April 23, 2024
Cashing in on the Mobile Home Park Niche with Walter Johnson's Insights
Walter Johnson breaks down the opportunities in Mobile Home Parks. He is an active investor / syndicator with 16+ years of experience. Walter unlocks the secrets to making substantial profits in mobile home park investments. We break down the nuts and bolts of raising capital, implementing infrastructure improvements, and why these investments go beyond mere property transactions.
The Real Estate Explainer podcast is produced and hosted by Brian Kiczula. Brian has been helping real estate investors navigate the changing real estate markets since 2002. Brian is a licensed Real Estate Broker and Cost Segregation Specialist. The podcast features interviews with real estate industry professionals in niche markets across the United States.
Discussion points:
- Structuring Mobile Home Park deals
- What to look out for
- Value adds
- Holding periods
- Finding off market deals
- Ideal Purchase Price
- Ideal number of home sites
- Change of use
- Challenges in the market
- Owner financing
- Success
- Structuring leases
- Tiny Homes
- Sonos Capital
Chapters
00:00 - Real Estate Investing in Mobile Parks
09:23 - Investing in Mobile Home Parks
16:34 - Real Estate Investment Strategy Discussion
21:13 - Investing in Mobile Home Communities
Transcript
WEBVTT
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Welcome to the Real Estate Explainer podcast, where we talk about anything and everything real estate.
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I'm your host, brian Kixler.
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Take notes.
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Today, walter Johnson is going to be talking about what he looks for when acquiring mobile home communities across the United States.
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Walter, thanks for jumping on the podcast with me today.
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Mobile home parks are an interesting asset class.
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Your niche is acquiring mobile home communities across the United States.
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As a cost segregation specialist, I did, I would say, between 10 to 15 studies on mobile homes last year or mobile home parks last year.
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I also did a handful of RV parks.
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I've got an RV park that I'm going to be doing a study on next week in Texas and from a depreciation standpoint, they are an amazing opportunity for accelerating depreciation.
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What do you really see the opportunities in mobile home parks right now?
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We look for mismanaged parks, we look for inefficiencies in parks, and I would say the word I'm looking for kind of lack for better words right now is actually we look for some hair on our real estate deal.
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And what I mean by hair we look for look.
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Can we fill in homes?
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Can we actually increase risk?
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Can we decrease expenses?
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Can we put in our own management to actually run that park?
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So when you're buying a mobile home park, you're buying real estate but you're buying a business as well.
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So I think that's actually what we're looking for.
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You're looking for a business that's maybe a little bit mismanaged.
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They haven't done the correct marketing on the property.
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They haven't kept up with maintenance there's going to be deferred maintenance in the community and you're looking in and doing value adds.
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You're looking at value add communities.
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That is correct.
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A hundred percent yes.
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When you're coming in, are you looking at and when you're raising capital to acquire these properties, are you building that into your deal structure?
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Are you saying, okay, we're going to acquire a park for $3 million, we know we're going to have to bring in $500,000 to upgrade the infrastructure, maybe put a new signage, landscaping.
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Are you building that into your initial numbers?
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Yes, we are Absolutely yes.
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All right.
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So what are some of the things that you're looking at, the value adds that you're looking at doing when you're coming in?
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Is it strictly cosmetic, meaning landscaping, signage, maybe resurfacing the roads?
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Are you doing other heavy lifting items, such as upgrading the septic?
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Just some of the larger ticket items, right?
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Both actually.
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So when you look at a park, I would.
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My assumption is that everyone wants to actually live in a good, clean, quality place.
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That's my assumption.
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So we go into a park and we look at it saying, yes, we actually want to provide, maybe repave the roads, put new landscaping, in signages because a lot of parks actually don't have signages and we necessarily upgrade the sewer systems or septics because we usually look for public utilities.
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I live here in Florida, I'm in Sarasota.
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A lot of the communities, these older communities that are built in the 50s and 60s, they're on septic and it's one of these things that is it's a, it's a.
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It's a huge expense or it can be a big problem, especially when it comes to quality of life for your tenants that are in these, that are in these communities.
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Is that a hard no for you?
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A?
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pass on a park?
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No, not at all.
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I actually had a park where it had private utilities and I was actually telling someone like two nights ago about this, to where the subject tank actually flooded and there was actually like sewer water on the street, so it was I don't like sick.
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We had six streets or something like that.
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it was pretty big park, but no that sounds horrible yeah, no, and then 80 like adeq federal kind of government actually came down.
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I don't know how they got involved, but that's actually happened.
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But we cleaned it up, they tested us, we got flying colors, they lobbed us after that.
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So when you go into these communities and you're doing the value ads, you're stabilizing the rents, you're bringing in new tenants.
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How long is your typical hold period?
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How long are you planning on holding these assets?
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Years, yeah, it's years.
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It took years, and then even if you sell the property, do you maintain management in that same community thereafter, or do you take your management with you.
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Yeah, we take our management.
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Usually the management is actually on site at the property.
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Usually there's a property management that lives at the park property.
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Okay, there's your animativeness person that lives on site so so you're basically, it sounds to me like buying properties that are undervalued, possibly mismanaged, going and doing the value ads, stabilizing their rents, improving the property, holding it on, holding onto it for a number of years and then possibly reselling it as a retail property to another set of investors down the road Right absolutely Does that sound like kind of the business model that you're operating in.
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All right, very interesting.
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How do you find these deals?
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How do you find a park that's primed to be sold, because you're probably not pulling it off LoopNet or another commercial space and buying at retail?
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No, not at all.
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So I look at those sites just for what's going on in the retail market, but I don't buy anything and no, I go directly towards sellers and owners of parks.
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So are you then cold calling, sending mailers, mailers, yeah, cold calling, sending mailers, yeah.
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So you're finding other ways to reach out to community owners to see if you can make the acquisition?
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Yes, and are you part of and I don't know, are there associations that you're a part of, whether they're local, regional or nationally, that you join with other park owners?
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So you're going to the conventions, you're meeting them and you're coming across opportunities that way.
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Yes and no.
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So I'm actually a board member of Manufactured Housing Community of Arizona, so I don't.
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I'm in the city of Mesa in their affordable housing manufactured housing division as well, so I don't get to go do the cool stuff like meet and greets.
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I actually have to do that a lot I don't know how cool that sounds.
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Man right, I actually have a lot of life, work behind the scenes to yeah, yeah, yeah.
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Are there deals in those associations?
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Yes, but no, yeah, I would say a lot of the good deals to be had don't actually hit the mark so they're never going on the market.
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So you really have to do the boots on the ground, the networking, make the phone calls to the sellers, let them know that you're in the market, you're able to make the transaction once they're ready to sell.
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I imagine some of these deals can stretch out for years, because you're probably coming across donors that they're totally happy with the way things are going right now, but maybe five years down the road there's a change of circumstance and they're ready to make the transition.
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Yes, and that's why you actually just have to keep your fillers out there and you have to do it yourself is because when people sell a property, they want to sell to a person that's actually going to take over the property and do a good deed.
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And I think that's when you talk to sellers.
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That's what they want.
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They held it for decades and they just want to put it in buyers hands and that buyer they want to know what that buyer actually has good intentions.
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Yeah, and I've heard that from multiple investors, different investors and different classes, whether it's uh apartment complexes or it's storage facilities or small uh retail or warehouse space, a lot of these owners occupy the properties.
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Maybe they live on site or, in your case, a mobile home community, they were the manager.
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That's certainly the case with some of the RV parks that I've worked or done transactions with, and then storage facilities, the owner has been the operator for you said, decades.
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They've been there.
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So when they're ready to sell, they want to make been there.
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So when they're ready to sell, they want to make sure that the individual that they're selling to is going to do a good job and make sure that their existing tenants are taken care of.
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Just, I completely see that.
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Yeah, we're buying parks and we're making money and that's great, but at the end of the day, we're still in a people business and you get I wouldn't, I don't know, I never got close to any tenants but you get some of these tenants or residents and you want to make sure that they're actually taken care of as well.
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That's what's been my experience with dealing with.
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I'd like to thank today's sponsor, costsegrx, a cost segregation company.
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If you're interested in a cost segregation study, log on to realestateexplainercom and click the cost segregation link at the top of the page and then, when you're looking to acquire a community, what's the average purchase price?
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What purchase price are you looking at?
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We go from $2 million to $29 million.
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So $2 to $30 million is what you're looking at.
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And then what's the sweet spot when it comes to not necessarily the dollar amount of a park, the number of units, so the number of tenants that are going to be in that community.
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Do you want to go buy something that's got 10 tenants or are you looking at something that has 100?
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What's kind of the, what's the magic number that you're usually going after?
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If it's in a good area, I would say 30 is probably the bare minimum, but so I would say 30 to 700.
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So 30 is the bare minimum.
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Is that just because of the cost to manage it?
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Yeah, scalability, but if it's 30 and it's actually, let's just say, like Texas or Austin, texas, then it's 30, or Denver, colorado, that's a prime location, so you can actually do something good with 30 spaces, but after that, no, if it's a normal park, we're looking at 80 spaces, or?
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above economy to scale.
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You can't go in and drop a half a million dollars on a community that's got 15, 15 sites.
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It just wouldn't make sense, especially if there's any major site improvements that you've got to do.
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So absolutely, and one of the things that a lot of investors, especially in the commercial space, look for is just additional opportunities on the site.
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Do you look at increasing the number of sites or a number of so?
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You're not looking at doing that.
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You're also probably not looking at, uh, converting any of the rv parks into different uses maybe we're.
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We were looking at one in northern arizona.
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It's rv space.
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We're actually looking at park clean park models in, so we do look at that, but it's I think it's 90 spaces or something like that.
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And that's already.
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That's a very similar business model.
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So you're not taking it from an RV or a mobile home site and adapting the land use to condos, pulling everybody out and building a condo facility.
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I know some of the communities, especially in Florida.
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They are on prime real estate and some of the best locations just because they were built so long ago and literally the communities have been built up around them and I think that there's just an amazing opportunity to take some of these old mobile home communities and repurpose the land, bring in a developer and convert it into a shopping center or condos or a high-rise, and that's going to be unique to the individual market and the property.
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But that's a totally different type of business model.
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So what are some of the challenges that you see or that you come across when you're looking at purchasing these communities?
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I think right now prices are high.
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I think sellers are actually coming down to reality.
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But there was a time to where you could put a park on the market at three cap and it would sell.
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I think those days are done.
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I wouldn't say there's any challenges.
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It's just finding the deal to where the actual owners are realistic with their pricing.
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And then how are you structuring the financing on them?
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Right now, interest rates are.
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It's not a favorable market.
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Are you seeing owner financing that helps out, or are you taking bank financing on these deals?
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Or is it you're?
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raising the capital and it's cash.
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Yeah, both, or I would say all three.
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So one we're looking at for 3.6 or something.
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So that'll be all.
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Cash Bank financing is not favorable right now.
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I think you know sort of park is probably the mid-sadness, but 35% down that's actually a lot of money.
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So I think a lot of sellers actually are more inclined to actually do seller financing with 5, 10, 15, 20% down.
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So I think seller finance is actually the key.
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And then how do you structure those deals?
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Are they holding on to the note for, let's say, five years, five year prepay?
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Do they structure prepays and then balloon payments?
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Or is it a five-year deal, interest only, and then at the end of the five years it's a balloon, you bring in the cash.
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Yeah, we usually do five, seven or 10 years.
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We usually don't do a P and I principal interest.
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We just do interest only because, yeah, they get the actual income if it's principal interest.
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But that comes to us in terms of balance reduction but I think they're actually okay with interest only.
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Okay and I want to repeat that.
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So you said it's seller financing 10 to 15% down and you're looking at five, seven or 10 years interest only, and then what are the ballpark rates on that?
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Five, 6%.
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So five or 6%.
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So that's awesome Because if you're looking at a hard money deal, you're going to get crushed on the rates.
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If you're looking at traditional financing, like you just said, you're 35% down plus the 7%.
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It's going to be hard to make it pencil Because, like you said, you're not just buying, you're not just buying real estate, you're buying the whole business.
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So you have to make that business work.
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It's just got a cash flow so that you can pay to properly manage it and take care of it and bring in the improvements that you need.
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Yeah, no, absolutely Brian.
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If you had a piece of property you wanted to sell because you hung on for it for a while and I said, hey, what about I give you a million dollars for your down payment, so you have a million dollars more than what you had yesterday, and then I give you income per month equivalent to what you were actually receiving on that property, you probably would take it.
00:14:51.120 --> 00:14:53.734
Yeah, I think I would take that Best of both worlds.
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Yeah, people get tired.
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There's deals to be had, but you're dealing with business and parks and people get tired and they still want to generate some income and have some money in the bank, and so that's what we're able to provide.
00:15:08.231 --> 00:15:09.696
So what are some of the biggest?
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I don't know if you, because I didn't prep you for this.
00:15:11.961 --> 00:15:14.077
I don't know if you pull it out of the air, but I'll try you.
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What's one of the biggest successes you've had when it comes to acquiring and then possibly selling a property down the road?
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I think the biggest success is probably when you buy it, because when you buy, you're like, hey, I actually made a million dollars today, right, because when you close because usually we buy parts that are undervalued, but when we actually look at parts, when we close out of Scrooge, we actually make millions of dollars, that's true, but when we actually sell, we have to find something else to do.
00:15:47.163 --> 00:15:52.100
I think the biggest successes are when we buy something, so it's acquiring the property.
00:15:52.490 --> 00:15:56.136
Yes, so that's an interesting and I think that's counterintuitive for a lot of investors.
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They say, hey, I'm really going to make my money when I sell this property.
00:15:59.553 --> 00:16:03.804
So they're looking at the end goal, maybe months or years and years down the road.
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But what you're saying is that's not it.
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You're making money when you buy the property.
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You're closing on the deal you acquired it.
00:16:10.000 --> 00:16:18.413
So that's the real success in your business model and I think actually not just yours but probably most real estate investors.
00:16:18.413 --> 00:16:30.312
They're making money when they acquire the property because they're buying it at a discounted rate and they know, based on their capabilities, they can drive the value of that property up.
00:16:30.312 --> 00:16:34.201
So selling it in the end is great as well, but it's that initial acquisition.
00:16:34.850 --> 00:16:53.000
Yeah, and when you raise rent, you actually, let's say, we raise rents in January or tax time April, and we raise it 25 bucks a month, not a lot of money, but when we actually do, we're like oh, by, let's say, we raise the rents by April 1st and then by May they're paying the new rent.
00:16:53.000 --> 00:16:59.802
We actually increased our portfolio or the value of that park, let's say, by 2 million, so that's actually pretty cool.
00:17:03.289 --> 00:17:05.896
Yeah, that's really cool, and especially if you're looking at all of a sudden it's a community, that's actually pretty cool.
00:17:05.896 --> 00:17:09.425
Yeah, it's really cool, and especially if you're looking at all the sudden it's a community that's 30 plus units, 100 units.
00:17:09.425 --> 00:17:21.617
All of a sudden that 25 or 50 a month, it really does make a big difference to the end value of the property 100 yes now, when you're structuring leases, are you doing, uh, long-term leases with your tenants?
00:17:21.617 --> 00:17:23.801
Are you writing month-to-month?
00:17:23.801 --> 00:17:24.824
Are you going annual?
00:17:24.824 --> 00:17:26.356
Are you doing multiple years?
00:17:27.391 --> 00:17:33.470
No, we usually do month-to-month, because we have some that are actually, if they don't pay rent, it's no pay, no stay.
00:17:33.470 --> 00:17:37.118
So we actually have to do evictions, but usually it's just month-to-month.
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They own their own home.
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It's pretty stable.
00:17:41.192 --> 00:17:42.114
So they own the property.
00:17:42.134 --> 00:17:46.162
Yeah, it's kind of usually like a single family home or apartment building.
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They're usually just one.
00:17:48.031 --> 00:17:48.753
And are you?
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Do you own any?
00:17:49.615 --> 00:17:54.493
I'm sure you actually own some of the homes that are in the community just by default.
00:17:54.493 --> 00:17:57.902
I know the the parks that I did last year when they took them over.
00:17:57.902 --> 00:18:01.599
They ended up with a handful of mobile homes that were on the.
00:18:01.599 --> 00:18:03.794
They were just on site, so they own those.
00:18:03.794 --> 00:18:06.781
Do you typically then rent those out or do you move those off?
00:18:07.810 --> 00:18:08.653
We rent them out.
00:18:08.653 --> 00:18:09.694
We're buying a park right now.
00:18:09.694 --> 00:18:11.861
I think it has 56 park-owned homes.
00:18:11.861 --> 00:18:12.663
That's a lot.
00:18:12.663 --> 00:18:15.240
We'll probably sell them or give them away.
00:18:15.240 --> 00:18:16.244
Or give them away.
00:18:16.244 --> 00:18:21.355
But give them, sell it for a thousand bucks, whatever they were, because that's not really your business model.
00:18:21.415 --> 00:18:22.436
It's renting the space.
00:18:22.436 --> 00:18:48.993
So you having the mobile homes on that property, while it could be considered a bonus, it may actually not be a bonus at all, because if they're not in good condition then you have to remove those so you could bring in another tenant and the cost associated with moving a mobile home um 20 grand you said 20 000, so 20 000 to remove that home from removing.
00:18:49.034 --> 00:18:53.523
No, yeah, so for a homeowner or for a residence, actually move it out of a park.
00:18:53.523 --> 00:18:59.450
It's like 20 grand these days for us actually demo, it is probably three grand right now okay.
00:18:59.569 --> 00:19:18.606
So it's cheaper for you just to go ahead and demo the property, haul it out there, than it is to move it to a different park or and that's why you said when give it away it's because it makes sense for you to give it away or to sell it for a couple of thousand dollars instead of moving it for 20 or demoing it for $3,000.
00:19:18.606 --> 00:19:20.010
Right, yeah, all right yeah.
00:19:20.010 --> 00:19:23.751
That's an interesting piece of the business that I would have never even thought of.
00:19:23.751 --> 00:19:33.943
I would have thought that acquiring a park that had mobile homes that you're renting out would be a plus, but I can definitely see how that could be a negative.
00:19:33.943 --> 00:19:46.563
And when you're acquiring a property, like you said, that's got 56 homes on it, you really have to look at the condition or the quality of those homes and negotiate that into the purchase price quarterly.
00:19:47.164 --> 00:19:53.240
Yeah, and your property insurance and your liability and the hot water in the refrigerator goes out.
00:19:53.240 --> 00:19:54.864
That's your responsibility.
00:19:54.864 --> 00:20:00.682
We work hard, but we actually don't work that hard on owning mobile homes.
00:20:01.112 --> 00:20:01.574
Yeah, I get it.
00:20:01.574 --> 00:20:02.577
It's a different business model.
00:20:02.577 --> 00:20:13.599
It's like being a commercial real estate investor and you're going for triple net properties because you don't want to deal with the day-to-day maintenance of the individual units.
00:20:13.869 --> 00:20:15.756
Yeah, I remember one park we actually had.
00:20:15.756 --> 00:20:16.720
What was it?
00:20:16.720 --> 00:20:26.061
They were actually cooking and then the kitchen caught on fire and then it caught the next home over their house on fire as well.
00:20:26.061 --> 00:20:27.375
We actually own them.
00:20:27.375 --> 00:20:33.884
So just imagine the insurance and the cost and yeah, it was, it was not pretty.
00:20:34.325 --> 00:20:38.998
Yeah, you're not looking to be a landlord in that sense, no, just a different added responsibility.
00:20:38.998 --> 00:20:40.355
How about tiny homes?
00:20:40.355 --> 00:20:42.651
Have you ever ventured into the tiny home market, have you?
00:20:42.852 --> 00:20:44.557
I know they're popping up here in Florida.
00:20:44.557 --> 00:20:45.800
They actually are.
00:20:45.800 --> 00:20:46.583
They're RVs.
00:20:46.583 --> 00:20:47.003
Actually.
00:20:47.003 --> 00:20:49.394
They have financing.
00:20:49.394 --> 00:20:52.480
I guess the financing in the base of Gladham is RVs.
00:20:52.480 --> 00:20:53.442
So no, I haven't looked.
00:20:54.530 --> 00:20:55.373
Okay, interesting.
00:20:55.373 --> 00:21:01.277
Well, I guess what I meant specifically in your scenario is buying a park that's specific to tiny homes.
00:21:01.277 --> 00:21:02.820
But you just answered the question.
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