Mobile Home Park Mastery: Episode 137

The 1 – 2 Punch of Park Performance

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There’s an old saying that “good ranchers live poor and die rich”. But mobile home park owners get to live rich and die rich. Why the difference. In this episode of the Mobile Home Park Mastery podcast series, we’re going to discuss that second profit center of mobile home parks that few people talk about. As you’ll see, there’s actually two compelling reasons to get into mobile home parks, not just one.

Episode 137: The 1 – 2 Punch of Park Performance Transcript

There's an old saying, the good ranchers live poor and die rich. And that's a really awful way to live your life. This is Frank Rolfe, the Mobile Home Park Mastery podcast series. We're going to be talking about the one two punch of owning mobile home parks, where the money comes from and one aspect of making money in the business that no one rarely talks about.

Now we all talk about the fact that mobile home parks are the last frontier of real estate that can produce a 20% cash on cash return. There's no magic to how you do that. All you have to do is find a mobile home park, buy it with leverage, assuming 20 or 30% down, and have a three point difference between the interest rate on your loan and the cap rate you buy the park under. So let's model that for a minute. If I can buy a mobile home park for $800,000 and I could put 20% down, $160,000, and I can get the rest of it financed through a bank at a five and a half percent interest rate, and the cap rate on the deal is eight and a half percent, I have a three point spread and I'll have a 20% cash on cash return on my $160,000 down payment.

So I'll make basically $32,000 a year on that down payment. And it's just basic math. There's no mystery, there's no magic to it. That's just the way the numbers fall. So what's wrong with that? Nothing's wrong with that. It's great. Nothing out there makes 20%. CDs make a point and a half, maybe two. Apartments, a good apartment deal might make you 10. So we're doing about double what apartments can do and about 10 times that of traditional investments you get down at A.G. Edwards. But that's only part of the story. That's a story we are always talking about. But there's another part of the story. Now if you raise your rents in that mobile home park 10% a year, then your rents are going to double over a seven year horizon. And if your rent's double over that seven year horizon, the value of the park is going to double. And that means when you go to sell that park, or refinance that park, in the future you're going to have a huge income advantage.

You're going to have a huge liquidity event, but it's one we never talk about. All we ever talk about it is the 20% cash on cash and how great that is, but we never talk about the end of the movie. Because here's where it gets really complicated. If I then sell that mobile home park 20 years later for twice or more of what I paid, then let's look at the math. If I bought that park for a million dollars and I put down $200,000, 20%, I had an $800,000 loan and I sell that park later for 2 million dollars, I made a million dollars off my original 200. That's five times my money and what I put down, and that's not that uncommon an ending with a mobile home park. But we need to run those numbers then backwards. Since inception we didn't then make 20% cash on cash. We made a far higher number, but no one ever talks about it.

And that's what I'm calling the one two punch. We talk about the first punch, three point spread, 20% cash on cash return, but we all conveniently forget to ever talk about the second punch, the knockout punch, the punch where you take all of that value that you've created from buying the park properly and increasing the rent and increasing the occupancy while maintaining the costs, that massive surge in value. So why do we never talk about it? I think we don't talk about it because no one ever thinks as far as selling or financing the mobile home park. Many park owners I know have owned their mobile home parks for their entire lifetime, so they don't ever think about a life without their mobile home park. Some people do, some people are more liquid. They sell their mobile home park and they buy another, but they still never think about cashing out their chips.

They often do a 1031 from the proceeds of the park they sold into the new one. They never take the money off the table. So they just keep building and building and building this value until the very end. I know a park owner in Colorado that inherited a park from the parents and it was just a regular old park at one time and that park is now worth about $40 million. No one ever talks about it because they never sell the park. Instead, all they do is they refinance the park periodically, run the park, raise the rents, fill lots, but they never think about that final capital event when they go in there and liquidate the property because they may never liquidate it.

If you go to any of these mobile home park conferences and things as I do, you'll always see people there that have owned these mobile home parks generationally. So they might be in the third generation now, maybe even the fourth generation, some of the really old parks and they've never thought once about selling and it's never been imputed into their returns because it's something that is off the table to them.

They won't sell the mobile home park. They see it as their cash cow, as the goose that lays the golden egg and they have no desire to ever get rid of the goose. But if you did, if you look at the final numbers that you would have when you took that value and you made that giant score at the end and you then work backwards, that might be another 20% cash on cash than what you already had if you were to take it back to when you first bought the mobile home park. And I think it's important we all realize that because a lot of us are working like those ranchers. Now, we're not totally like the ranchers. Owning land like a rancher and raising cows on it, it's a pretty hard scrabble existence. It's really hard to make any money doing that. So they basically, a lot of these ranchers, they pay the mortgage payment on the land, on the farm, and they keep doing their magic, but they don't really ever get a whole lot of money.

They're certainly not making 20% cash on cash return on the ranch. But what happens is as they pay that thing off and the value of land increases over time, the value of cattle increase over time, at the very, very end, it's worth a whole lot. But often they don't ever see that because they're dead and they pass it on to the next generation. But that doesn't mean you shouldn't talk about it because in a world we live in today, we're all about trying to numerically compare to each other. So in the world of investments, when you look at mobile home parks versus apartments and houses and any other form of real estate sector you want to discuss, we're always comparing like professional athletes as far as how good that's done historically and how good is it doing currently. A lot of park owners will ask me questions like, what's the greatest cap rate you've ever had on a park?

But I'm really lying to them because I don't actually know until I finally sell it. I can say, well, I bought the park cheap, I did really well filling it up, I raised the rents and based on what I pay, I'm now at an 88% cap rate. But that's not entirely true because when I sell the park at the very end of the movie and I work backwards and I impute my return on that liquidity event on that sale, back into those numbers all the way back to the beginning, I may be far higher. Now one thing's for sure, I won't be far lower so I know the number can't go down. But the question is how high can that number go up? That's of far more interest. And it may be a lot of these deals that we all talk about is this is 20% cash on cash and this one's 25%, we may be off by 10 points, 20 points or more than that based on how long you owned it before the liquidity event and additionally what you did to make it worth even more.

But the bottom line is it needs to be a discussion we all think about. Whenever we invest in things, we're taking money that could be in a whole range of assets and we're selecting the one that we think does the best for us. But sometimes with mobile home parks, we don't really think through the entire equation of just how good it can do. And it's simply unfair to mobile home parks. It really is. Now you might say, well what about all those other assets out there, apartments, industrial buildings? Well, here's the problem. They don't have the ability to create value like our industry does. I don't know anyone out there who's buying an apartment complex at half occupancy and rents it or half of market. I think it's much more efficient system than that, so they aren't going to have that same liquidity event at the end.

They may have one, but it may not have anywhere near the impact of the mobile home park. So if we're really going to fairly talk apples to apples with investments, it's about time people started to notice and analyze and discuss that second leg of the equation, that one, two punch evaluation. Because in many ways that may be where a lot of your final money is. For that family in Colorado, the value enhancement of that property over the years is what set them all up for life. It has a great income, but it's that value that's the really big thing at the end and it's about time that all of us started discussing that because it's completely accurate and completely fair.

And it's important when we're making decisions for investments, we all look at that fairly and we look at what the other opportunities are and possibly there are people out there right now who aren't investing in mobile home parks, they never even thought about the fact of all the value that you're building every time you raise the rent and fill the lot and reduce the cost, because it's substantial. Remember with cap rates right now in the industry running as low as five and six percent on valuations in some parts of America, every dollar you increase something is a multiplier up, at least 10 for one, sometimes 20 for one. You're creating huge value every day when you operate your mobile home park correctly. This is Frank Rolfe, the Mobile Home Park Mastery podcast series. Hope you enjoyed this. Talk to you again soon.