The goal of every mobile home park investor is to buy good deals that offer low risk and high rates of return. But how do you do that? In this week’s Mobile Home Park Mastery podcast series, we’re going to discuss the basic drivers to profitability in mobile home park purchases, along with an example of each one that illustrates the point. You’ll find that success is extremely predictable, and you can tell what will work (and what won’t work) during your due diligence period, based on normal industry metrics. This is the first of a three-part series called “The Good, the Bad and the Ugly mobile home park deals”.
The Good, the Bad and the Ugly. It's a great western, but this isn't the Turner Classic Network. We're going to be talking today on Mobile Home Park Mastery about good deals, bad deals, and really ugly deals. We're going to do this in a three-part series, focusing first on good deals, what they look like, where they come from, what they can do for you.
Let's talk first about good deals. You'll find that most good deals come from our later years. We have a lot of good deals in our early years of park buying two decades ago, but more recently, you'll find many of our better deals because we've learned as we went on what really are the key drivers to success versus things that are a little too risky and maybe should be avoided.
The first deal we're going to talk about is a park that we owned in Kankakee, Illinois. Now, this park is a very interesting little footnote into how strange you can find some of the parks out there, the way they're operated by mom and pop. The property, when we bought it, had a NOI of negative $38,000 a year, roughly, which is kind of crazy. The park has 98 occupied lots, and yet it's producing negative $38,000 of net income. That just shouldn't be. Why do I know that? Because mobile home park expense ratios typically run about 30 to 40%, but they never run over 100%.
Well, we got into the financials on the property and started going through it and saying, "Why is this thing so screwed up? How is it possible the expense ratio exceeds 100%?" We rapidly found the whole problem revolved around the salaries on the property. The property, although it only had 100 occupied lots, it was sporting a full-time manager, full-time assistant manager, and four maintenance men. Clearly, that's excessive on a property of that much occupancy. How much should it have? Well, the industry norm is typically around $10 per space per month. If it had 100 lots, you would figure about $1,000 a month for the manager. There's some other additions that you throw on, but let's say manager in that property should not have been making more than 18,000 a year.
However, the property's bigger than that. It's not a 100-space property. It's significantly larger. Basically, a manager of that property that was well paid and in line with industry expectations would make about $30,000 a year. However, the overhead on the property was $240,000 per year. There was about $210,000 that could be saved simply by letting go the existing manager base and replacing that with new people. Even better, the existing people weren't doing a very good job. Property was not looking good, not well managed. Not only was excessive payroll being paid, you were not getting anywhere near the performance that would be implied by how much is being paid.
This is one of our favorite type of turnaround methods is, basically, cutting costs. You'd be shocked at how many mobile home parks out there have the craziest expenses. My very first park I ever bought, good old Glen Haven in Dallas, the thing that was making run negative every month was this insane cable contract that the former owner had entered into. Not really sure what they were thinking when they did it, but here's what they'd done. They had signed an agreement to provide cable to all 83 lots on the property at full monthly cable rate, no discount at all. Back at that time in Dallas, cable TV was running about $35 a month, so he entered into a contract that was costing about $2,500 a month to provide cable at its full price to all 83 lots. Why did he not ask for a discount? Why no volume wholesale? I don't know. He just didn't do that.
The crazy part was, when I started going through the expenses of Glen Haven trying to figure out what I could do to cut each one since the property was negatively cash flowing, cable really caught my eye because A, I didn't know why a mobile home park would be providing free cable, B, could not at all figure out why a mobile home park would be paying the full residential rate to every lot without any discounting. Then, when I started driving around the mobile home park, I saw some other issues. One, the park was only about half occupied. Why was he paying cable on the lots that had nobody on them? Secondly, I noticed on the homes that were occupied, most had a little dish on them. They had Dish TV or DirecTV. They weren't even using the cable anyway.
I called the cable company and asked them when the contract ended. To my surprise, they said it already has ended. It's on month to month. So I went ahead and canceled the contract. The crazy ending is I got no pushback from anybody. Nobody said, "Hey, you canceled my cable. Where's my free cable?" Why? Nobody was actually using it. What did it do? It saved the park about 2,500 a month, which just happened to be about exactly how much the property was running negative and solved the whole problem.
Cost cutting in mobile home parks can be a very, very smart idea. When you see properties out there that have insane excessive costs, it's a pretty good bet that this is a good idea, because if you buy that property, cutting costs is simple. It goes back to a call or sending a certified letter. Now, make sure, however, that the things you want to cut can be cut. Make sure that those contracts you want to end actually are coming up for expiration. You have to make sure that you've got your bases covered as far as when you make the appropriate cost cuts. Cost cuts are simple. They're immediate. It all falls to the bottom line.
What happened in Kankakee? Well, we fired all those folks and replaced them with new people, saved about $200,000, and it turned the property from a negative position to a very large positive position virtually instantly. In fact, by the end of the first year, we were running very, very healthy numbers, indeed, which you would not have thought possible from the onset, but it simply came down to replacing the staff.
Now, another great deal we did is one we just purchased, just recently, in Iowa. Now, we bought this property at a mid-teens cap rate, which is very good, to say the least, obviously. On top of that, we have plenty of room raise rents and to bill back water and sewer. In fact, about $100 a month of potential right off the bat without even taking the rent fully to market. We buy deals like that frequently. Now, people in other sectors of real estate will say, "How is that possible? How can you have a mobile home park where the rent is 200 a month and the market rent is $400 a month?" It all boils down to mom and pop never really liking or focusing on the entire idea of pushing rents.
Now, all of us who have been born and bred during the inflation era are used to having continually rising prices. Every year that goes by, I get a letter from my cable company, my power company, everybody, letting me know that they're raising my rent a little. It's just assumed, as an American today, that you are always fighting to keep up with inflation. What if you don't? What if you don't care? A lot of moms and pops, what happened is they're not really from the inflationary era. If you're a Greatest Generation member, you basically had most of your business career before the advent of inflation in the '70s. As a result, you don't really think about prices going up every year or even going up at all. On top of that is mom and pops get their parks paid off, why would they raise the rent? They've already got more money than they ever imagined. Instead of writing that monthly note payment, now it all goes to them, so they, again, don't see any desire.
The third reason is many moms and pops get so in tight with the residents. Often, the residents form their only friend and fan base, and they don't want to lose all of that affection by raising the rent, so they just simply do not. If you look at most mobile home parks in America and you look at where they began, what they were per month ... Let's say the park was 60 bucks a month back in 1969. Well, today that would be 500 a month with inflation. Mom and pops often drop the ball for a decade at a time. Really, what you're doing as an owner is you're just trying to bring the park up to with inflation where it always was and where it should have been. It's not gouging. It's simply good business, and it's actually good for the residents.
If you don't keep those rents up where they're supposed to be, you'll have no money for capital expenditures. On top of that, the parks won't even exist because there are other uses for the land, often, that are worth more than a park that's paying out or receiving a $200 rent in a $500 market. In fact, if you look at most of the mobile home parks in America that are redeveloped in other uses, you'll find it's almost always into apartments. Why? The average apartment rent in America, 1,200 a month, average mobile home park in America about $280 a month.
What's the most we've ever raised the rent? Well, that would be the park in my early career I bought it Grapevine, Texas. I raised the rent from $100, day one, to $275, day 61. How was it possible? Well, the market rent, at that time, in Grapevine was 350 a month. That was the cheapest park I could find in the city of Grapevine. If you wanted to live in Grapevine and have the Grapevine school, you were paying at least 350 a month, but here's a mobile home park that was charging only 100.
Why? In talking to mom and pop, pop went into local politics and did not want to raise the rent, thinking it would anger potential voters or spread people bad opinions of him, so he left it insanely low at 100 bucks a month. He knew the market rent was 350. He chose to keep it at 100. Why did I not lose a single soul when I raised it? Because it was still a great deal. At 275, it was still 75 bucks a month under any other mobile home park in Grapevine, and the location was stellar. It was within walking distance to a brand-new middle school, surrounded by really nice, single-family custom homes.
Now, the third great source of deals on great deals would be exemplified by a park that we recently bought, filled, and then sold. This park was also in Iowa. In so doing, we filled about 100 lots. We went in there and basically took 100 vacant lots, brought in 100 homes, sold those off. In so doing, we virtually doubled the value of the property. We did all this within a span of about three years. How do you do that? How do you fill lots? How does that work? Well, it's a little more difficult than cutting costs and raising rents, because it's not something you can do overnight. In those two ways to have a good deal, you're basically doing things that you fully control and you can do with simply a call or a letter, and you stick a stamp on it, and you're good.
When you go to fill lots, little more challenging. What you've go to do is you've got to figure out what size home you can bring in. You've got to figure out what the market will support as far as pricing of that home. You've got to figure out a source to buy the homes. Then you've got to bring them in, set them up, and then run ads, answer the phone, show the homes, get people in those homes. There's two ways to get people in a home, either selling the home or renting the home. Since the advent of the Safe Act in 2007 and Dodd Frank in 2010, park owners today are just not interested in doing mortgages anymore. The mortgage laws are so insane no one wants to do them. Instead, they either sell the homes for cash, or they'll do what's called a rent credit system, or a third way is they'll let other people create mortgages.
21st Mortgage is one of the largest groups that does this under a program called CASH. Under the CASH program, what they do is they bring in homes, brand-new homes, at no cost to the park owner. You run the ads. You show the home. When a customer wants it, they paper the transaction directly through 21st. 21st carries the paper. 21st carries the burden of the Safe Act and Dodd Frank. You, as the park owner, get a brand-new home with nothing in it.
Now you'll say, "What is the downside to that? That can't be. That's too good to be true." Yes, there is a wrinkle to it. You have to cover the mortgage whenever the home is vacant. You additionally have to go in and make any repairs if they break it during the time of vacancy. Obviously, you have to run the ads, and show it, and sell it, just as you did before. We think that's not asking very much. To be able to fill a lot in a mobile home park with nothing out of pocket, to us, is extremely attractive and well worth the additional burden of having to cover the note in between residents.
Let's do an algorithm of that for a minute. Let's say the home is empty, over a five-year period, for three months in between two residents. That's not asking much. In most mobile home parks, that might mean $900, perhaps, in lost rent. Let's say I additionally have to go in and do $2,000 of repairs. Well, great. I'm out $2,900 on that $30,000-plus home over the span of its life. That's a whole lot more attractive than me having to spend $30,000-plus in the first place to bring it in. Additionally, I don't have to worry about the Safe Act or Dodd Frank.
Also, under that 21st program, they now will also do used homes as well as new. Now I can take and buy a used home, bring that into the park, and they'll even finance that, assuming that the blue book value of the home I've brought in is in line with what the customer is paying, which is a great huge asset to park owners because now I'm not only stuck with new homes, excuse me, I can also bring in used homes. That's fantastic because there's some markets where new homes are just simply too expensive, and used homes are definitely where you want to head.
Basically, good deals, to us, are really about three basic mechanisms. One, the ability to fill lots. Two, the ability to cut costs. Three, the ability to raise rents. That's really the byproduct, the raw material that creates good deals. Now, that's not all entirely true because there are some things you can fix and some things you can't fix in mobile home parks. Those may have some bearing on your ability to pull off all three of those. If, for example, the location has no demand, you certainly can't fill lots. If the expenses are not negotiable, well, you can't cut costs. If the market rents are currently at or below your park's rents, you can't raise rent. Normally, when you're out there looking at deals, you're going to find that that's not the case, that there's plenty of room to make improvement.
What is the main reason this exists? Probably, it's because we're still buying in our industry from the original mom and pop owner who's typically not a very sophisticated owner who typically has some things we can improve on. If we were buying these mobile home parks from people that already owned them, and had bought them recently, and had large mortgages, and were fairly sophisticated operators, we would not have nearly the same ending. We'd probably be more like the apartment industry. Now, you can still make okay money, if you're lucky, in apartments, but you're typically looking at return levels of maybe 8%. That's if you do a really good job. Our industry is predicated more on the goal of trying to hit more around 20% cash on cash. To do that, you've got to buy things that have a little more meat in them, things you can improve on, things that can make the values go up. The good news is, in mobile home parks, we do have the raw material out there to get the job done.
Now, I hope you enjoyed this discussion of good deals. Next up to bat, we'll be talking about bad deals. Then, after that, we'll be talking about really unbelievably horribly ugly bad deals. Stay tuned for the next in this three-part series.