Like any other science, there are a host of terms that are of relevance to mobile home park investing. In this episode of the Mobile Home Park Mastery podcast series, we’re going to literally review these from A to Z – from “Affordable Housing” to “Sam Zell”. If you want to get a good grasp on the components of brief strategies that successful mobile home park buyers and operators utilize, then this topic should be of great interest.
Episode 141: The A To Z Of Mobile Home Park Investing Terms Transcript
Gary Rivlin, a reporter for the New York Times once described me as a walking encyclopedia of all things mobile home park. In that vein, I thought it would be interesting to go over the A to Z of mobile home park investing.
This is Frank Rolfe, the Mobile Home Park Mastery podcast series. We're going to start with an A and go all the way down to Z. Here we go. A, affordable housing. That's the business that we're in. That's the market that we serve. Mobile home parks are perhaps the finest form of affordable housing ever known in American history.
Why? Because we are not subsidized by the US government. We truly deliver a nice, safe, clean, affordable place to live. And we have so much great attributes. No neighbors knocking on walls and ceilings, parking by your front door, having your own yard, being a homeowner, having neighbors who are not transient, but are stakeholders in the community.
So A is for affordable housing. B is for bestplaces.net. One of the greatest websites ever developed to help you analyze mobile home parks for sale. I can go on bestplaces.net and in just a few moments I can tell you the metro, size of the population. I can tell you the median home price. I can tell you the two and three bedroom apartment rent. I can tell you the housing vacancy rate. I can tell you what everyone does in that whole market. How much they earn and what kind of jobs they're in. B is for Best Places.
C is for CAP rate. You can't talk about mobile home parks without discussing CAP rate. What is CAP rate? It's a fraction. That income on the top, price you pay for the deal on the bottom. The higher the CAP rate, the better if you're buying and the lower the CAP rate, the better if you're selling. CAP rate is one of the essential ways that most mobile home park people look at parks to buy. That's how they rank them. So C is for CAP rate.
D is for density. The dream density for mobile home park is 70 units per acre. You never get it. Why? Because most mobile home parks were built prior to the 1980s. And that means back then homes weren't quite as big as they are today. So the typical density in a good mobile home park can run anywhere from 10 to even 15 units per acre. The key thing to watch, don't get into a park that's too dense. If a park is too dense, the lots will be too small to put a home on. You might even have Fire Marshall problems. How small is too small? If a lot can't hold roughly a 14 by 46, two bedroom, one bath home in our opinion, it's probably become an RV lot.
E is for EBITDA. Earnings before interest, taxes, depreciation and amortization. It's a banking term. Bankers will throw it out to you to test to see your knowledge of the industry. If you don't know it, you'll be embarrassed. So learn it now. EBITDA, E-B-I-T-D-A. Earnings before interest, taxes, depreciation and amortization. Let's go over what that means. The interest and amortization is your mortgage payment. The T is your personal income taxes.
D is depreciation. A funny number that we get to add back from the IRS. E Is for EBITDA. F is for fair housing. All house in America falls under HUD. We do not allow any discrimination, no steering. If you don't know the laws of fair housing in the US you need to get the free handbook. They'll happily mail it to you. I would have your manager read it and sign a document stating that they have read it. Don't mess with fair housing. It's law in the US.
G is for growth of net income. Anyone buying a mobile home park probably has one key goal and that's to increase that income over time. How do you do it? Filling vacant lots. Cutting costs, often sub-metering water, sewer back on your residents and raising rents. We know of no one who really desires to buy a mobile home park that never goes up in value or up in income. So growth of net income is very important.
H is for HUD. HUD covers many parts of the industry, but none more important than manufacturing. Every mobile home in the United States since 1976 has proudly worn a HUD seal saying it's safe to live in. So you can't buy a home and bring it into almost any park in the United States if it does not have the HUD seal. The old homes that didn't have them, well they're grandfathered. But don't go trying to buy one and bring it in today because they typically will not give you a green tag for power hookup if you do.
I is for interest rates because mobile home parks like all real estate, they're all about leverage, sensible leverage. Borrowing from the bank, whether you want to be at 50% loan devalue or 80% loan devalue or even higher, we all utilize debt. Debt comes with a price. That price is the interest rate. Interest rates are important. Interest rates right now are running for probably about 3.8% of the larger deals that are institutional quality, up to probably about 5.75 from traditional banks.
J is for joint venture. Many, many people buying mobile home parks like to do it with others. A JV is a fairly common thing in our industry. There's nothing wrong with it. It gives you diversity, it gives you a little additional safety and maybe someone to bounce things around with. So JV is for joint venture,
K is for cash for keys. It's a popular evictions plan if you're evicting somebody and they don't have any money to pay you. Sometimes you're best off just to pay them to leave and that process is known as cash for keys. You give them money to be gone by so let's say Monday. It's a win win for everyone. They get money to go down the road, you get the home back typically with less damage to it. You don't have to go through the evictions court. It's embarrassing for the resident and costly for you. Cash for keys is a great system. That would be the K with cash for keys.
L is for location. Mobile home parks, like all forms of real estate, of course we're all about location, location, location. But I only used the L just that one time. The types of mobile home locations that work well? Gritty urban ones right in the middle of town and upscale suburban ones out in the outskirts. What doesn't work? Any location that you would not live in yourself.
M is for Metron meters. Metron meters are a special kind of water meter that hit the market a few years ago that are electronically read. They in fact read every 20 minutes. It saves you from having your manager try and climb under the mobile home and get the reading, which is very reassuring.
There was a runner up for M and that was metro. Metro population is defined as the population that surrounds the greater population over the small city that you may be buying in. Metro is critical. That is your employment driver. I don't really care what the population is of the city the park is located in. What I hear is the metro population. Typically we're all looking for about a 100,000 and up metro population.
N is for no pay, no stay. That's our standard collections mantra. It means if you don't pay the rent, you can't stay in the park. It doesn't mean you have to pay the rent, but it means if you don't pay it, you can't stay. The customer has to make a firm decision. Do they want to keep a roof over their heads or do they not? And if they do, they have to pay the rent. We don't do payment plans. It doesn't work. It sets a bad precedent for the other residents. So no pay, no stay is the best way to do collections.
O is for occupancy. Every mobile home park in America should have strong occupancy because the demand for affordable housing is so great. If the occupancy is not high, you need to watch out. It may be that no one wants to live in that mobile home park location any longer, but throughout America you should run a test ad before you buy a mobile home park and everything should point towards greater occupancy in demand for affordable housing.
P is for a phase one. Phase one environmental is a key part. Whenever you're buying a mobile home park, you want to make sure that everything is in good working order as far as environmental pollution. The cost to clean up environmental pollution is significant. If you do a phase one and they're wrong and they miss it, you're covered under their insurance and you're free from personally being liable to do the cleanup. You've got to do a phase one. We never buy a park without a phase one. Runner up for a P was in fact park, mobile home park, but I think we see mobile home park enough and we all know what that is, so I went with phase one instead.
Q is for quantitative easing. We see quantitative easing as having an impact in mobile home parks in two directions. Number one, it keeps our American interest rates low and that keeps the cost of the interest on that loan for your mobile home park low and that's fantastic.
Also, we find that most mom-and-pops have quantitatively eased the rent to the customers. Not really good idea for mom-and-pop, but great for you as a buyer because you can then raise the rents up a lot and still be an incredibly affordable bargain.
R is for rules. Every park must have rules. In fact, mobile home park rules are stricter than in the community at large. We typically do not allow dangerous breeds of dogs, trampolines, swimming pools, all kinds of odd items. Where do these things come from? They come from typically the insurance industry who tells us what we can and cannot do in order to be insured. So R is for rules.
S is for spread. This is a spread between the interest rate and the CAP rate on your deal. Here's the simple formula. A three point spread between interest and CAP rate typically gives you a 20% cash on cash return. Buying a mobile home park with a 5% loan, to get an 8% CAP rate you should be able to hit 20% cash on cash return. That's the easiest way to target the kind of return levels everybody wants.
T is for test ad. Test ads are very, very important. If you're going to buy a mobile home park, you want to run a test ad to see if there's any demand for that park. And if the phone doesn't ring a lot, don't buy it. We typically run an ad in the largest Metro paper and we also run one ad on Craigslist. 10 day run. We're trying to find at least 20 unique calls. Not one caller who called 20 times but 20 individuals who call.
Typical industry norm is what's called the nine, three, one. Three calls is a showing. Three showings is a sale or rental. That means if you can score 20 calls in a 10 day run, that means you could move theoretically one home per week. And that's the kind of numbers most people want to be able to hit.
U is for undervalued. We find that true of almost all mobile home parks are all under valued from coast to coast. Why? Because mom-and-pops had been a terrible job of keeping the rents up to market. So there's all kinds of opportunity to raise rents, fill lots, cut costs. If it wasn't for the undervalue of most mobile home parks, we wouldn't be as big a buyer as we are. No one would recommend that you be one either.
V is for Vukovich, our favorite loan broker. MJ Vukovich, over there at Bellwether. We love loan brokers. Why? They make life so easy. They go out and get the loan for you. They typically charge one point for doing so. They'll get a better loan than you ever will at better interest rates. So we love brokers and our favorite one is MJ Vukovich. So I had to put him in there as the V.
W is for Warren Buffet, probably the most high profile person in the industry. Warren Buffet bought Clayton Homes back in about 2003. He also bought 21st Mortgage and Vanderbilt. That makes him now the largest manufacturer and load servicer of mobile home parks in the United States. We love having a name as big as Warren Buffet in our industry. So W definitely goes for Warren Buffet.
X is tough, but I'm going to go with xeriscaping because in parts of America, the mobile home parks don't look like what I'm used to. When I go out West, I don't see green, luscious yards. I often see more of a primitive kind of desert look done with stones. It's still just as good. There's nothing wrong with it. It's just an entirely different look. Probably the best way to tell where you are with a mobile home park, if you were blindfolded and dropped in by a helicopter, is looking at the yards and the terrain. And in a lot of the Western terrain xeriscaping is the way to go.
Next is yield for Y. What is yield? Yield means basically lots of many things. It can be your cash on cash return, your cashflow return. It can be all kinds of stuff. It can be a ROI. It can be many things, but yield is basically like the report card that tells you how well your mobile home park is performing. And just like any other form of measure, it's very important that you watch that. You need to have a target of a yield and you want to make sure you're hitting it.
Finally, Z is for Zell. Sam Zell, the largest owner of mobile home parks in the US through his REIT called ELS. He's brought infinite credibility to the industry. He got in the industry about the same time that Dave and I did, but obviously in a much, much larger way.
He was in fact the largest owner of apartments and office buildings in the US prior to starting to buy mobile home parks. He sold out about half of his office and about half of his apartments, but he has never sold a single mobile home park. He's nabbed about 160,000 lots. So we're certainly glad he's in our industry and he gives it lots and lots of credibility.
All right, well that's the A to Z of mobile home park investing. Hope you enjoyed this. We'll be back again next week.