The A To Z Of Mobile Home Park Investing Concepts And Terms

Mobile home park investing is a lot more sophisticated than many people think. In that spirit, we’re going to be devoting this event to reviewing literally the “A to Z” of mobile home park investing – from Affordable Housing to Sam Zell. 26 letters at roughly two minutes per letter.

If you want to learn more about 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 A To Z Of Mobile Home Park Investing Concepts And Terms - Transcript

Welcome to another MobileHomeUniversity.com lecture series event. This is Frank Rolfe. Now, we're going to be going over the A to Z of Mobile Home Park investing. I've got a term or thought laid out here for each letter of the alphabet. We're going to spend about two minutes on each one. Then, we're going to open up to Q and A. But, right now I have the phones set on mute, but here when I get done going through A to Z then, I'll unmute and answer as many questions as there are out there.

So, let's start out with the A, and the A is for affordable housing. Now, that is the key business we're in. So, it's very appropriate that should be the first thing we talk about. Mobile Home Park business in our opinion is all about delivering a product that is a competitor to the apartment, but delivers what Americans need. That's a nice, clean, safe place to live on roughly $500 to $600 per month. Now, in some parts that $500 to $600 may include the mobile home on the lot, and in many other parts it may just include the lot rent.

Now, before you say that's not fair, you're cheating on affordable housing. No, that's not true because probably 80% of every mobile home in America is paid for. It's owned free and clear by the person living in it. So, it really is just all about the lot rent. There's probably about a 20% grouping though where the lot rent does not include their entire economic picture but, they have to rent the home, or buy the home, or paying a mortgage on a home. However, even then you will find we are by far the lowest cost form of housing in the United States. Apartments can not nearly touch us. They're medium, or average cost is $1200 a month, roughly, which is far, far above the world of affordability, and stick build is far worse.

There's two forms of the industry. It's not all about affordable housing. There's another segment called lifestyle choice. That's the basket of Sam Zell and the other reads, California and Florida based retirement areas. But, for most of us in the industry, probably for at least 80% of every park in America, it's all about affordable housing. So, that's a very appropriate start to our lecture today is the A is for affordable housing.

The B is for a place thing called BestPlaces.net. So, we are on that site constantly throughout the day. If you've never been there you definitely should check it out. BestPlaces.net is basically the repository of all government data on housing and other issues in the US. So, all you have to do is go to BestPlaces.net and, you put in the zip code of your park in the search bar. It will tell you such things as the population, the medium home price. You can search through the housing stats. Three bedroom apartment rents, housing vacancy rates. You can go over to the economic tabs and you can look at where people work. You can look at how much people earn. So much data it's unbelievable. If you'd only had that 20 years ago, it would have made our lives so much better, and in many cases might have spared us from buying some parks we shouldn't have bought. But, if you've never been there, BestPlaces.net. It's open on my computer screen all day, every day, because we're constantly going there looking at parks to buy, or looking at parks that are already owned try to see where we fit into the big ole picture.

Sometimes that data does change. Probably the biggest change I've seen recently was the change of Anderson, Indiana from a small town of 100,000 to being part of the Indianapolis Metro at two million. But, BestPlace.net is huge. Now, there was a second place finisher for the B and that of course is the bootcamp. Our next one is coming up in Orlando, January 11th through the 13th. But, I think Best Places was the more important term to go over at this juncture.

C is for cap rate. Now, you might say what's a cap rate? Cap rate to me is easiest thought of as a fraction. Net income over the total cost of the deal. When you think of it that way you think back to old high school math class, which you may have hated because God knows I did. All you have to do is divide the top part of the fraction by the lower. So, divide that net income by your total cost, and by the park. That gives you the cap rate.

Now, you might say why do I care? Well, cap rate is a measurement tool, nothing more. So, yes, a cap rate doesn't tell the whole story any more than RBI tells the whole story on a baseball player. But, what it does tell you is it gives you the beginning benchmark, the where you have to be in terms of spread, which we'll go over in a minute. So, you can't calculate spread without cap rate. But, that's all cap rate is. It's simply a fraction. It's net income over total price of the deal. Divide net income by the total price of the deal, and low and behold you have the cap rate. We'll talk here as we get down to the S what the term spread means.

Then, we'll move on to the D. D is for density. That was an easy choice. You know, when we go out and look at Mobile Home Parks to buy and look at anything just driving around, we're constantly obsessed with how many mobile homes there are in the park per acre. More importantly, how big the lots are, and what size home we can put back on them. Probably the most important part of density you have to always remember is all the old parks have really high density because the homes are really small in the old days. I just read an article from 1955, and in 1955 it was talking about these new giant mobile homes that people were seeing on the highways that were up to 50 feet long. Wow.

Of course, today it's almost double that. So, what it means is some of the early parks do not have lots that are very big because the biggest home they made back in those days might have only been an eight foot by 30 foot home. As a result, if your park will not have lots big enough to hold a 14 by 48, those lots are probably overtime not going to be of much value to you because they don't make homes that are less than 14 feet wide, expect those FEMA models they make every once in a while. If your home is not at least 48 feet long you can't get a two bedroom one bathroom. We've all learned from experience at this point that one bedroom one bath never work. It's just a suicide mission to try and render sell a one bedroom one bath home.

So, what it all means is you've got to be able to hold a 14 wide by 48 foot long box size home on your lot. Or, maybe it's not really a mobile home lot. Maybe you're kidding yourself. Maybe instead that's really an RV lot. Now, of course you can sometimes combine lots together to get larger homes on them, but then you're going to lose a fair number of lots in that trade. If you're going to have homes that are, let's say, 80 feet long but the lots currently hold 14 wide by 50 feet long then you will lose ... it'll take you two lots to get one home. So, if you had a 100 space park, and you did that on every customer, you'd be only a 50 space park. Density is a very important item, but kind of like a trust game. All of your older parks are far more complicated on density. That's just the way it works out. There's no perfect mobile home park. All the great locations were built long ago, and again, they always suffer from low density. The key is, is it a density you can live with? Also, don't forget the fire marshal because if your density gets too high he can make you remove homes claiming it's a danger to safety. Bare in mind, the only one who can undo your grandfathering is in fact the fire inspector or the city inspector.

All right, moving on to eviction. Eviction is a simple process but oh, it sounds so negative, and unhappy. It is. It's always a horrible thing to throw someone out of their home, but what we found over time is that people in Mobile Home Parks really can pay the rent. Most eviction cases you get are not really hard times where they can't pay the rent. It's they don't want to pay the rent. And, many moms and pops never enforced the whole idea that we call no pay no stay, which we'll come to in a minute.

So, as a result, the customers were taught over many years of residency that paying the rent was purely optional. Pay it if you want. If you can't pay it just pay partial and oh, what the heck? Skip a month or two because mom and pop will never evict you. Evictions are critical in a well run park. The concept of no pay no stay simply means you don't pay we evict you, and we'll go over that in a minute.

But, what we found is if you use that format and if you press it and you don't let people out, and you don't take partial payments and you don't forget they didn't pay you and you file evictions every month. Pretty soon, everyone pays because they always had that $300 to pay you. They really just didn't want to pay you. It's not the same case that you'll see on an eviction, let's say, in a McMasion neighborhood where the person lost their job. Is an executive at Lock Heed and they can't really afford the $5000 a month rent. You sit there in the audience if you go to the eviction trial and think, man, that is really a tough position to be in. But, in Mobile Home Park lot rents for the average in America is about $250 a month to $300 a month. It's not that they can't afford it. They just don't want to pay, and as a result, being the owner is all about training them that you have to pay.

Then, you come up with the F. The F stands for fair housing. That's one of the most important things you need to know as a landlord in America in 2018, soon to be 2019, is you should never run a fowl of fair housing. Fair housing comes from HUD. That's a division of the US government and basically, it's very simple to follow fair housing. What it means is you can't discriminate. Now, most park owners know you can't discriminate so, that's not normally where people get in trouble because everyone knows if someone calls, and no matter what their age, race, creed, color, it doesn't matter. Everyone knows by now in America you can't discriminate.

Where people get in trouble is a form of discrimination that most people don't know very well, and that's called steering. So, what does steering mean? It means the couple comes into your Mobile Home Park office, meets with your manager and says, "Hey, we've got three kids." The manager says, "Oh, I got this one street in the park where everyone's got kids. You'd fit in perfect there." Even though the customer probably wanted that data, even though it doesn't seem that would be a bad thing to do trying to give someone the data they would want to make a decision. Sadly, that's against fair housing. That's called steering.

If you steer people to one part of your park as opposed to another, that's viewed as a form of discrimination. So, just be very careful. How can you know more about fair housing? Simple. Get a copy of the fair housing handbook. You can get it from HUD, from the government, for absolutely free. Give one to your manager, read one yourself, make sure you fully understand that.

G is for grandfathering. That's a very, very important term in the Mobile Home Park A to Z. So, what is grandfathering? Grandfathering is something whereby every Mobile Home Park in America falls into one of three piles. It's what they call legal conforming, which means you can build it back again today. It meets all of the current laws. Legal non conforming, which means it was legal when it was built, it no longer can be built today, but it's grandfathered. Then finally, illegal. Illegal means you have no right to exist so you can just be shut down at any time.

Grandfathering is the one that most parks fall into. There's very few parks out there, but there are some that are illegal. So, you always have to make sure that you're not looking at one of those. But those are much of a rarity. The legal conforming are also a rarity because most Mobile Home Parks in America were built for the 1950s to the 70s, and you could not build them back again today, because most of these hate Mobile Home Parks. So, that middle group, grandfathered, that's where most of the things you look at will be. How do you know about your grandfathering? It's simple. You get a thing called the certificate of zoning during your due diligence. It will tell you whether your park is legal conforming, legal non conforming, or illegal. It will also tell you how many lots you are allowed to have. This is all very important information.

If your document states you are grandfathered as a 75 space park, what it means is you better not have 76 homes in there because they're going to make you take one out. If it's illegal you never buy it. But, we have never had an issue with grandfathering that ever have had to go to court. Everything we've had with grandfathering we've always succeeded at informally, and most of the problems revolve around the fact that in every other form of real estate in the town, if a structure comes down for any reason. Whether it's a tornado or a fire, if it's grandfathered you can't put it back. But, Mobile Home Parks are different. We are effectively a business used as a parking lot. So, the mobile homes, which are personal property, just like cars, can come and go at will. Sometimes the inspector gets confused not realizing that we are a hybrid of real property and personal property, and that we are allowed to take and fill our vacant lots.

Next up to bat is H. H stands for a HUD code home. It's one of the unique attributes of our product that we have our own little special niche in the world of HUD. In every mobile home that comes out of the factory gets a nice little seal on the back left corner stating that it's been inspected and approved by the US government through HUD. Therefore, it's legal to go in any Mobile Home Park in America. They did not bring out the HUD program until 1976. Every home prior to that does not have a HUD seal. As a result, even though they're grandfathered, right where they sit, you can never move them because anywhere you put them, unless it's way out in the county and nobody cares, you will not be able to get your green tag to hook up the power.

So, whether you're looking to buy any used home, or moving a home around in your park, make sure it has that HUD seal because most of these are absolutely chronic on the fact you can not ever bring in anything that is not HUD code. Will that ever be changing going forward? Unlikely. There's been some discussion in the industry of bringing out another level of HUD code, possibly another HUD code that would allow manufacturers to create a home that is more reminiscent of a stick built that would allow them to go in residential lots and cities. But, for the moment, there's just one kind. It's the HUD code that we all see on that little seal on the back glass. Without it you can't bring the home into the city. Got to have that seal.

Next in the alphabet is I. I would logically be for interest rates. Interest rates are so very critical in real estate investing because to make any kind of money in real estate you've got to have what's called a spread, which we'll come to again in a minute. But, interest rates have been very, very interesting in our industry ever since 2007, because when Dave and I got into business over 20 years ago interest rates were always around six to seven percent. Then, of course we had the great recession in 2007. The interest rates were driven down through quantitative down to nearly zero percent.

So, for the longest time you could buy a Mobile Home Park and finance it with an interest rate of only three, three and a half percent. Now, those times are now long gone because they've been raising the rates up, although people probably notice today they've announced they maybe aren't going to raise the rates anymore. Maybe the stock market not had the tumble it originally had. Nevertheless, interest rates do come and go. I think the key thing to remember as a concept from lecture tonight is that interest rates do go up, and they do go down. Don't be thinking you're a genius if you buy a park when interest rates are very, very low because you've got to protect your interest by making sure you can raise the net income to adjust for higher rates.

Interest rates in America, back when our nation began in 1776 were roughly six to seven percent. Throughout our nation's history that's always been the equilibrium where investors feel safe in the risk of loaning you money. It was never intended to be down to zero, one and two and three percent. That was a feature of nothing more than Quantitative Easing. That was basically artificial, non sustainable. As they've been pulling out of Quantitative Easing the rates are rising right back to where they've been for over 200 years, six to seven percent. All the reason I'm telling you this is because when you're out looking at Mobile Home Parks today, make sure you're buying parks that you can raise the rents or increase occupancy enough to readjust your net income such that if rates do rise to their old equilibrium of six or even seven percent, that you'll be okay. This means you have to be able to raise your net income enough to garner what may be as much as one additional point increase from where we are today.

Next on the investing A to Z is J, I used joint venture. What I mean by this is not that you always have to do every deal at a joint venture, but it means many people buy parks using structures where there's more than one person as the buyer. There are partnerships out there of every variety. People who get together and they say, "Hey, I want to buy a Mobile Home Park. How about you?" "Hey, I do too." Then, they pool their money together so they can buy what they deem to be a larger more stable park.

You also have constructions like red d506's, part of the jobs act that many people in the industry have started to raise funds to buy Mobile Home Parks in a bigger way. You have self directed IRA's. You have people today who have self directed IRA's, which is about $500 conversion of a standard IRA. They use that to fuel money or buy Mobile Home Parks then use it. Although, I can't tell you whether you legally can or can't, to buy their own Mobile Home Park. The bottom line is don't be thinking that as you get into the industry you have to go it alone, and you're sad with only the capital you have because many, many people out there are constantly looking for partners. There are even Mobile Home Park outfits that buy parks where each group buys a portion of the park. The general idea, the more parks the more portfolio balance, if you own 25% of four parks than if you own 100% of one.

Next on the A to Z is the K. This K one we're going to slide this in here. It's a little odd but you'll see it has meaning. The K we're going to say stands for keys, as in the term cash for keys. Now, what is cash for keys? Cash for keys is a derivative of no pay no stay. In the world of no pay no stay, you don't pay the rent and therefore, since you haven't paid the rent I must now kick you out. But, sometimes to get the customer out, it's not always the best plan to file the eviction. Sometimes instead you are better off paying them to leave. Now, before you say, oh my gosh, you've lost your mind. Let me explain.

If you have someone living in your Mobile Home Park in a mobile home and it rents for $700 a month and they can't pay the rent. They haven't paid this month. You send your demand letter and they're certainly not going to pay, here's what's going to happen. If you file the eviction, more than likely if they have no intent of paying you, they're going to hang out in the house til the very final moment where you get that rid of execution and throw them out on the street. In the end, they may even do harm to the house to teach you a lesson. How dare you evict them?

Sometimes you're better off just going to the customer and saying, "Obviously things are not working out financially for you. So, I have a plan. Here's the deal. I will go ahead and give you $500 cash if you'll go ahead and leave the home by Monday and give me the keys. All you have to do is simply move out of the home, use my $500 as a deposit on your next residence and don't damage the home, and give me the keys." Many times that's the smart way to proceed.

Now, if you want to hear all about that concept talk to anyone who owns a Mobile Home Park in California because California has such tough eviction laws that most people all the time, in a fluid manner, almost like a stock exchange are trying to exchange cash for keys. Using that same example, let's look at a park in Freed Apple, Indiana and compare that to California. If your rent was $700 in Indiana and the customer doesn't pay you. Then, if they sit in the home until you get your rid of possession and let say that takes you 60 days. You'll be at $1400 not counting any damage they do to the home. You can pay them $500, well then you save yourself $900.

California's far worse. Evictions there can take sometimes up to a year or more. So now, you've got $8400 to $16,000/$1700 to play with. So, they would go to the customer almost immediately and offer them sometimes thousands of dollars to leave, because they know the very act of them not paying will not get them out of the home for sometimes 12 to 24 months. The cash for keys or any derivative to get the customer out of a home, with the home unharmed, quickly ahead of the courts, is definitely a smart idea. Don't be saying, "Oh gosh, that seems so immoral. Somebody didn't pay the rent, and here I am paying them to leave. Oh my gosh. That's insane." Well, again, this is America 2018. It's not all about the morality of it, it's just getting the job done. There's so many laws to jump through and other hurdles that you've got to work out what's at for your business. Is cash for keys is the best thing for you to get the customer out, yes, even though they owe you money, do it. You're not trying to prove a point when you evict the customer. You're simply trying to get paid.

Next on the A to Z list is L. L, of course, would have to be for location, right? This is after all real estate. What's more important in real estate than the good ole location, location, location? We've been doing this for over two decades, and we found is there's basically two types of Mobile Home Park locations that work. One, the gritty urban location right in the heart of town. It's identical to millennials who all prefer living right in the heart of the city, even though there's sometimes crime. They like being there. They like to be where the action is. Same with people in Mobile Home Parks sometimes. They like to be right in the heart of the action. They like to be right down the street from city services, or amusements or whatever they want to do. So, that's one when you location style. There's certainly nothing wrong with it. Don't judge people and say, oh gosh, what a terrible way to live, living in that strange location there across from the strip club or whatever, because that's what millennials are doing right now. There's so many developments that are based on people wanting to live right in the heart of it all. So, that's one great location.

The other winning location is suburban. Now, in a suburban location this seems to be a location that is highly desirable that people want to live in, and they want to live there because it's got great schools and low crime, and charming atmosphere. So, as a result, that kind of location works as well. The kind of location that never works is that rural stuff that nobody really cares much about. Off the beaten path, not in a good area, way out in the country. You drive through a lot of parks like that. I drive parks all the time. Next week I'm driving to Ohio and Pennsylvania. I'll see many parks along the side of the road, out in the middle of nowhere, and if you don't know any better, if you're not familiar with the industry, you might say oh, that's what parks are all about. These weirdo locations next to the old abandoned gas station on interstate 44. No, that's not true. Those are actually locations that don't work.

How will you know if your location works or not? Well, the rest coming up when we get to number T, which is test ad. But, basically what you do is you run a test ad that you then gage how many calls you get. That helps you calibrate whether or not that's a good location or not. But, if you're looking in an area, going back to Best Places, the B in our lecture, that has a medium home price of $100,000 and up. The three bedroom apartment rent of roughly $1000 a month and up. The changes are it's a location that will work because obviously people want to live there badly enough that the home prices are pretty healthy high.

But, here's one final thought. We aren't just the same as other real estate on location, location, location. A bad location is nearly impossible to fix. So, if you buy a Mobile Home Park in an area that nobody wants to live in, what are you going to find? You're going to find that no one wants to live in your park. So, always be very careful. Don't be thinking this is a different kind of a business. This is trailer parks. Nobody cares about location. It could not be farther from the truth. I've found people who live in Mobile Home Parks are actually very, very cognoscente of many of the same goals and desires of people who live in McMansion suburbs. They're always looking at school district, and wanting a nice quality of life for their kids. They want to have safety. They want to have convenient upscale shopping. So, location is in fact very, very important to our industry. That is why the letter L goes for location.

I'm going to say for two. I have two different M's that are important to me. One M is metro. That ties back a little bit to what we talked about just minute ago on location. In a metro, what you have is, and you can find this on BestPlace.net, going back to the B. When you put in your zip code of where your park is located at, right below what pop's up, there's a little thing and it says metro colon. What the metro is, this is a thing the US government has devised. Kind of a foot print of that market, that the government says, "Okay, this is where the people who work in this area, they all live." So, they kind of join all these neighborhoods together in what is called the metro.

The metro is by definition always larger than the city that is located in the metro because it serves all the outlying areas. What's really important when you're looking at Mobile Home Parks to buy is the metro. Not necessarily the town it's located in. There are many, many successful Mobile Home Parks that are in fact in very, very small towns can be a very large metro. So, if you're looking at a park, for example, in some suburb of Cincinnati, it doesn't really matter if that little suburb has 2,000 people in it because your metro is Cincinnati proper, which has two million people in it. And, that's where all the jobs and all the opportunity, and all the economic drivers are. So, metro is a very, very important item. We will look at a park of any size as long as it's in suitably big metro. When you say how big is that? About 100,000 to us is a good sized metro.

Now, the other M would be for Metron. Metron is a form of water meter that hit the market here a while back. We are huge, huge fans of this, and in fact, we just recently last year retro fitted all of our meters to Metron. What makes Metron's so good is the Metron meters, you don't have to have someone to read them. They read themselves. They bounce the signal onto a satellite every 20 minutes. So, basically your meters are being read every 20 minutes, not just once a month. As a result, it will tell you if there's any leaks.

So, not only is it reading your meters to bill the water, it's also reading your meters to alert you to if there's going to be a lot more water to be billed. We really like Metron meters. They cost roughly $5 a month to rent them, and in many states you're able to add that $5 into your water costs. So, Metron is something you definitely should check out if you have not done it. We liked it enough ... you know, we tested it originally on 10 parks. It did so well, we ultimately rolled out to every park we own.

Now, let's move on to the next in the A to Z of Mobile Home Park investing. That would be N. In this case we are going to say N stands for no pay no stay. We talked about it a minute ago. It's a form of eviction but, here's how it works. Basically, the customer has rent that's due on the first of each month. If they don't pay by the fifth of each month, then it is considered to be late. So, then what you have happen is you've got the customer who didn't pay and are now late. Well now, they must pay you a late fee. It's not one standard price because every state is a little different on what those late fees can be. So, sometimes the late fee in many states is $50. Another state's late fee might be $30. Nevertheless you assess them the late fee, and then you send them what's called a demand letter.

Now, what the heck is a demand letter? A demand letter is required by law in most states. It tells the customer, hey I didn't get your rent. I'm not sure you're aware but, if I don't get your rent by this date, I will file eviction on you. That is a warning to them because it's possible the tenant did send it and it got lost in the mail. It's possible the tenant forgot. This is their formalized warning, hey you owe your rent, and you owe this late fee.

If they refuse then, what happens is you file the eviction. So, when the time runs out on the demand period, you file your eviction with the court. The constable goes out and serves them, which is very embarrassing obviously to anyone. No one wants to have a constable knocking on your door where they typically always hit the afternoon. So, you're at dinner perhaps with your family, and you get served a noticed of eviction. That's very embarrassing, very bad thing. So, people are obviously not happy when this occurs. Many of them, as soon as they've been served with that eviction, will call you and make arrangements to pay because they don't want to be kicked out, and now they're kind of humiliated.

If they don't pay you though after they've been served the eviction, then you go to trial for the actual evictions trial. Once you win that and, why I say once you win and not if you win, once you win, and you're going to always win because they almost never show up. Then, you will have an eviction. Now, with the eviction in hand you have to wait for the appeal period, which is typically two to three days. Then, you file for what's called a rid of possession, or rid of execution. That is the rid under which the constable will go out and throw the people out on the street. It rarely gets to that because most people in your Mobile Home Park can easily ... they can totally afford to pay the rent, they just don't want to pay the rent because who does? Paying rent is no fun. It's way more fun to buy stuff, to go to the football game, to go to Chili's, to do many things. So, consequently they would rather not pay it.

But, really no pay no stay is really ... it's a concept. It's a thought. It's a training mechanism to make sure the customers pay every month. Now, what if they don't pay you every month? Well, you know, the ones who don't pay every month but yet, pay the late fee are your most profitable customers. Just ask the fine folks at Visa. That's how it works. So, basically you don't have to get mad if they don't pay you on time. They're going to pay you the late fee, but overtime you'll soon find that nobody wants to pay the late fee. So, they end up just all paying on time for the most part.

We've also found with no pay no stay that they don't pay you, what ultimately happens is all those late fees you collect, those will offset any bad debt you have from people running off. So, once again, it's a happy story because you're still doing okay financially, in part because they didn't necessarily always pay you on time. Now, we have found that throughout America, even in hard scrabble parts in Oklahoma, that if you use a no pay no stay system you'll be fine. If you stop, you will be destroyed. If you do not do this, even though you think it would be nicer for people to pay with you never having to be mean, they simply won't. The minute you back off of a no pay no stay structure in your park, what will happen? They'll just stop paying you once again. So, once you start it up you must never, never stop. But, you'll find this is actually a good thing.

Let me tell you why it's really a good thing for everyone involved. What I noticed back in my very first park in Glenn Haven was, and I didn't do no pay no stay. Back at Glenn Haven I knew nothing about Mobile Home Parks or even being a landlord. All the time I would do partial payments. Someone would say, "Hey, I owe you $200. I don't have $200. Here's $100. I'll pay you $100 next month." Then of course next month I'd hear the same story. I don't have $200, I'll pay you $100, I'll pay you $200 next month. Then, of course the next month would be like, here's $100 I'll pay you $300. It would never get paid. I realized all I was doing by being a nice guy was getting people in trouble, because they really had the money to pay the first time around, but since I let them extend it through the payment plan they built up these large balances, which in the end was going to mandate that they be removed from the park. So, I was basically letting them get into trouble.

It's kind of like giving a credit card who is irresponsible. If you don't give them the credit card, they're still irresponsible. They can't rack up the crushing debt. So, if you think you're being a nice guy by doing payment plans and not pursuing people for rent, no. You're actually allowing them to dig a hole that they will never get out of. So many evictions out there that you see people fall prey to where they're behind thousands of dollars in a Mobile Home Park. Who was actually the culprit in that deal? It was mom and pop who didn't press them to pay. That's what tough love is all about. Trying to get people to do the right thing because it's good for them, even though they may not like it at the time.

Moving on to O on our A to Z list. O of course is occupancy. Occupancy is so very important in a Mobile Home Park like it is in any form of real estate. So, when you bought the Mobile Home Park to begin with, you projected a certain amount of lots or homes to be occupied. One great way to make money going forward is to continue that theme by filling up very vacant lot, and every vacant home that you have. That's the ideal. The dream in the industry is to own a park in which every lot is full. And, every home on those lots. It's everything is completely full.

It doesn't stop there. Occupancy can also mean RV spaces in your RV park if you have a park that's RV in your park. It can be your self storage units. It can mean anything else you have. Mom and pop's old house and apartment building. The key is that the dream is to fill everything. That needs to be what you're always thinking. I want to fill everything on my property because that is one of the key steps for me beating my budget and getting the kind of NOI that I want. So, that's how it works. You have to always focus on occupancy.

Now, what we found is the managers never, never as aggressive at occupancy as you would want them to be because it's not their money. You get all worked up when you have that vacant home because you're personally losing $700 a month. But, what are they losing? If you don't pay them much of a commission, if you say I'll pay you $50 if you rent it. Well, all you cost them was the opportunity cost of $50 for that month because they figure, well I'll rent it next month and still get my $50. So, you always have to stay on top of everyone with occupancy because only you and you alone care with a burning desire to get everything full. So, it's absolutely essential that you be the master of the occupancy.

Of course when it comes to occupying lots the number one way we do that these days is with a program through 21st Mortgage. It's called the cash program. There's another C, but I couldn't use that on my C because I thought cap rate was too important. But, it would definitely come to the number position would be the cash program. Program was started by 21st Mortgage, which is part of Warren Buffet's Clayton Empire. Under the program they will bring you in a mobile home to fill your vacant lot, and even include all of the additions. The decks, the skirting, everything. Then, when you run the ads to show the home, if someone wants to buy it, they go directly to 21st, and 21st cuts you a check when they've been approved for the entire amount of the house or, actually in this case, no. I'm sorry. They cut themselves the check. They cut the check to you if it's a used home. With a used home, you front the cost, and they pay you back.

But, the bottom line is the cash program allows you to fill your lots if you are in the right spot with the right customers at no out of pocket cost. We have literally filled parks as many as 100 vacant lots with cash homes, and had not a penny out of our own pocket to do so. Other than in some cases, small amounts of a lot preparation. So, what does it all mean? It means that there's never been a better time to fill vacant lots than right now, because the cash program didn't exist until recent times. In fact, the current version we use of the cash program's only been around for a couple years. It's very, very affective. They have very, very high approval ratings, and very, very low defaults. So, if you've not heard the 21st program, I would definitely look at it. It's 21st Mortgage, the division of Clayton. And, you will soon find Candace Dylan in fact is the community rep. I believe for most of the US. It's a program that has been paying huge dividends to park owners now for more than awhile. In fact, we were an early user of the program. We really liked the thing a whole lot.

Coming up next is the P of A to Z. That stands for principle, as in principle of interest, as in your mortgage payment. I used the P for principle because there's an old saying that I think is very, very good. That is, before you can have return on principle you must have return of principle. Don't know where that quote came from. I've always liked it because what it tells me, it reminds you don't do any crazy stupid thing looking for a really high insane yield because if you lose your capital, what was the point of it all?

If you go out an invest in some crazy thing. Like, if you say, well I think I can make a 40% return by opening a convenient store, and then you lose all your money. Then, you never actually had a return at all. So, that's why I like Mobile Home Parks. They're very stable. I feel very comfortable every night when I go to bed. When I wake up the next day, the park will be there, as will all of its customers. That means I'll have the revenue to pay all the bills and the mortgage payment. But, to me, don't be risking your hard earned money, your after tax investment money on things that are shared gambling.

So, always protect your principle. Your principle is absolutely key. Real estate is an industry that's founded on the idea of capital preservation. That's why you have people who do various tax deferred exchanges of real estate. And, it's all because principle is important. Capital is important in real estate. Always has been, but don't be out going and doing things that you don't have 100% assurance you'll get your principle back because you're chasing after interest that may not be obtainable. If you lose your principle, there was no purpose of any of it to begin with.

This next one is interesting. For the Q I chose Quantitative Easing. Why did I chose that? Well, we talked about it a little. To me, it's just amazing that the government took such a kind of gamble. It's kind of crazy that we depressed our interest rates to levels that had never been seen in American history not that long ago. So, just over the last 10 years you saw something that no one ever saw before. All the way back to George Washington. George Washington wouldn't have even believed it if you ever said it. But, I guess at the time we took a huge gamble because we were in a giant recession, one of the biggest ones since the great depression. The government didn't have much to play with. What do you do when you don't have a lot of money? I know, let's jam down the old interest rates, and that's exactly what they did.

Did it work? Well, it seemed to. We've been having a seeming boom since they started doing Quantitative Easing. Is it sustainable? I don't know. People talk about another great recession coming up in 2020 and one reason people think is the increase in the interest rates. So, by keeping them artificially low did we really solve anything, or did we simply delay it? Not really sure.

What I do know is that in the next great recession more than likely they'll do it again because it worked last time. So, if the next great recession is in 2020 every reason to believe they'll be dropping interest rates again. In fact, some people think they only raised the rates to give them the maneuvering capability of lowering them again. I think it's very possible. It's also odd during Quantitative Easing that we threw all the people in America that saved money under the bus to the benefit of all the debtors. That's exactly how it worked out. So, all the people who saved money anticipated they would get six to seven percent interest on their money. Some people were getting one and two percent seemed kind of unfair. In fact, it seemed kind of zany for a while.

I know a banker in my small town of Missouri was offering a whomping ... was it a .02 or something at point at the bottom of the cycle. I ran the numbers and for you to go buy a CD at the bank in a $10,000 denomination the interest would not even pay the gasoline for our time to go fill out the paperwork. So, again, Quantitative Easing is an interesting thing.

Up to that next is R. R I put in rules. This is one of the unique features of Mobile Home Parks. In fact, Time Magazine described Mobile Home Parks here about a year or so ago in an article called Home of the Future. It describes it as a gated community for the less affluent. Now, some people were insulted saying Mobile Home Park people are not less affluent, but I don't think that was the point of the article. I think the point of the article was that Mobile Home Parks offer something that people can't get elsewhere. That is actually rules that are stricter than what the city has.

In the city, you can get away with murder in any subdivision, and even look around the subdivision you may live in. You'll see people not cutting their grass. Stacking up junk behind their house where no one can see. Then, you have that dangerous breed of dog they let freely roam around at certain times of the day. But, in the Mobile Home Park the owner has the ability to stop those behaviors through this thing called rules.

Everyone of our tenants signs two documents. A lease, and rules. In many cases, the rules may be more important than the lease because most state law allows for a month to month tenancy of a mobile home. So, even if they didn't sign your lease in many states, that's okay. You can still get paid. You can still evict them. It's the rules that are important.

Most of your rules in America, without those rules you can't get insurance in a Mobile Home Park industry. The reason is three big factors of insurance today in Mobile Home Parks are you can not have any dangerous breeds of dogs, you can not have any swimming pools, you can not have any trampolines. The insurance industry chose these three items to banish because obviously, they had lots of lawsuits in the past, and they didn't want the litigation going forward. So, they said no more. You can not have this stuff.

But, in every city we're in the city allows that stuff. You can have a Doberman, you have a Rottweiler, you can have an inflatable pool in your backyard. You certainly can have a trampoline with or without the netting enclosure. So, without those rules you may find yourself not being able to obtain insurance. And, not having insurance in a Mobile Home Park would be the scariest scenario imaginable. I've never experienced it, but for me, who worries all the time, and Dave, who worries all the time, we would probably never be able to sleep again if in fact we didn't have rules floating around out there.

Next up to bat on the A to Z is the S. The S I'm going to dedicate to the theory of spread. Now, what spread means is you've got the cap rate that we already talked about. That was one of the C's of today's lecture. Then, you have the interest rate, which yes, that was the I in today's lecture. So, let's go back and revisit those. Cap rate is the net income over the total cost of the property. So, you divide the net income by the cost of the property. That's your cap rate. Your interest rate is the interest rate on your loan. If you have the three point spread between those two. So, if your interest rate is a five, and your cap rate is an eight. That will give you affectively a 20% or greater cash on cash return. That's what most people are looking for when they buy a Mobile Home Park. They want 20%. If you give them tens time more than that 2% they're getting on their treasury at the moment.

So, spread is very important. If you don't get a three point spread you can't get the 20%. If you have a two point spread you'll be up 10 or a little higher. One point spread you'll be in the single digits. But it's spread that's all important. That's not magic when people make 20% cash on cash returns. All it is is math. They simply have a three point spread between the interest rate and the cap rate.

Right now with interest rates potentially going up, it's very important you only buy parks where you can raise the rents, or fill lots or do something to maintain that spread. If you had bought a three point spread back when interest rates were at three, and they ultimately go to six, which I'm not sure they ever will but, if they did ultimately get up to six your return has been completely wiped out. Now, you're not making any money at all. So, it's one thing to have a three point spread when you buy. It's another thing to maintain that throughout. But, that's what spread is all about. I think it's a very important theory most of us rely on.

The T is for test ad. Now, Mobile Home Parks are unique, just like all of our markets, all of our customers. Some of them are more desirable than others, but how do we know that? How do you as an outsider go into a market that you know nothing about? How do you go into Columbus, Ohio for example, and say, oh yeah well this neighborhood ... that one's hot, but this neighborhood over here, oh it's not hot at all. You can't possibly know that. You're not from Columbus. You don't have any idea any of the myths and legends and, skills of district scores and everything that's going on there.

So, how you do that is you run what's called a test ad. We run our test ad both in Craigslist, and the largest metro newspaper. Basically, we see how many calls me get. We use a Google disposable number. It goes directly through transcription. It's recorded, and then after a 10 day run we take out any duplicates and count up how many calls we got. If you got 20 calls or more, that's a winner. If you got two calls it's a complete loser. It's rare that you have to worry about it because normally, it's either a winner or it's a disaster. Be very few that fall in between.

What that is is that's an affirmation. That's a measure of actual popular chase in that market on where to live. Something that you can't possibly know because you've never lived there. You've never been there long enough to ever know what's desirable from what's not. So, that's ad tested is very, very important to give you piece of mind when you buy the park. If a test had calls well you have every reason to believe that your park will do fine after you buy it. If your test ad goes terribly, yes your park will not do any better after you own it.

Next is the U. We're going to use as the U the concept of being undervalued. Now, I was an economics major at Stanford and the economics department at Stanford they had this theory called market efficiency. That was basically really no good buys out there. No good values. Everything has all been ingested for risks and for everything else known to man. As we all know, in the real world that's just bologna. That sounds good in the economics department but, that doesn't have any varied in the real world. So, why are all of our parks so undervalued?

That's what I get asked all the time. That's what I thought when I got in the industry. Why are these things so screwed up? How come I buy a 15 space park with a brick house for $60,000? Isn't the house worth more than 60 buy itself? Well, the reason their undervalued is it's all part of what I would call a mom and pop Quantitative Easing. They deliberately undervalued their own properties. I don't think they intended to on the front end, but what they've done is they've deliberately set their lot rents way, way too low. As a result, they're understating what the actual revenue could be. Meanwhile, their costs are way, way too high.

Typically, the number one position a manger, who we've got parks where the manager is making $100,000 a year. This is a park that would be typically managed for $25,000 a year. Bottom line is often they're just too nice. They're just too helpful for their own good. They overpay people. They overpay on items. They don't charge people enough because they're trying to be nice. Then, the end result is they have partial ... don't create the same net income that you or I or anyone else could do with them. That's where the real money is in the industry. So, when you go out there and find a Mobile Home Park that's got 60 lots occupied out of 80, where the lot rent is at $350 and the market is at $300. All that value to tap, that's one courtesy of the mom and pop. So, under valuation of parks is ramped. It's everywhere, you see it everywhere you go. That's where all the real money is in the industry.

Overtime though, the mom and pop's die off and everyone buys Mobile Home Parks who are professional investors and fix those things. And, raise the rents. Fire the manager making a $100,000 a year and fix all those items. They won't have any money left in the industry. It's the mom and pops that really led to the fact that you can make money. Now, before you go crying to the moms and pops, also remember that they have no debt. When they built these they never dreamed the values would be what they are today. Every time you buy a Mobile Home Park for a million dollars, it's a pretty good bet the guy told his wife when they built it that maybe one day it might be worth, you know, $150 or $200,000. So, it's not the end of the world. Maybe instead of getting three million for the park they only get a million eight, but that's still a million eight in their pocket. So, it's not that bad. It's kind of a win/win for everybody but, it's just unique that you have a group that deliberately threw their own businesses under the bus trying to be nice to everybody. On the one hand it's very philanthropic and admirable, but in another way it's just a little strange.

So, it gets down to the V. V I'm going to go with MJ [Voucavich 00:49:03]. So, the V for Voucavich, who works at Bell Weather, and it's the guy we use in all of our loans. I think the reason I want to use him is just a concept of getting loans through loan brokers. Now, most people when they think of getting a loan coming out of almost any other real estate sector or business, they think they have to do it themselves. They have to go ahead and build their own presentation, make the list of all the possible banks, deal with the banks, get offers, and choose one. They've got no one to hold their hand through the whole process or follow along the closing. But, that's not true in our industry.

Our industry has this thing called the loan broker, also known as the capital consultant. Brokers are a unique group. What they do is they will go out and do everything for you. They will go out, build a package, deal with the banks. They will negotiate the rates, they'll go to you and say, "Okay, I got three banks that will do the deal. Here's the difference between the three. This is the one I would recommend. You choose the one you want." They go to them, they help all the way through the process and they only get paid upon closing, and they typically only get a point. One of the best deals out there.

So, if you love the two for one Tacos at [Daclabosh 00:50:16] for 99 cents, I'm sure you'll love the loan broker because he does all the steps for you, and in the end pays for himself typically by negotiating the lower rates that you can get yourself. The looking at deal CMBS, time to a debt, or agency debt, which is what everyone wants to do because it's up to a decade fixed low interest rate and non recourse. Then, you pretty much have to use brokers. You would not even be able to find the players in the conduit world, or the agency world on your own. So, that's why I selected the V for Voucavich, MJ, who is the broker that we use on all our stuff.

Next up to bat is the W. This W was so obvious to me from the beginning. Who would be the W or what would be the W for discussion on Mobile Home Park investing from A to Z none other than Warren Buffet. Had to be Warren Buffet. Warren Buffet is one of the most important fixtures of our industry. We are so unbelievably lucky to have him. What happened was you had Clayton homes and back during the Mobile Home Park recession, which started in 2000 where you had a complete collapse of personal property lines of credit. The manufacturers are in tough times.

Out of no where came Warren Buffet. He came out of the shadows when sales had fallen from 400,000 units to under 100,000. He bought up Clayton homes from Jim Clayton. But, no one at the time knew what the ramifications would be. The first thing was, when you bring a Buffet man to any industry it makes people really happy. So, right off the bat, Buffet enters the industry and all the banks and people said, "Okay, we're going to be fine now because Warren Buffet has invested in us. Therefore, that means it's all going to be okay." And, that's what we thought too.

But, we didn't know exactly how okay it would become with him at the home of Clayton. What happened with Warren Buffet here at the home of Clayton is they started investing money, and doing the right things with Clayton that people should have done all along. Modernize them, do a lot more consumer testing, an the most important thing they did was they brought up new ways to finance the homes. The most important we already talked about, and that is the cash program from 21st Mortgage. So, basically, Buffet not only built the homes, he finances them too.

Kind of a one stop shop, and a one stop shop is a huge asset to our industry. So, before Warren Buffet if you wanted to buy 10 homes to fill your thoughts you'd have to spend $250,000 out of your own pocket. Today, you can do the same thing by spending zero if your customers have the credit and the down payment to buy the homes through 21st. It's really been a huge asset, even if you never do a cash deal with 21st in your entire life, even if you never buy a Clayton home, you still benefited because with Buffet in the industry, it so much improves our standing with lenders and just America at large in the media. All those cool ads you see on college football, that talk about it's smart to live in a mobile home, who paid for those ads? Well, you better bet Warren Buffet's team via Clayton. So, all the good things in the industry you see pretty much all come from him. In fact, I'll be at the Louisville home show in January and if you're out there you'll notice there's no comparison between the homes in the Clayton section and all the other manufacturers. That's simply because Clayton's been bringing the best of single family and multi family designs and marketing to our industry. That's really helped raise the level of play of everybody.

This next one is hard. What in the world starts with X in the Mobile Home Park industry. I had to ponder this for a little bit, and then I came up with something I thought would be interesting to talk about. But, it's not something that's the most important part of the industry, but that's xeriscaping. Now, X-E-R-I-S-C-A-P-I-N-G, and what it means is where you landscape using no greenery. So, for example in some parts of Colorado, Arizona, the yards are made of nothing more than river rock, or some kind of decorative rock. Maybe a cactus in their, maybe.

So, the whole concept is landscape Mobile Home Park yard that doesn't require irrigation. Now, why that's important is it's parking back to some things I've seen in some parks recently. Most importantly, Tony Sides Air Stream Village, out there in Las Vegas. There's a guy who used to have 800 million net worth. Sold Zappos.com to Amazon and he lives in a Mobile Home Park out in Las Vegas. In fact, you can Google it up, and you can even contact him as Brandon and I did and he'll have his assistant to give you a tour if you want. It's a park, it has about 24 units. Mostly air stream RVs and also some tiny homes, but it's completely xeriscaped. It's just a parking lot.

Ben and I thought we expected all kinds of landscaping because they guy's got enough money to do anything you want, but instead, he elected just to go have a giant paved parking lot. So, the homes just sit in the parking lot, and then you've got a giant stage, and some other out buildings. But, in a lot of areas I think you'll see more xeriscaping coming on. I've seen some very nice yards in some parts that are made out of AstroTurf. You don't have to mow it. It's green all the time.

As global warming changes across America, there's a lot of parks out there where it may not be raining as much going forward. Xeriscaping parks may become a big deal in the future. I could definitely see that. There are some areas for example in Texas where it just doesn't rain anymore. All the grass is there. It's all brown. It's all dead. All this old Bermuda grass, it's all dead. Perhaps the future is you go in there and xeriscape these parks because if you see the global warming maps, whether you believe in global warming or not, we've all noticed there's something strange going on out there in the atmosphere and as rain stops falling quite so much maybe the future we'll just bring in a whole lot more rock.

Next on the A to Z, we're now up to Y. Y, that's an easy choice. That would have to be yield because that's what we're all after. The reason anyone should ever invest in a Mobile Home Park is try to capture an income stream, money. It's all about the money. We're not a glamour industry. You know, there's a guy in my small town that wanted to make a feature link movie. So, many people in town, myself included, went and help and loaned money to him, and financed this movie. The movie came out. It's actually gotten fairly good reviews. I don't know if we'll ever get our money back, but that's not really important because it's been fun watching him make the movie.

I went to a couple of shoots when they made the movie. I seen the end result of the movie. It's fun. Who doesn't want to make a movie? We all grew up watching movies in the theater, and watching old Hollywood reruns. So, it's kind of fun, but that's not what Mobile Home Parks are about. If the movie never makes any money, well okay. It was still fun. However, if the Mobile Home Park makes no money what the heck are you thinking of? So, Mobile Home Parks must have a yield. We are an income property business. It's essential that you make an income.

So, really what it boils down to is how much income do you have to have to want to do it. For the REITs, the real estate investment trusts, the answer is not a lot. ELS has a yield of three to four percent. That's not because they're keeping a whole bunch. No, that's 80% of their income. Then, you have other players, which are individuals, who buy parks that need a lot of work. They put a lot of sweat equity and they can sometimes have yields that are 50 and 60%. So, the key item of the y, of yield, is you got to have one.

There was a park sale a while back of a park in Laguna Beach, California and when you read the cap rate it comes out less than the interest rate, which means the owner is having to feed the property monthly. I find that shocking. Why would you want to do that? Why would you want to buy a mobile home park that doesn't make any money? So, that's why I chose yield for the Y, is because if you don't have a yield then I guess the better question is why? Why are you buying a Mobile Home Park?

Finally comes the Z. So, we're finally in the final letter Z of the A to Z. What could you possibly choose for Z than Sam Zell. Why Sam Zell? Because Sam Zell is a pretty cool individual. He brought out a book this year called Am I Being too Subtle. It's a great read. If you've not bought it go on Amazon, but it used though because that's what Sam would want you to do no doubt. But, the Zell model has been very simple in life. He's been extremely good at analyzing risk. That's what he's all about.

So, basically his theory on life is if it has low risk and high reward, you should buy it. If it has high risk and low reward you should never buy it. He tight listed everything under that manner. It's kept him out of bad times. In fact, he's the only one in history to ever be number one in three different real estate sectors. So, he's been number one in office, number one in apartments, and number one in Mobile Home Parks. But, what I think is really interesting is he's sold off most of his office, half of his apartments, but he's never sold a Mobile Home Park ever. So, obviously he still likes the product because he keeps adding on, buying more. He's the largest in the industry by far. He has 160,000 lots.

But, he's also the number one real estate investor in history. So, Warren Buffet, he actually would strip Warren Buffet as far as his track record of success. Buffet is not necessarily the greatest real estate investor, not real estate, greatest investor in every segment that they're in. But, Zell has been. He's the only one who's ever been number one in three different divisions of real estate. So, we're very appreciative that he's in the industry. Again, just like Buffet, brings a lot of credibility to the industry. It's very good to have the guy who's number one in so many sectors, number one in our sector. In fact, many people would argue that a lot of the lending that we appreciate today all comes from the fact that Zell is there. He gives everybody confidence that things are going to go good.

All right, that completes the A to Z of Mobile Home Park investing.