Mobile Home Park Mastery: Episode 207

Surfside And The End Of Investing In Structures

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The Surfside condo tower collapse is more than just a tragic tale of the unthinkable occurring. It’s also a wake-up call that there is massive risk in owning large, aging man-made objects and now that this is on the radar, we will now begin a period of bureaucratic over-analysis, a fee-grab by opportunistic engineering and third-party report companies, a liability windfall for personal injury attorneys, the loss of insurance coverage, the collapse of mortgage availability, and the end of life for those sectors of real estate that didn’t see this coming. In this Mobile Home Park Mastery podcast we’re going to review why renting land – and not structures – has once again proven to be the smartest real estate decision of all time.

Episode 207: Surfside And The End Of Investing In Structures Transcript

On June 24 2021, the Surfside Condominium Complex collapsed in Surfside, Florida. And it may have ushered in a new era in which investing in physical structures is a little less appealing. This is Frank Rolfe, the Mobile Home Park Mastery podcast. We're going to talk about the problems of investing in structures as opposed to investing in land.

The first problem with structures of course, is that they are manmade and as a result, they ultimately wear out. Even though Surfside was built out of concrete, the concrete over time eroded and gave way or at least that's how it would appear. Really everything that man makes on Earth has a shelf life, doesn't really last forever. So as a result, when you own structures, you're always racing the clock, because at some point there will be a lot of work needed. In the case of Surfside prior to the collapse, they estimated it needed somewhere around $16 million in repairs, but they're not even really sure if that's even the true figure. They don't even know if that engineering was even accurate. Now following Surfside, they're looking at other buildings saying wait, this building needs $10 million, this one needs $50 million. The bottom line is that when you invest in structures, you're investing into something that over time will wear out. It will need very large capital contributions to keep it going.

Another problem is that structures well they become obsolete. If you looked at a photo of the Surfside complex, you noticed it didn't look like a modern condominium. The one right next door had all glass windows, very sleek in appearance, whereas it was more of a 1970s  or 80s construction with balconies, but it was dated looking. And you see that in all kinds of infrastructure across America, whether it be hotels or office buildings, or apartments. Things over time change, tastes change. There's a whole industry on that on HGTV of taking houses -  some not that old - and walking in and having the potential customer say, “Oh, I hate it. I want to knock out all the walls, I want to paint it bright white, I want to have all new cabinetry.” How did that happen? It's only 20 years old, maybe even less. The problem is that tastes change over time. And when you invest in infrastructure, sadly, you're investing in something that may become obsolete to the customer in pretty short order. Now there are timeless classics like midcentury modern architecture, but even it went through decades of having no appeal whatsoever. So the next problem when you invest in structures is simply that over time tastes change, demand changes, desirability changes, even though you did nothing wrong.

Finally, structures lead to liability. Obviously, you've seen that with surf side, but you see it every day. Structures burn, structures collapse, structures cause lots of liability concerns for people. We don't even really know where Surfside will end up. But one thing we know for sure, is that there will be a huge day of reckoning financially based on the liability of the collapse. But even in cases unlike surf side with much smaller issues, structures are a magnet for liability. So when you own structures all the time, you're worried about what's going to happen with the structure that is more than likely going to get you sued. Will it be a leak? Will it be black mold? You never really know.

So how are mobile home parks then different? How are we different than those other real estate sectors or really all other real estate sectors which includes structures on the property? Well, we are basically a parking lot. That's what mobile home parks are, that's why it's called “park.” It’s not called mobile home park in reference to a national park, or a city park or a large green space. It’s called a park because the early trailer park was titled a trailer park because it was a place to park trailers. They were built by cities trying to attract affluent people who owned trailers when traveling to pull in and stop, and spend the night, and spend some money and possibly eat, or who knows maybe even locate their factory there. But we're a parking lot. We don't have structures. Now sometimes a mobile home park will own some of the homes. But the goal of pretty much all mobile home park owners universally is to own none of the homes. We just want to be in the land business. By being in the land business. We don't have to mess with structures.

And by not messing with structures we gain in two categories. Number one, we don't have those large cap x costs from that structure falling apart, needing a new roof, needing a new foundation. And we also don't have to mess with repair and maintenance, that ongoing battle you have, which may have nothing to do with structural issues but just the bad behavior of tenants who break things. Or just things that break - appliances, toilets, tubs - all these various items that over time will let you down and cause you large repair bills.

Finally, by not having structures, we have no obsolescence concerns. We are a parking lot. Over the decades, mobile homes and their styles have come and gone. We own mobile home parks that may on any individual lot have as many as two or three different homes over the years. The early homes eight feet wide, maybe 10 feet wide, the second generation 14 wide, the modern maybe as much as 18 feet wide, different numbers of bedrooms, of bathrooms arrangement of just the general rooms as a whole. But because we don't own the structures but just the land, people are free to go ahead and swap out the home they have that they feel is obsolete. Decades back people who dealt in mobile homes, they would try and have people trade in their mobile homes frequently just like cars, get the new model they would tell people. And as a result, mobile home parks have always been a very flexible tapestry where people could bring their homes in and out, based on whatever was popular at the time. But the good news is that park owners don't have to worry about that popularity.

Now there's historical precedent on why owning land is superior to owning structures. And for that, all you have to do is go back to the original American real estate millionaire. None other than John Jacob Astor, born in 1763, and died in 1848. Now what makes John Jacob Astor unique? Well, he had a large fur company, but he was the first one who really dabbled on a large scale on investing in real estate. He took his profits from the fur business, and he invested in land, almost all of it exclusively on the island of Manhattan. But what made Astor unique in the way he invested is he had no interest in structures at all. If you wanted to build a house, if you wanted to build a barn, he would go ahead and rent you the land. But then you had to build those structures. He wanted nothing to do with it. Was it because he didn't want the cap x cost? He knew there'd be one day obsolescence? We're not really sure, but he was adamant he wouldn't do it. And when Astor died, inflation adjusted, he would have been one of the most wealthy people in American history, all simply focused on owning land, and never structures.

Now, the Surfside collapse is going to trigger a whole new era of much greater focus on structures. You're already seeing that. You're already seeing other buildings and Florida suddenly being condemned, because of concern of how they structurally are standing. But universally throughout all of real estate, in my opinion, you're going to see lenders and buyers with renewed focus. They're going to look at every structure and say, okay, what's really was wrong with this thing. I can see a whole new level of third party report coming into the picture, a much, much deeper dive into all structures, because people are going to want to know, and they're going to question what am I really getting into here? What is the real condition, not just what I can see but what I can't see? Just as surveys changed over time from boundary to ALTA, I have no doubt the property condition reports will become much more severe, much more intense, and that scrutiny will be punishing financially for those who own structures. They won't be just the broad brush, “Well, it looks good from the outside.” Now, it's going to be a whole new level of introspection. And as a result, it's going to result in large capital calls for repairs, and reduced values for properties that are assumed to be not up to speed or in line with the infrastructure needs.

The bottom line to this is the best alternative, truly the best alternative to what's going on now in the world of infrastructure, will be the mobile home park. We are going to offer the best alternative to those who are now going to be concerned with the future and the status of structures. Now for the longest time, we've all take structures for granted people have invested in them. We have our own playbook that all investors use on how to evaluate structures. But I think that playbook is about to change. So if you're looking for a safe harbor for real estate investing that has nothing to do with structures, but simply land ownership, then mobile home parks are probably the right place to be. This is Frank Rolfe, the Mobile Home Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.