Opportunity Zones are hot right now. But the way to make money with them may be a little different than what most Americans think. In this episode of Mobile Home Park Mastery we’re going to discuss the action steps to harnessing the power of the Opportunity Zone tax program based on the bigger picture than delaying or avoiding the tax man.
Episode 135: Opportunity Zone Trailer Park Concepts Transcript
The tax cuts and jobs act of 2017 created the concept of Opportunity Zone. It's basically a program that allows people to reduce or even eliminate capital gains tax if they buy a property in the 8,764 zones in the 50 States in the United States, not even including some other possessions such as American Samoa, Guam, the Northern Mariana islands, Puerto Rico and the Virgin islands. But let's just focus on these 50 states right here in the good old heart of the USA. So how do you make money with the Opportunity Zone? I think from what I've looked at, it's not really about taxes at all. It's more about timing and harnessing the natural result of people putting a focus on areas that have been starving for capital for a long time.
The first thing I note, and you will also note if you look up Opportunity Zone and link to the map of where the Opportunity Zones are, is they are not all in blighted areas. I find that kind of shocking. In fact, one of the early Opportunity Zone cases, which got some notoriety, is that the treasury secretary, Steven Manoukian, was at an event with Michael Milliken in Beverly Hills. Now, Michael Milken, as you recall, was the bond trader that got in so much trouble a while back, and when he was released from prison, started the Milken Institute. And they were able to convince the treasury secretary to include a tract in Nevada into Opportunity Zone that is in no way in any way financially in hardship.
And if you look at that map of the U S you'll see that wasn't the only one, and a lot of very upscale cities and a lot of areas are doing great economically. They still have Opportunity Zones. So the first thing I would do is I would search the map and find those cases of Opportunity Zones that are in areas that are actually really, really strong economically right now. Next thing I would do is I would look for areas that have really big lot reds. Don't be looking at Opportunity Zones down in Mississippi or Louisiana. Lot rents in those areas maybe under $100 a month.
Instead, turn your sites more to the north, or maybe in the states such as Texas. Look for pockets where rents are more in the 3, 4, $500 variety. This will give you the maximum bang for your buck as you gradually raise rents as those areas pull out of their current despair. And look for parks that have great infrastructure. Look for parks that have good solid roads, city water, city sewer, all the bells and whistles, the raw material the larger buyers and lenders will want to see at some point in the future.
Also find areas with a workable city that will work with you, because in many cases these old Mobile Home Parks and Opportunity Zones need to be brought back to life, and you don't need the city fighting you over that. And you also don't need the city fighting you over bringing in homes to fill the vacant lots. So make sure that the city is a player with you, that they're willing to bend over backwards to make a success of your Mobile Home Park turnaround.
Also, be sure and buy these things very, very cheap. These are Opportunity Zones. These are areas that right now are deemed to not be very economically strong. Therefore, you should not be paying Neiman Marcus pricing. More like Dollar Tree pricing. Some of the deals I have looked at in Opportunity Zones are priced appropriately, because sellers are just very unhappy about that part of town, and they're thinking it's very hard to find a buyer, and as long as they have one, they should try every way possible to get a deal struck.
So what do you do? You find deals that meet all of our regular criteria. Great infrastructure, great density, great age of homes, solid location inside that enterprise zone, but ones that have a lot of forward movement in raising rents, lowering costs, filling lots, filling vacant homes. So you want things that are basically stable for the most part, at least have some degree of occupancy with city water and city sewer, but have phenomenal upside. 50% occupied parks, parks with rents that are 50% of the surrounding area, maybe less. Those are the ones you would focus on. Those would be the ones that have all the right ingredients for success. And then what you would do is you would buy the property, and simply let the general neighborhood rise with all the investment from other investors into all the other categories.
Typically, an Opportunity Zone deal I looked at recently, up towards St. Louis, you've got a Mobile Home Park that, it's not the Mobile Home Park that's dragging things down. In fact, the park itself has fairly decent population, mostly people who live there decades back when the area was much more promising, but everything surrounding it is in dire condition. The apartments are terrible. The retail is abandoned. The hotel down the street is abandoned. There's raw land, and there's debris, and there's litter, and it's not looking good right now at all.
But you have to wonder what's going to happen, because there's so many investors that are going to start focusing on those 8,700 tracks of land, those zones, and as their money starts flowing in, you have to imagine it's going to forever change those surrounding areas. At the very park that I looked at. You can visualize if someone came in and started buying up all the surrounding areas and started bringing those back to life, imagine the impact on your Mobile Home Park.
Remember that Mobile Home Parks are not that expensive to bring back to life. A lot of it is like Hollywood set design. You can go and you can paint a mobile home for 500 bucks. You can re-skirt it for a thousand or less. You can re paint the roof for 250. You can rebuild the deck for 250. There's a lot you can do, a lot of bang for your buck as the park owner, but that's not true of all the things around you.
That retail center, that strip center that's all abandoned except for one store, to bring that back to life, that might cost half a million dollars. It might cost $1 million. It might cost more than that. Let those people write those giant checks on those which are, to me, much more speculative. I mean the guy with the shopping center will have to pour in huge amounts of money, and then pray he can find tenants who will go into the Opportunity Zone when they're not even sure if the customers are there to support it. I could see those investments being like catching falling knives.
You might want to wait a few people down the road until you finally get to a solid bottom that's stable. But for the park owner themselves to simply sit and wait and watch the rest of the neighborhoods fill up, I think that's where the Opportunity Zone money is. It has nothing to do with taxes. Even if you had to pay full tax on it, full capital gains tax audit, who cares? What you're really playing into, what the real business model is is you're harnessing all of this sudden inflow of capital into a very tightly targeted area. To me, that's what will create the value.
And the folks pouring all that money in. Yes, they're searching out of more attractive taxation, because as we all know, there's not a lot of money in retail, and industrial, and apartments like there used to be. So those people are actually taking the big risk with the much lower reward. You as the park owner can take a much lower risk and have a much larger reward. Now the big challenge though, to all of the Opportunity Zone that I don't know the answer on yet is financing. That's the key question. How will the financing work? Will you be able to get a loan in an area that is currently blighted? An area that is thought of so poorly that it makes those 8,700 Opportunity Zone areas. That's the big question.
Now from a park owner's perspective, I think you have an advantage on many others, because a lot of the Mobile Home Parks I've seen in Opportunity Zones at least have some semblance of occupancy enough that if you bought it properly it could pay the note. I also think you're probably going to see some push inside the government to try and force lenders to make more loans into Opportunity Zones. And then the simple fact that it's in an Opportunity Zone gives most lenders some degree of reassurance that over time, things can only get better.
Additionally, the fact that there's a finite 8,764 of these zone areas means that the very fact you have a Mobile Home Park in one, it's kind of a rare commodity. Remember that when I got in the Mobile Home Park business and when Dave did, all we knew at the time was there had to be something great to the industry, because the supply and demand was so screwed up. So few tracks zone mobile home. In this case, you have an even bigger filter. How many mobile home parks are there within those 8,764 tracks? So the argument would be to the lender, this is a very rare asset inside of another very rare classification, and hopefully the lenders will get the message.
Now this is a very, very fresh concept. This is just stemming from a law from 2017 that is just now taking the enactment. So this isn't stuff that anyone has a proven game plan with, but a lot of real estate investors have been looking at it trying to figure out how's the best way to play it on my sector? Well that's how I see it on the Mobile Home Park sector, not as complicated as some of the others. It's simply about getting your foot in the door, getting in on the bottom floor, buying the mobile home park at a cheap price with decent financing, is simply riding the Opportunity Zone as far as it will go.
Now there is some degree of risk with the Opportunity Zone because it is part of the government, and this tax act of what happens to it in the future. But once again, I'm not that concerned about where it is 20 years from now as far as taxes. If you had to pay full taxes on it, I still think it's probably an interesting idea. This is Frank Rolfe, Mobile Home Park Mastery podcast series. Hope you enjoy this. Talk to you again soon.