Mobile Home Park Mastery: Episode 100

Our 100th Anniversary Special

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A 100th Anniversary is called a “centennial” – and that’s exactly what this episode represents. Starting on August 7th, 2017, the Mobile Home Park Mastery podcast series has delivered 100 straight weeks of everything you need to know about mobile home park investing. We’ve covered every topic from the history of the sector to predictions of the future – and everything in between. No topic has been taboo and we’ve continually offered straight facts with no sugar coating. Our mission is to erase the untruths and stereotypes about an industry that provides the only non-subsidized form of affordable housing in the U.S., while providing practical tips and explanations on how to correctly invest in this unique asset class. Thanks for listening in for the past 100 weeks and we look forward to talking with you further in the future.

Episode 100: Our 100th Anniversary Special Transcript

100 is a really long time. We typically celebrate the number 100 as a centennial. Well, this is our centennial episode of the Mobile Home Park Mastery Podcast series. Yes, this is our 100th episode. We began August 7, 2017. Here we are today around two years later. It's interesting that this broadcast also falls right around the 4th of July, which is our national Independence Day, because the whole point of Mobile Home Park Mastery Podcast is to give you independence from ignorance regarding investing in that sector known as mobile home parks. There are so many negative and wrong stereotypes and concepts regarding what's really a pretty neat industry, and hopefully Mobile Home Park Mastery Podcast series has brought you a little more light on the truth about our form of investing.

I thought it would be interesting on this 100th broadcast to go through our top 10 to date and revisit those topics, as many of those date now two years past. Our first broadcast ever is also our number one most listened to episode, and that was simply Why Invest in Mobile Home Parks. Not much has truly changed since that inaugural episode, and let's go over one more time why we all invest in mobile home parks.

Warren Buffet has always been very big on the idea of a moat. To him, a good investment is one in which you have a good business model that's protected from the competition by the existence of a moat, and in our industry you have two moats. Moat number one is the simple fact that they've not allowed any mobile home parks to be built in the U.S. in a meaningful way since about the 1970s, and this will never really change because city governments hate mobile home parks. They hate them because they cost the city money. Mobile home parks typically have a lot of children in them, and they go to school and it costs the city a lot of tuition money which they don't garner back in property tax.

Additionally, people in mobile home parks are at least thought of to use a lot of other city services, things such as health care, so the city looks at mobile home parks as a losing proposition, something where they get very little tax revenue and they have a lot of expense. On top of that, they're able to use and harness the force, that stereotype against parks which most everyone in the community has, so rather than say, "We don't want the mobile home park because it's going to cost us money," they can instead say, "Well, we would love a mobile home park, but, you know, our citizens don't want one and we are representatives of the citizens," and so that's how that works.

The second moat, of course, is that it's very expensive to move a mobile home. In fact, the word mobile shouldn't be a part of the expression mobile home because they're not actually mobile. They're not mobile because it costs about $5,000 to move one, and also the homes that are older than 1976 which are pre-HUD, you're not actually allowed to bring them into pretty much any city in America today. They're grandfathered right where they sit. So we have a moat blocking new construction in mobile home parks and we have a second moat blocking removal of our customers, and we're very comfortable with that.

On top of that, mobile home parks play into the entire megatrend of affordable housing in the U.S. This is a huge megatrend, one that you read and hear about all the time. Of course, nobody in government actually addresses it, but nevertheless, if you're going to be in an industry right now, that is a really good industry to be in. Also, mobile home parks offer high yields. Why? Simply the stigma against the industry precludes most investors from getting involved. Therefore, when mom and pops go to sell, they have fewer people calling, fewer people interested, and that results in higher cap rates.

Add it all together, mobile home parks we still believe to be the most attractive sector in all of real estate. Nothing there has really changed.

The second most popular one we ever did on the Mobile Home Park Mastery Podcast series was called The History of Mobile Home Parks. Now that one is very fascinating because we see history right now occurring. The mobile home park industry really began back in the '30s and the '40s. It took a lot of flight in the '40s because of World War Two and all of the exposure the servicemen had to living in mobile homes and mobile home parks, and then it became chic and hip in the '50s. Even Elvis lived in one in two different movies, It Happened at the World's Fair and Speedway.

You had many famous people involved in the industry. Frank Lloyd Wright designed a model. Raymond Loewy designed a model. Stanley Marcus of Neiman Marcus fame built a prototype mobile home park in west Dallas around that period. Here's the crazy part. The demographics of mobile home parks back in the 1950s was higher than that of stick-built subdivisions, so if you lived in a mobile home in a mobile home park, that meant you had higher educational status and higher income.

How has that changed today? Well, as we know, the main focus is still about affordable housing, but still it's a wide ranging industry. You've got no less than five billionaires who claim to have mobile home park addresses all up in Montauk up in the Hamptons, but you have a range of other folks. The parks down in Malibu, parks in Laguna Beach, a lot of movie stars, mostly on the way up or way down in their career, live in these parks. So it's not really all about affordable housing, but it is for the most part.

Right now you're seeing some shifts in the industry, some history in the making, people who are starting to build new strange parks using tiny homes out in Austin, people who are discussing how they can do more to foster the building of mobile home parks or allowing mobile homes on lots throughout America. So right now the demand for affordable housing is causing a lot more people to look at this industry and say, "How can we do more for it?" Just recently you saw double-wides out on the General Mall there in Washington D.C. out by the different memorials and by government buildings with no less than the head of HUD talking about the benefits of mobile home parks.

So really we're seeing a lot of the negative stigma torn down right now by the simple fact that mobile home parks are the only form of affordable housing that's not subsidized and that really, really works. You're going to see a whole lot more of that because as our nation continues to struggle with the whole idea of building a dwelling that people can afford, there really is no solution other than what we do, the simple old mobile home park.

The third most popular episode we had was called The Mathematics of Mobile Home Parks. This hasn't really changed much at all. The math is still the same. Expense ratios range from 30% to 40%. A lot of the different areas and formulas of the industry remain completely unphased. Right now, basically we're an industry where you can get a mobile home park still at a three point spread between cap rate and financing rate, which means you can obtain a 20% cash-on-cash return. Nothing there has really changed at all.

Now people would say, "Gosh, I'm seeing so many more people in the industry than I used to." Well, sure, bring them on. The industry has 44,000 mobile home parks. Only 4,000 are institutionally owned. 40,000 are still sitting out there, fair game by the original moms and pops. At this point in the movie, there's not anywhere near enough buyers to cover all those parks, so the advent of more people in the industry hasn't really done much to affect those yields. The only thing that has is the fact that interest rates have come down and stayed down now for roughly a decade ever since the government began quantitative easing, so people are now becoming more amenable to the fact that interest rates will remain in the range of about 4% to 6%, which means you can buy mobile home parks at a cap rate of 7% to 9% and maintain those desired three point spreads which will get you that 20% cash-on-cash return. So not much has really happened there.

Consolidation, we haven't seen a lot of consolidation recently. We had two, no three different $2 billion transactions just a few years ago, and in the last couple of years since we did that podcast, there's been several more in the hundreds of millions of dollars, but recently there hasn't been a whole lot. Why is that? Well, simple. Probably a lot of people who saw the John Oliver broadcast or heard that Elizabeth Warren sent nasty letters to private equity groups warning them not to mess with mobile home parks, that's kind of soured people for the moment. They're kind of like, "Let's just wait out and get in, wait and see what happens with all of this political nonsense."

Bear in mind, America's right now in a cage fight between capitalism and socialism, and for some reason our industry's become part of the narrative as to the concept of the evil landlord beating up on the poor person, which is, of course, utter nonsense and everyone knows it's true. But then again, when you have a lot of media time to fill, I guess that narrative at least fills a few seconds in your broadcast.

So instead of consolidation right now, what I think you're seeing is people who are still interested. They're still hanging around out there watching to see if the things will kind of die down there. They're kind of laying low, but also there's just not a lot of mobile home park operators out there that are big enough for these groups to buy. Most private equity group groups want to spend about a hundred million dollars of their own capital, so they're trying to find deals that are typically 300 million to 500 million in size, not many of those. If you want to be in the 100th position as far as the 100th biggest park owner in America, all you have to do is own about 600 to 700 lots. That's not going to interest a private equity group, not at those kind of lofty numbers. There's probably not but 20 groups in America big enough to get that kind of a number on a sale. So one reason you're seeing right now a slow down is they just can't find any things to buy. Our industry is just not massive enough.

The apartment industry on the other hand is 10 times larger in all regard with the number of lots and values, so clearly we're a long way from having a lot of new private equity action. However, there are some groups out there who are quietly buying up parks behind the scenes that people don't even know they're there. The largest private equity group in the United States, Carlisle Group, is now up to 5,000 lots and they've been buying them one park at a time, so you may actually be seeing consolidation right now. We just don't actually see it because it hasn't surfaced.

Our fifth most popular broadcast was The Future of Mobile Home Parks. Again, I feel like right now we're just in the middle of the movie. The movie is far from over. I don't know where this industry heads in the years ahead. The demand is off the charts. Lenders love the industry because it's the most stable, the lowest default rate of any form of real estate. So we have all the background work in place to do great things, but the problem is we don't get a break.

The government doesn't help us at all. There's been nothing done to help people buy mobile homes to go in to those vacant lots and mobile home parks, so today the park owners have to do it themselves. They have to buy the homes and bring them in. Fortunately, there are groups out there financing this endeavor, so that helps a whole lot, but none of us really know what the mobile home park will look like 50 or a hundred years from now. It'll still be there, there's no doubt, because it's the only way you can get a highly dense subdivision within the city boundaries today, but I don't know what will be on the lots. It may still be the mobile homes we see today. It may be a whole new product.

There's some great products people are building out there. Everyone sees those shows on TV building nice ways to live in small spaces, and we know that Americans are really starting to like the whole idea of living small. We just don't know what that's going to be. The jury is out. I think it's very fascinating to see where that ends up.

Our sixth most popular broadcasts was The Government's Role in the Future of Mobile Home Parks. Now, one part of the government's role has been working really well, and that's called agency debt, Fannie Mae and Freddie Mac making loans on mobile home parks. Believe it or not, right now those Fannie Mae, Freddie Mac loans, called agency debt, represent 50% of all new mobile home park loans made each year by dollar volume, so clearly the government is doing a whole lot when it comes to financing mobile home parks, but what about the mobile homes? This is the year they're supposed to do their test case with Fannie Mae and Freddie Mac doing mobile home loans and then securitizing them. They're going to start off very small with only about $10 or $20 million in total volume. However, it's going to grow over time as they go around and securitize that, so there's no question that possibly we'll see much larger things going on in the future, but we just don't know yet how that is going to work out. so the future is still an unknown.

I think it's going to be pretty neat as far as how the government reacts to the affordable housing crisis in our industry. I just don't know what they're going to do. I would love to see them enact the program they already passed through HUD, which was to give people in Section Eight vouchers to buy mobile homes. However, it never really got enacted, so nothing's really come from that. I also think at some point they will start doing some kind of interesting tax situations. Congressman Ellison had already proposed that mobile home park owners who leave their parks as mobile home parks and don't redevelop them would ultimately pay little or no income tax on the sale. So I think we'll see more things like that to help bolster what we do, but I don't know what it will be yet.

Number seven most popular episode, The Current State of the Product. If you've seen a modern mobile home, you know how good those products are. I am truly amazed when I go to the shows in Louisville or Tunica of just how great the product has become and, of course, we have only one person to thank for that, and that's, of course, Warren Buffet and Clayton Homes. Finally somebody put enough design skill and sense and money behind the product to make it attractive. Now the outsides, yes, they still could use a little work. I love the vinyl and shingle roof designs. I think they're great, but clearly the inside is way better than the outside. If they could just find a way to make the outsides as nice, they would really have something going. It's kind of like the Airstream trailer. The outsides are so classic, they never had a need to change them since about the 1930s. We still have not lucked out and found the optimal way to build the outside of a mobile home, but when we do, it'll be fantastic.

If you have a chance to ever go in a mobile home in a modern setting out in a mobile home park or at a dealership, you really need to. It's really hard for me to explain how good they have become at building these things. In fact, the layout and the finish out is very reminiscent of moderate construction, either multifamily or single family, so the state of the product is really, really good and I think only getting better as more money is put into the designs. I just wish they could make the outsides a little nicer.

Our most popular number eight, Where the Investment Types Stand Today. There's so many different forms of mobile home park investing, it's not all just one thing. We do the affordable housing end, but there's also a thing called lifestyle choice, which is more of an upper end arrangement where it's mostly catering more to retirees in a coastal setting. You've also got different kinds of niches inside those, right? You have retirement parks that are not in a coastal city, not as amenity rich, and then you have some side byproducts kinds of things such as parks that cater to just one group, like man camps in oil and gas areas. There's even sex offender parks out there that cater to just that. So there's really quite a bit of a variety in the investment type today, but the one thing that they all hold together is the power of the demand for the product and the fact that you can still get really high rates of return on it. That has remained pretty much constant throughout.

Our ninth was popular episode is Ben Franklin Was Right, The Three Action Steps to Succeeding in Investing in Mobile Home Parks. What Ben Franklin was talking about that I always use the quote was talking about that diligence is the mother of good luck, and what that means is simply that. Those who use and conduct great due diligence always seem to win. Why? Because they put in the homework. You ever noticed those people at school who got straight A's? What did they always do that others didn't, and that's right, they always did their homework. They always did great homework. They always were very prepared for tests. The same is true in the industry today.

I could not talk enough on the necessity of doing good due diligence if you're going to buy a mobile home park because it's a very strange asset type and something that most people have no knowledge of how it works. If you go into buying a mobile home park with no advanced knowledge of what you're supposed to be doing, the results can be catastrophic. So Ben Franklin, although he never had a mobile home park, he was 100% correct, and that has not changed at all over the last two years.

Finally, number 10 most popular broadcast, Three Action Points on Finding a Mobile Home Park. Now mobile home parks, as we've all discussed, they're a little strange, stereotype, people consider them downscale. That's because they don't know any better. But what are the three key things that have changed as far as the action steps to buying? Well, when it comes as far as identifying the properties, picking out what's good from bad, that hasn't changed much, not much going on there. The due diligence, of course, that's not changed at all either, but let's talk from an event negotiation because that has changed to some degree right now.

What's happened in the industry, and it keeps changing, is the simple fact that people are getting more and more amenable to buying mobile home parks at lower cap rate when there's the built-in ability to push the rents. Now we're not pushing the rents because we're trying to take advantage of people, unlike what some people would claim. That's complete nonsense. What's going on is our rents are insanely low in our industry.

Don't take my word for it. Look at Charles Becker, the economist from Duke. He studied mobile home park rents, and he found they were about 50%-plus too low. He based it on the simple fact that if you look at mobile home lot rents back in the '60s and you'd run them out through current using inflation, you end up with about $500 a month, yet our rents in the U.S. are only about $280 a month. They're woefully low. That's due to what's called mom and pop quantitative easing. Basically moms and pops never set their rents based on the economy or what people could pay. They set them based on their own whims. Sometimes they wouldn't raise it for decades. Other times they would deliberately not raise it even though they knew they should because they thought, "Oh, well. I got the note paid off. Why bother? Why should I increase it?" and of course, that's not how real estate really works.

One strange thing that's occurred though is this whole thing with our own quantitative easing of interest rates. So what you have today is you have low rates which seem to be set in stone. They don't seem to be going up much. In fact, they're already starting to go down again. So let's just say that your rates in America run from a range of about, they've been as low as 3% so let's say 3% to a 6% window, something like that. That means you have to buy a park at a cap rate of 6% to 9% to have the three point spread that gets you the 20% cash-on-cash return.

But the big item is in today's mobile home park world with the rents as low as they are is do you take the cap rate based on the day you buy it or do you take the cap rate 90 days later or so when you've raised the rents up a little to get a more towards market? More and more people are getting comfortable with selecting the latter. They're saying, "Well, I'm buying the park today at a 280 rent. The market is 400. I'm going to go ahead and run my numbers based on it being at 330 because you know what? That's what I'll raise it to after I buy it. I'll go in there and clean it up, bring it back to life, freshen it up, and I'll go ahead and raise the rent." As people become more comfortable with that, so have lenders. In fact, maybe the lenders being comfortable made more people comfortable with that.

So today what's going on is a lot of people are simply buying at would appear to be lower cap rates, but it's not entirely true. If you buy a park at a seven cap rate and then you raise the rent 90 days later and boost it to an 8% cap rate, exactly what cap rate did you buy it at? The seven for 90 days or the eight that goes on until you raise it again? So that's one big shift that's happened in the world of negotiating on the parks. So today if you want to be a successful buyer, you have to stretch a little. You have to do what the crowd is kind of doing here. The lenders are supporting that, as are the appraisers, because they simply know that the rents are insanely, stupidly low. You have plenty of ability to raise them and still be insanely affordable, and yet a lot of people are now factoring that in to some degree into the numbers.

Always remember the mom and pop, this is their one and only asset, often their biggest asset. They want to get a good price, so if you're going to want to buy one and compete with other people and get them the price they need, sometimes you have to bend the rules a little. I don't think it's asking too much to bend that rule simply because you can raise the rent. It's still a great deal for everyone involved, and to be honest with you, it needs to be done. The mobile home park industry will not become mainstream like the apartment industry and other sectors until our rents are higher. The rents will have to be consistently across the board about $500 a month before we will be able to hire top flight management and other groups, which is what the industry really needs. We need to put capital back in these parks to bring them back to life, and to warrant that kind of capital in many parks, you're going to have to get higher rents.

It's what the customers really want at the end of the day anyway. They want to live in a place that can be proud to call home with working water and sewer and roads without potholes, places they can be proud with a nice entry, places where the manager is professional and treats them respectfully. That's the future. That's where everyone wants to be.

Those were the top 10 topics that we had, some dating as long as two years ago. Again, I appreciate everyone for listening in. I'm glad that we're able to share this hundredth episode together. I look forward for the 200th episode a couple of years from now. Hopefully everyone has learned a lot. I know I've had a lot of fun producing these podcasts, and we'll talk to you again soon.