going to have to get the deal up where it's worth probably around a million dollars because a million dollars at 25% down suddenly you leave about $750,000 note and now you are in the sweet spot for loan brokers who can finance many, many more buyers and it's much easier on the buyer. If you were to say what's the key item on this tranche, it would be buying that deal for $400,000, raising the rents a lot, pushing back water and sewer, and ultimately, getting the value up where now the value is 800 or 900 because now you've taken that from one tranche to the next tranche. We're going to go over in a minute but there's a lot of value in that.

Finally, the other volume of deals you look at is absolutely key at this level. This is a park size sweet spot in America. There's so many deals in this 25 to 50 lots, $250,000 to $500,000 dynamic. You just want to burn through as many as you humanly can. The more of those kind of deals you can put your deal funnel the better because they abound. They're absolutely everywhere, and when you're looking for these kinds of deals, you now have the additional resource of a broker because a lot of brokers have on their list of listings deals in the $250,000 to $500,000 size, although, brokers were not a resource on the first tranche at zero down now brokers are a possibility.

That, again, greatly enhances your odds of your volume that you can blow through your funnel. Now, an example of an ideal deal on this tranche is a park that I had in Grapevine, Texas. I bought the park for around $260,000. It did not need a lot of capital work. It needed better management. The lot rent was a $100 when I bought it and I raised it within 60 days to $275, which was still low because the market was about 325 to $350 a month.

I lost nobody in the equation. I cleaned it up to a certain degree. I mowed it better. I put up a better-looking sign, and then, I turn around and sold the park for as I recall that $560,000. Also, when I bought it on the front end I was able to get seller financing and it had city utilities, and so, it was like a perfect park to buy on the 50 to $100,000 tranche. That's the kind of park you would want to buy. Then, what do you do while you take that park? You could 1031 if you wanted, if not, pay your capital gains tax, and then, find another property, but on the next property, you'd be up to hold another tranche in size, which is where we're going to go into now.

The next tranche would be if you have capital of $200,000 to $500,000. Now, you're talking in an anticipated deal size of one million to two and a half million, which means you have now broken into a 100 lots plus. That is the truest sweet spot of the industry because almost everybody is interested in parks that are a 100 lots plus, all the way from the very top of the end with the REITs, all the way down to just anybody else who can afford it, a 100 lots that's hot stuff.

Now, you've broken into that at $200,000 to $500,000 of capital. Our theme this tranche is tapping into the power of non-recourse debt and big exits because that's really what you're doing now. You've got a whole different business model than zero down than the 50 to 100 down because now you're able to play in an entirely different arena. If the zero down was high school football and the 250, I mean, the 50 to 100 was college football, well, now you've entered the NFL.

What do you have? You have all of the above deal configurations that we've already talked about, zero down, master lease with option, solving an assignment small-town bank, seller carry that's not zero down, but now you have some additions. One is you now are able to start breaking into high-quality deals that can be institutional grade. Now, you're looking at deals that are much nicer, much cleaner than the earlier styles.

Now, you're going to get more into what look like nice subdivision, still improperly managed as we'll talk about in a minute, but definitely much nicer looking and require much less management from you as the owner. You're also looking at deals that need nothing but annual rent increases if that fits your goals. You're just looking at a whole different animal. You've gone from investing in penny stocks on the zero down to stocks that are not penny stocks that are up a notch, but they're still not in any way solid stocks.

Now, you starting to deal in the lower end of the blue chips when you get to this tranche. Now, some considerations on this tranche. Number one, brokers are really essential because these type of deals at the 100 plus size typically ends up through a broker either as an actual listing or as a pocket listing. Brokers are very, very important resource on this tranche. Probably, the most important.

You can still find them through cold calling and direct mailing and dropping by but brokers are probably your best source of this kind of a deal. You want to focus on deal since you're really looking here for the big exit. Deals that have really great bones but they're just not operating at 100% of their potential.

Now, on the tranche before so if you drop back to the $50,000 to $100,000 tranche those deals, you know there's no big institutional exit. You might still get a good exit if you can build it up large enough that you can get a loan broker involved, which makes it definitely easier on the buyer, but you're still talking to buyers who are not typically institutional grade, but now that we've got up and active, and that we're in the 100 plus lot department, you may actually, if you groom the property right be able to sell it to a REIT or private REIT or a private equity group of some tribe or Carlyle group or somebody.

You want deals that have potential to attract them, you want things with bigger lots, definitely paved streets, better locations, better pride of ownership on the part of tenants so you're having to raise your caliber of deals that you're looking at. Now, you're going to be even more concerned about the concept of the three-point spread, which we're going to talk about in this tranche and the next tranche. After doing zero down deals, you don't even care what the spread is. You're just basically trying to take chicken droppings and make them into chicken salad.

You don't really have the luxury of putting a lot of focus on what your spread is on it, and, well, even when you go to the next notch up on the deals of $50,000 to $100,000 in capital, again, you can't really be so picky as to be looking at spreads and all kinds of esoteric financial arrangements. You're just trying to find a deal that you can buy, that you can afford with your capital, that you can really jack the rent up or do something monumental to make it more valuable, but now we're in a whole another arena, and that is now we're looking at things that are institutional grade, and when you get the institutional grade arena, to be a competitive buyer, you're going to have to understand and work around this concept of spread.

Let's go over what spread is. Spread by definition is the differential between the cap rate of the deal and the interest rate on the financing. If you are buying a mobile home park at a seven cap and financing it at a 4% interest rate then your spread is three points. If you look at spreads in the net effect, assuming 80% LTV or even 75% LTV and assuming all the normal industry metrics, a three-point spread basically equates to roughly a 20% cash on cash return. That is the benchmark that most everyone in the industry is looking for. The REITs far lower or the REITs they have no goal of 20%. They're happy with much lower amounts.

For most people out there they're looking for 20% and the way you achieve 20% is with the three-point spread. Now, you're starting to get in that arena. Now, you may say, "Well, why weren’t you talking more about spreads a minute ago?" Well, the problem is if you're a smart buyer to get a three-point spread and be happy with it, you have got to lock that interest rate on for a longer term, and because now we are talking deals that are bigger, a million to two and a half million now we have the potential of going into conduit.

Also, the CMBS debt and agency debt; Fannie Mae and Freddie Mac, where you can get 10-year fixed interest rates. You're able to lock your spread on for a decade. That's a very important point as we'll come to in a minute. Now, unlike the other tranches, you're thinking a lot more like a professional investor as far as trying to lock on your spreads. You can also look at deals that are much farther from home because these deals by definition if they're going to truly be institutional grade in the end, they're going to be much more stabilized, and additionally, your larger lot size allows you to have a higher paid and better manager.

Now, rather than having to drive out there and look at them frequently, you can go out there and fly and look at them very periodically. Maybe even every six months or in some cases every year. That has now changed dramatically as far as the approach on that. Also, remember that this size deal you could directly live comfortably off just one deal. A deal that's a million dollars let's assume the EBITDA is $100,000 before you fix it up, and so, most people could live happily on $100,000 when the park was paid off. If you did nothing more than buy the park, keep your day job, and ultimately pay the park off.

Well, that was a heck of a good idea, however, additionally if you have 100 space park and you raise the rent up $80 a month over time that's an extra $100,000 per year straight cash flow into your pocket. If you bought a mobile home park for a million dollars that had 100 lots and it had $100,000 of net income and you use that net income to do nothing more than to cover the note, give you 20% return on cash on cash on what you put down, but then you raise the rent up an additional $80 overtime. Four years at $20 a whack.

Now, you've also got an extra $100,000 per year in cash flow, which is nothing fancier than 100 times 80 times 12, but reminder when you raise the rent there's no incremental change in the expense ratio because raising the rent has nothing to do with the expense ratio. The expense ratio is based on other factors. It all falls to the bottom line.

Why I am telling you this is that when you are in this tranche it's very important that you take your time and pick a winner. Don't compromise here. You want to hold that for a deal that has got all the right raw material to be a winner. When you're down you're doing zero down deals you can do as many as you want because there's no capital drain, when you're on the earlier tranche the $50,000 to $100,000 tranche, you know you're going to have to do more than one deal. You can't live off just one deal, depends on how much your budget is of course, but now we're talking much bigger dollars. You can afford to be a little pickier, a little more slow-moving because you want to hold off for just the right deal.

Also, because of your size now you're going to be able to fill vacant lots because you're large enough to tap into programs like the cash program. Now, unlike the first two tranches where filling lots isn't really in the game plan, in this tranche filling lots can be part of your plan. Now, you have not only raised rent and water sub-metering and cutting costs, you additionally have filling vacant lots. That's another very important step.

On the earlier tranches if you were 80% occupancy day one unless someone brought in a home not of your doing then you'll still be at 80% at the end of the movie. In this case, you can buy a park at 80% occupancy and you can incrementally push that each year so you can get it at default if it all works out. You also have enough scale now on this tranche to actually handle private utilities if it's necessary and the property is worthy.

Now, remember from boot camp the ideal system, infrastructure density, economics, age of home and location, so what does it all mean? It means that if one, if you're weak in one category but very strong in the others then you can still go forward and buy it. Now, private utilities are possible if everything else is very, very good but the park is on the well and you've run the numbers and you know if the well fails it might cost you $30,000. Well, now the park is large enough to justify that. Now your capital is large enough to handle that potentially. It's also increased your pool of deals you can look at.

Now, the most important part of this tranche, which I cannot emphasize enough, is your reward for being at this tranche level is the availability of non-recourse lending. Small town banks typically will not do non-recourse. They will tell you, "Why should I make the loan if you're not willing to co-sign on it?" It's hard to argue. I don't really have a good counter to that, however, when you get to this size deal, the norm of conduit lending and agency debt is in fact non-recourse.

It's also additionally 10-year fixed rates. The biggest reward you're getting at this tranche are the financing options, which are really impressive. That is probably the key item on this tranche is the fact you can now borrow 10-year fixed and non-recourse, which is a huge deal to almost everyone.

Another consideration is that your future buyer may be an institutional player like a REIT. You want to prep the park to fit the profile of what a REIT would buy. You've got to always be thinking in the back of your mind about the huge exit. This ties back not to my mobile home park life but my billboard life back when I had my billboard company. Billboards come in all shapes and sizes but the most valuable signs are one standardized size. It's called the 14 by 48. 14 feet high by 48 feet wide.

I always hoped one day I could get a big exit. I was building signs that were 14 by 48 when my competitors were building sizes that were not standardized. They would build a 10 by 40 or 10 by 42 or 1 crazy guy was building a sign that was 8 by 65 I believe. Why? He thought it looked cool, but the problem was when it came to the end of the movie, you could not sell to the big companies if you were not standardized, and that's why I was able to sell to a public company is because I already had public company quality stuff.

I already met their game plan what they wanted. When you're buying a park at this tranche level, you have to think at the end of the movie and think, "What would somebody like YES community want this to look like and not be too creative, not to be too custom?" Go over and drive through a YES community or an RHP community or a SUN community and say, "Hmm. What can I do to look more like that at the end of the movie?" Even if it's a little more expensive to do maybe you should do it.

If the park has got a swimming pool it's not working great, it needs $20,000 of repair or you could just fill it in, you might say, "You know what? I'm going to keep that pool alive because that SUN community is parked part right around the corner they've got a swimming pool and I want to impress them someday when they come down a decade from now that my property looks just like their property." You always have to be thinking a little bit about the exit and the fact that the park would have to be at a higher level, which is not true on those first two tranches.

Now, here's an example of how it works in that 100 space tranche. I'm going to use an example of the park that I had in North Texas in the Dallas-Fort Worth metro area. 160 lots it was a cosmetic wreck but it was stabilized and it could support a note, but it needed some work, but it had great underlying bones. It was an old HUD park from the 1960s. What's a HUD park? A HUD park is a park that was built at a time when the US government was financing the construction of new parks if you went by their guidelines.

Their guidelines where you had to have a clubhouse, you had to have a pool, you had to have a game room in that clubhouse, it had to have a ping-pong table and a pinball machine, the roads were extra wide. They were always curving to look like subdivisions not like shotgun parks, a lot of concrete work. Typically, concrete, two-car parking pad, concrete sidewalks, all the trimmings, so really good construction process.

You see a park that's an old HUD park those are always winners because they have really, really good layouts of infrastructure. I bought the park for $850,000 with seller financing on the front end. I put down $170,000 and the seller carried the paper. Then, I put another $100,000 in the roads and the cleanup. I had to $270,000 in it, which meets this tranche, and I then proceeded to raise the rents. I filled the vacant park owned homes, I filled lots, I did an expansion of another -100 lots and that cost me $700,000 to do the expansion.

Now, I am a little out of this tranche but the ending I think is a good moral because at the end of it I was able to sell the park for three, nearly three and a half million dollars to an institutional player. Again, the key on this tranche is to get things that you can build up to a value that you can get a really, really big exit if you work it perfectly. I think that's the important part of this.

There's two key items to the $200,000 to $500,000 tranche. It's non-recourse debt that's actually huge. That's big. That's the most powerful feature of this size, and the other is you have the ability in your final exit to get outside of just people on one park or two parks and actually start hitting larger institutions that own a lot of parks.

Now, we're going to go into the final tranche, which is the one million dollar plus tranche. At one million dollars plus, you're looking at an anticipated deal size of at least probably five million, and then, more based on your capital. Now, we're looking at the really big parks. We're looking at 250 spaces and above. This is the creme de la creme of the industry. It's not super-duper rare. There are lots of 250 space parks out there, but they are the most sought-after, considered the most valuable. They're getting a little tranche under themselves and let's go over what these are all about.

Now, the theme of this tranche is blue-chip deals and working in the institutional side of the industry because these are your blue chips. These are your Exxon stocks. These are parks that are typically very well respected. They're very liquid because there's many buyers who are interested in them. These, again, are larger institutional grade deals. All of your options are the same as all the earlier ones. You still the same options, you can do zero down, master lease with the option, sell an assignment.

Now, you can do small-town debt, bank debt, you can do real seller carry with money down, you can do conduit debt, you can do agency debt, but now you're really stepping up into the final big leagues. This is not just the NFL. This is the playoffs, the Superbowl caliber teams of the NFL.

You could also in this case with a million-dollar-plus of capital look at smaller portfolios of multiple parks because sometimes people sell not just a park but a portfolio of parks. Now, you can tap into those also. What are the considerations of this tranche?

Number one, these, again, these are like blue-chip stocks. These parks if purchased properly are very dependable and they're highly liquid because they're very desirable. Next thing is don't get lulled into the ego side of the business. That's a problem some people have when they start getting into the 250 plus park arena because bear in mind the 250 space park is a big park. Assuming three people per home, it's 750 people. It becomes its own small town, its own community, and sometimes people get carried away with ego that they own a small city and ego is very dangerous in investing.

There's an old adage that first, you get on then you get honest, and then, you get honorable. Honorable is not good from a business perspective. I'll give you a hometown example right here in St. Louis area of Budweiser. Budweiser, first, they got on. It was a German immigrant who started brewing beer in his basement, and he very aggressively sold it and sold it to his neighbors and people liked it and he sold more, but Budweiser started with absolutely nothing. It's not a story of someone who inherited the darn thing, just basically an immigrant who knew beer making from Germany. That's all Budweiser was.

Then, he got honest, so then, he really ramped the business up, again, aggressive salesmanship, getting more distributors, keeping the product being what people liked to drink, very smart marketing, so he built it up, but then something terrible happened with Budweiser just from what I've read and heard, which was it became more about the ego of owning Budweiser than it did about making money.

When Budweiser sold to InBev, which is a beverage company out of South America, which is notorious for buying mismanaged beverage companies and fixing them, I did not read the Budweiser book but someone who read it told me that they were able to find they had one billion dollars a year in corporate G&A. When InBev started to explore where the one billion was going they were really horrified. It was going into the Clydesdale horse compound, it was going into massive amounts donated to the arts, ballet, it was going into a fleet of, as I recall seven private jets that were in multiple hangars, which they were paying rent on, some of which were not even being flown because people did not even know they owned the jets, just a disaster.

When InBev bought Budweiser they eliminated all of that G&A that saved a billion dollars. What had happened there? Well, successive heirs, I guess of Budweiser had lost track of the idea that it was a business. It was supposed to make money and not just something to talk about at a cocktail party so when you start getting into these larger parks weird things can happen. There was a park sold in California over the last five years, at an insane price.

I think it was sold for around $80 million, which is a cap rate that can hardly even be computed. I was told by somebody who knew of the deal that were the big reasons they bought it was to say that they owned this mobile home park in the certain location of California that it was one of the biggest deals of all time. That's not why you would want to buy mobile home park. Just be very careful with your ego in this tranche because the ego is not going to make you any money.

Also, never get too personal with any of your properties because at this tranche, at the 250 plus a lot level some people started fantasizing that this park is going to be the hallmark of their family assets forever. That's not where you want to be. You always want to have everything on the market available for sale at any time at the right price. Warren Buffett wrote about this in his investor letter a few years ago and in his investor letter he told the story of a shopping center where he had an interest across from NYU, and people would frequently call him up and say, "Hey, I want to buy your shopping center."

No matter who they were, he would say, "How much?" His theory was that if they would pay more that he thought it was worth at that moment then he would sell, and the point is you never want to be so emotionally involved with your property that's effectively not for sale because everything has the right moment to sell. Really everything in life, every business item it has a time to hold it and it has a time to sell it and you need to be constantly evaluating that.

You don't want to be in a situation where you create a park and you have so much pride in it and you've gotten so emotionally involved in it that you can't sell it. Another item, three-point spread is a powerful item but don't get too wacky with it. You see that a lot with REITs. On a 250 space park, we'll drop the cap rate down to insanely low level. Look at some of these things you would occasionally get from brokers and look how much the cap rate was allocated to the deal and who buys a cap rate like a 5% or 4%?

Not many people do that so maintain your three-point spread. If you can get lower financing, which is possible in this tranche. Let's say you can get a 3.5% fixed interest rate, you still got to buy it like a six and a half cap. Don't be lulled into thinking, "Oh, this deal is so big I can just buy it at a really low cap rate and heck, I can still get it financed so I must be doing the right thing." No. That's not entirely true.

Now, you will find in these larger deals the cap rates are correspondingly slightly lower. That is because there are so many institutions looking at these deals and they're willing to go with a lower cap rate so with supply and demand you're probably going to have to buy at a lower cap rate, but still make sure it's a sensible cap rate that gives you the necessary amount of spread. Don't get convinced that you are ELS or a REIT that can buy things and only pay at a 3% dividend. That's not going to work for the average American so that probably is not going to work.

Also, you want to focus more on quality at this price point more than any other because your future buyer at this price level is probably going to be a public REIT or a private REIT or some form of institutional buyer. They are going to absolutely demand top-of-the-line property conditional location. On this tranche more than others, you've really got to think about the end of the movie. What do I have to do to make this a park that really could be purchased and managed by the largest of the companies?

However, you still have to look for deals that have upside even if it's only the annual REIT increase. Nobody knows the future of interest rates. Right now they're talking about ending quantitative easing. It's been talked about for a decade so that's not a new topic and to date, even with quantitative easing reduction, which they've already done a lot of, has made the interest rates really go up at all, but what if they did go up a little? What if they went up a point? What do you do?

Well, to combat that and maintain your spread, you're going to have built in the ability to raise your rents annually to keep up with that. Don't buy a park where you can't raise the rents. Don't buy a park where you're in rent control, where you can't raise the rents at all. Buy things you can continue to raise just to head your spread.

Next, sexy markets help a whole lot. If the whole point of this tranche is the big, big exit to the big company they like anyone who are looking at the market that you're in. Look at where the REITs own their parks and it will be very eye-opening. Map out where ELS's parks and Sun's parks are, you can do it. They're right there on their website. You can find that they're in California and they're in Florida and there are a lot of markets they're around Chicago, they're in different places.

Now, you'll find some of them, particularly, SUN has parks in a lot of different areas you would not anticipate, but you will find that they're pretty much all in what we would call a sexy state or a sexy region. You will not, for example, find any of their holdings in states such as Louisiana and Mississippi. Why is that? I don't know. It's basically the function of the rents and they have not found those markets to be attractive to them probably because single-family home prices are not very high and they just don't buy there.

It's unlikely since you're looking for a giant exit, the smart decision when you're out there looking to buy that one 250 space park to buy that in Mississippi when instead you could have bought it in Texas, which is sexy. Be a little more cautious on your location, on your region. Not true obviously in tranche number one at zero down. You can't be that picky. You've got to find just the right park that you can hardscrabble your way into.

Here you can be more selective so make sure that you choose markets that are attractive at the end of the movie. Also, at this tranche, you want to get more active in state associations, you want to get more active in groups such as MHI. You want to meet the crowd of future buyers and peers and really network with those individuals because those are the people that you will one day be selling to, those are the people that you will be financing with, those will be brokers who cater this type of product. The best of the shows, I would suggest is the MHI show in Chicago, not the MHI show in Vegas.

Vegas, maybe it's more fun, it's definitely longer, its multiple days. The Chicago show though it has an entirely different atmosphere. It is almost all institutional owners. It is public REITs, private REITs, all the private equity groups are there, Carlyle Group is there, everybody is there, and when you walk into the room, which is typically held at a ritzy hotel, everyone there is in a dark suit. Unlike Vegas where you go and it appeals to a lot of people who are manufacturers of homes, home salesmen, retailers, some park owners, but a lot of other folks who are just there for the fun of Vegas and they all show up wearing Hawaiian shirts and shorts.

Chicago is definitely serious. It's all larger players who are there for only one reason and that's to discuss business. Maybe make some contacts, do some networking so if you're looking at 250 space parks, I think that is the one you would want to go to. As far as an example of something from this tranche was a deal that we purchased in Iowa over the last few years. It was a very large purchase. We paid around 10 million for it, but we're able to fix it up, fill a lot of lots, make it quite a charming place, and then, sold it at a huge amount, more than what we paid for it.

That was made possible by the fact that we do on the front end that this property had all the bones to be attractive to one of the larger institutional players. That's what that tranche is all about. In a nutshell, again, there is a roadmap to what you should be doing in the industry based on capital. The good news is regardless of how much capital you have there is definitely a path to take that works for you.

This is not an industry where you are precluded from getting in because you don't have enough capital. You can get into it with no capital at all, but based on the capital you have the strategies change dramatically and the options change dramatically. Again, that is my capital roadmap.