Mobile Home Park Mastery: Episode 128

Ford Vs. Ferrari Vs. Trailer Park

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The movie Ford vs. Ferrari focuses on driver Ken Miles, who was always in pursuit of the “perfect lap”. But what does the “perfect park” look like for the mobile home community buyer? In this episode of the Mobile Home Park Mastery podcast series, we’re going to discuss what the “perfect park” would look like structurally, geographically and financially. You don’t need a GT40 to find this podcast interesting.

Episode 128: Ford Vs. Ferrari Vs. Trailer Park Transcript

Have you seen the film, Ford Versus Ferrari, the fascinating glimpse at Ford Motor Company trying to overtake Ferrari and Le Mans, back in the 1960s? The driver of choice back then was named Ken Miles. Ken was a fascinating guy, because Ken was always in a battle with himself trying to achieve the perfect lap. That's why he would often finish races far, far ahead of everyone else.

He wasn't that concerned about winning. Instead he was more concerned about trying to achieve perfection every time he went once around the course. This is Frank Rolfe, the Mobile Home Park Mastery Podcast series. In that same vein I thought we would discuss, in search of the perfect mobile home park. Let's first start off with what would be a perfect mobile home park and it's a surprise twist. There isn't one. Here's why.

All of the best locations in the United States, for a mobile home park, we're all built in the '50s, and the '60s, back in an era when the lots would be smaller and the infrastructure, not as good materials as today. You can't get a perfect park. Doesn't exist. Let's talk about what the dream would be in a perfect park.

Infrastructure side, what you'd really like to have, you'd like to have PVC water, PVC sewer, concrete streets, curb and gutter, two car concrete parking pad for every lot, not master metered electrical, not master metered gas and sub-metered billed to the resident water and sewer. That would be the dream infrastructure. The dream density, seven units per acre that allows you to put every size home, including a double wide, on any single lot.

Again, unlikely you'll ever see that in a good location, but that would be the dream. Then you have the location itself. The dream location would be one of two varieties. Number one, a gritty urban environment, right in the heart of town. You see those in every city in the U.S. They're always 100% full. The other would be that very attractive suburban location with excellent schools, great shopping, very chic, very boutique, place you really wanted to live. Those are the two styles of location that would work the best.

Regionally, well, it could be any region, but you'd want it to be in a region that's been very, very strong economically, lots of growth. Texas is a good example. Texas and the entire Southwest has been fairly well known for lots of population influx, lots of job formation, relatively high rents, lots of diverse employment, so that would all be important. You'd also want to make sure that you are in a market that's big enough to support a successful park, which typically means a metro population of 100,000 people and up, a single family home price of $100,000 and up, and a three bedroom apartment rent of roughly $1000 and up.

Those again will be very important items in search of the perfect park. Far as employers, you wouldn't want to have a one horse town with one private employer that's bulk of all the employment, because if they go under, then your market is ruined. You'd want to have a nice balance of government and education and healthcare. Those are three sectors of employment that nearly never go into decline, that are always seemingly going good.

You want to be on the right side of the general trend on the silver tsunami. That's the aging of the baby boomers, many of which are going to sell off roughly 20 million homes over the next 10 to 15 years. Many of them are going to move locations. Some will downsize and remain where they live, but others are going to move to other parts of America. Some are simply going to move on, period. As that happens, young people are going to reset the boundaries of where modern Americans want to live.

It appears based on early statistics that they may not want to live in the same place as the boomers did. You may see population pouring out of such states as California, and Florida, and Arizona, and areas that where you had older boomers who went there in search of warmth, whereas younger people may not be that attuned to the need to escape the cold. You'll find that most millennials actually prefer those kinds of old traditional American environments. Many actually like the old town square feel, that kind of vibe.

Once again, you're going to have some changes there. A perfect park would be in an area where the silver tsunami is actually going to be a positive and not a negative. Then you have the issues with weather and weather events. We're all afraid or should be afraid of the new phenomenons with hurricanes happening in the U.S., and throughout the world. You're not sure you'd want to be in a coastal park. I'm not sure that the ideal park today would be something on the coast of Florida or anywhere where a hurricane can strike, particularly where the flooding of the hurricane can strike.

There may be other considerations beyond that. Perhaps you don't want to be in areas of California where there's fires. It's all depends on where you think the future of weather is going, but you don't want to be on the bad side of that curve. Then what about the states themselves? Well, you want to feel as a mobile home park owner that you're protected by the law and you'll want to feel that you're in a law that's fairly conservative, that doesn't really bend down to such issues as rent control and seizure of property.

You typically are going to want to be in states that have a fairly conservative state government and fairly conservative laws. Then on top of that you'd want to be an area that has also very strong MHA or Manufactured Housing Association. People behind the scenes are always looking out for your interests, making sure that things don't happen, that injure your ability to have freedom to charge whatever rent you feel fit. Additionally, freedom to feel that you will not suddenly be on the wrong side of some new law such as an attack on grandfathering or condemnation.

Being in a conservative state would also be important. You'd also want to have a mobile home park where you have the ability over time to raise rents appropriately in tandem with the value to create more income. It just makes complete sense. If you have a mobile home park with a rent of 250 a month, the market's at 350 and it's still insanely cheap on a community perspective, that would be a more attractive rent for you than one that's already very high, maybe $600 which is fully at market rent, and you're not sure how much more you can push it.

That'd be another issue. Another item you would have in the perfect park is going to be the ability to some degree to fill lots, another way to create value with mobile home parks is to fill those vacant lots. We all know there's massive demand for affordable housing, so that should be achievable. That can definitely be done. That would also be important.

Then let's just move on to economics in general. The perfect park today would start life off at a three point spread between the CAP rate and the interest rate. That's because a three point spread is the magical path to a 20% plus Cash-on-Cash return. The reason apartments and other sectors can no longer get you those kinds of high levels of return is they've lost the spread. What happens, for example in apartments today, the CAP rate is often only fractionally higher than the interest rate on the loan.

If the interest rate's at five, many apartment deals are now selling at a five and a half CAP or a six. That basically puts you in a position where you're only going to make a single digit Cash-on-Cash return and that's not really that attractive. Mobile home parks are one of the few sectors of real estate, if not the only sector remaining, that you can get that three point spread. That three point spread is what gets you 20% Cash-on-Cash return.

The perfect park would also be financeable, day one, preferably with non-recourse debt. The ways you can obtain non-recourse debt, number one, seller financing, number two, what is called conduit debt, also known as CMBS, Commercial Mortgage-Backed Security. Yes, I know you're going to say that's what brought down America in 2007, all that CMBS debt on single family homes and yes, that could very well be true, but mobile home parks weren't part of that. The other commercial sectors were not part of that meltdown. Never have.

They have always been held to a much different, more conservative standards than single family. There's nothing wrong with CMBS debt, but it's also non-recourse. The final is agency debt. Fannie Mae, Freddie Mac, they're very aggressive today and lending on mobile home parks. In fact, they represent more than 50% at dollar value of every mobile home park financed in the year of 2019. The perfect park would have financing that starts off non-recourse. It would also be fixed interest rate.

None of us know the future of interest rates. We've seen the wildest roller coaster. If you are a baby boomer, you've seen everything from the high teens rates under Reagan, to the rates today, which were as low at one point is down to 3% on mobile home parks. Once again, you'd want to see rates that are fixed. You'd also want to have a term that's probably around 10 years in length. All of your conduit debt is at 10 years. Your agency does it 10 to 12 years. Sometimes your seller financing can also be 10 years, but I think that's also another important feature of the perfect mobile home park.

Now that I've given you all these different traits of the perfect mobile home park, can we just jump out and find one? The answer is, no, you'll never find a mobile home park that meets every trait that I just gave you. You'll find things that meet some of them. Great location, great economics, all the other numbers are perfect, but yet the lots are smaller, certainly smaller than the density of seven units per acre. You'll find another deal that's got all of the density issues, the piping issues, perfect, but the location isn't that good, because you're maybe a little bit far out of town and therefore that's not there.

You don't have to be that concerned about finding the perfect park, because the good news is, the ones that aren't perfect all perform perfectly fine. It's just an attitudinal issue that you simply can't find it. If you start your quest and you say, "I only have X dollars in capital and I will not invest this money unless I find the perfect park," you may never find one because I've never seen the perfect park. Even those parks out in California, there on the beach, they always have problems with their utilities and lot sizes and all those kinds of issues.

You're just never going to find probably the perfect park. The key item is, what is the perfect park for you, what are you trying to achieve. For most people, you're trying to achieve a 20% Cash-on-Cash return on a conservative property that will never give you any problems or let you down or cause you any heartache. That's out there in abundance. Again, when you're looking for the perfect park, it's good to be like Ken Miles to try and find the perfect park, but you have to be reasonable.

Instead of looking for the perfect park, look for the perfect park just for you. That is attainable. The perfect park itself simply doesn't exist. This is Frank Rolfe, the Mobile Home Park Mastery Podcast series. Hope you enjoyed this. Talk to you again soon.