Brandon: This is the BiggerPockets podcast Show 262.
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“Folks generally don’t move the mobile homes. It costs, call it $4000-$6000, to move a mobile home so they’re not likely to do that. So you have very stable tenants. The tenants own these homes and because of the cost to move them, they stay a really long time. So your turnover costs are lower, your revenue is a bit higher because you have less vacancy”.
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Brandon: What is going on, everyone? My name is Brandon, your host today of the BiggerPockets podcast, here with my wonderful, fantastic, amazing co-host, Mindy L. Jensen. Is that really your middle name? I just made that up.
Mindy: No. S.
Brandon: Dangit. Aw.
Mindy: Mindy Sue.
Brandon: Aw, Mindy Sue. That’s actually like a name. We should call you Mindy Sue.
Mindy: That’s a name? That’s not a name. There isn’t one person on the planet named Mindy Sue as like one word.
Brandon: Mindy Sue sounds like you’re like, I don’t know, you live out in the country and you’re like a country bumpkin and you’ve got freckles or something. I don’t know. What’s up, Mindy Sue?
Mindy: I do have freckles. That is the only part of that that is true.
Brandon: You need pigtails and overalls. That would make it complete. Anyways, real estate.
Mindy: I am slightly too old for that. Yes, let’s talk about real estate instead.
Brandon: All right, so welcome to the podcast, guys. Today, Josh is not here, as you can tell by the higher feminine voice of Mindy. And so—
Mindy: He might be higher.
Brandon: Slightly higher. He missed out, though, because today’s episode is one of my favorites. I know we probably say it all the time. But for personal reasons, this show is one of my favorites. You know, we talk a lot about mobile home parks today, which I am a big fan of. Mindy, do you know why?
Mindy: Is it because you’re buying a mobile home park in Maine?
Brandon: I totally am buying a mobile home park. However, listen guys, if you are not into mobile home parks, that’s okay because today’s show, like almost everything can apply to not-mobile home parks as well. We talk about landlording. We talk about finding deals. We talk about developing relationships, growing your team, raising a fund, which is a fascinating topic that we’ve never talked about on the show before but how to actually build a fund to go out and buy lots of deals, which is really cool.
Mindy: This was a really great show. I learned so much, not only because I am also buying a mobile home park.
Brandon: Yes you are.
Mindy: By the time this episode airs, we should be closed on our joint venture mobile home park in the great state of Maine.
Brandon: That is true.
Mindy: Do we want to say it’s a three-way venture? Yeah, we mentioned Ryan. It is a—I don’t know, three-way sounds weird. It is a tri-venture.
Brandon: Me and Mindy—
Mindy: A tri-partnership.
Brandon: Well, and Carl. Carl and Heather. We can call it a five-way partnership. But either way. Mindy, we did not actually talk about that show because I didn’t know if Mindy wanted me to publicly talk about it, but yeah, Mindy is actually partnering with me on the mobile home that I’m buying. So Mindy, this was a good episode for you and I to do together. I’m glad that you were able to be here.
Mindy: I am, too. I’m really glad that Josh is a slacker and off playing hooky or whatever he is doing.
Mindy: Gallivanting! That was the word I was thinking of in my head.
Brandon: I understand.
Mindy: When I was waiting to do this with you.
Brandon: That’s because we’re partners now so we have the same mind. That’s how it works.
Mindy: Oh, look at that. I see you. Eye to eye.
Brandon: Okay. All right, anyways. So today’s guest—we’ll get to that in just a minute. But before we do, I believe Mindy, you have a Quick Tip today.
Mindy: I do. So I spend all day, every day, on the BiggerPockets forums and I get a lot of messages from people who say, oh, I’ve been listening to the podcast for decades but I didn’t know you had a website or a blog or whatever. So today’s Quick Tip is, do you know that BiggerPockets has a blog? The podcast only comes out once a week but we publish three to four articles on the blog every single day. Three to four.
Brandon: That is a lot. And sometimes they’re Mindy’s and sometimes they’re mine.
Mindy: Sometimes they’re Mindy’s. Sometimes they’re Brandon. Sometimes they’re written by people who know what they’re talking about.
Brandon: That’s true. Sometimes.
Mindy: In fact, they are written by investors who are out there in the investing world every day. You can learn from their experiences rather than from the school of hard knocks. I am a graduate of the school of hard knocks, let me tell you. The lessons stick with you but they really hurt to learn.
Brandon: That, they do.
Mindy: So you can go to the BiggerPockets blog at BiggerPockets.com/RENewsBlog.
Brandon: Do you know you can also just go to /blog, FYI. That’ll redirect there. Just /blog.
Brandon: You didn’t know that. Yeah, now you know.
Mindy: Oh, my goodness.
Brandon: The more you know.
Mindy: Bonus Quick Tip.
Brandon: Yeah, bonus Quick Tip. All right.
Mindy: So, BiggerPockets.com/blog. If you go to ‘blogs’, those are member-written blogs. Yes, we’re talking about the main BiggerPockets Blog, which has—what are we up to, like 9,000 articles? Another thing I hear all the time is oh, I can’t get enough of the BiggerPockets podcast. Totally understand you. This, you can learn more about real estate investing reading that blog than you can just about any other place. Except, of course, the podcast.
Brandon: That’s true.
Mindy: Which is what we’re doing right now.
Brandon: Well, good job, Mindy. Nice job on the not-so-Quick Tip today.
Mindy: Not-so-Quick Tip. No. If you want the long story even longer, have Mindy tell it.
Brandon: All right. So let’s move on and hear a quick word from today’s show sponsor.
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All right, big thanks to our sponsors always that you guys keep the show on the air, so sponsors, keep it up. You guys rock.
Mindy: Thank you.
Brandon: All right. And of course, listeners, check out the sponsors’ stuff. I mean, like, it’s not like we would have anybody be a sponsor to our show that we don’t believe in. And so, we actually believe in these sponsors who sponsor the BiggerPockets podcast. So, check them out and with that—actually, you know what, before we introduce our guest, I want to say something cool. We are recording this episode—I know, I don’t say things very cool—
Mindy: I want to say something cool.
Brandon: No, you’re going to like this, Mindy. So we are recording this episode, actually even before Christmas, technically. But this comes out here in the middle of January. So by the time you’ve listened to us, we have actually launched another podcast at BiggerPockets and it is a podcast hosted by Mindy. Mindy Jensen here. You have your own podcast with Scott Trench. So tell us real quick—you’ve got eight seconds to tell us. Go. I’m timing you.
Mindy: Eight seconds? Oh, my goodness. So, one of the most popular questions is—
Brandon: All right. You’re up.
Mindy: My goodness, stop, Brandon.
Brandon: You’ve got eight more. Go.
Mindy: Yeah, okay. One of the most frequently asked questions in the BiggerPockets forums at BiggerPockets.com/forums—
Brandon: It sounded like you said BeggarPockets which is an interesting title of a site as well. But anyways, keep going.
Mindy: Wow, shush. This is my time, not yours. If I recall correctly, you dominate the first part of the podcast with all of your questions.
Brandon: I do. A massive chunk of it. Okay yes, go ahead. Go ahead.
Mindy: Shh. Okay, so one of the most frequently asked questions in the BiggerPockets forums is how do I get started investing in real estate with no money and bad credit? And while you, Mr. Brandon Turner, wrote a delightful book called The Book on Investing in Real Estate with Low or No Money Down, I don’t think that it’s a really great idea to start investing in real estate if you have absolutely no money and terrible credit.
So Scott and I are personally involved in the personal finance community. We’re really passionate about teaching people about their finances so we decided let’s start a podcast called BiggerPockets Money and we’re going to teach you how to get your money all fixed. We had an amazing first guest, Mr. Money Mustache was on Episode 1 of the BiggerPockets Money show, which launched on January 1st and I’m really looking forward to what’s coming up in the future. We’ve recorded several shows in advance and we’re going to teach you about budgeting. We’re going to teach you about controlling all the aspects of your finances so you can get your financial house in order and start building your financial future.
Mindy: Way longer than eight seconds.
Brandon: That was a lot longer so for the people who are still here, let’s get to today’s show actually because your show is fantastic and Mr. Money Mustache is one of my favorite people in the planet. So go listen to those episodes if you have not yet. You can get to it by going to BiggerPockets.com/
Mindy: It’s The BiggerPockets Money Show.
Brandon: Okay, so BiggerPockets.com/MoneyShow. There we go.
Mindy: You can get to it by going to BiggerPockets.com/MoneyShow.
Brandon: All right. So today’s show is amazing, like we said. We’re actually bringing on a repeat guest. His name is Jefferson Lilly. He’s actually the original inspiration for me wanting to get into mobile home parks, which is now, me and Mindy have bought one which is awesome. And we dive into a lot of stuff like I said earlier, but Jefferson is just crushing it. He and his partner bought, what, 2600 pads right now. Like mobile home spaces.
Mindy: Something crazy like that including one that’s 500 lots in one park.
Brandon: Yeah, it’s crazy.
Mindy: No, that’s two parks.
Brandon: It’s two parks, yeah, but still. It’s insane.
Mindy: Two parks right next to each other. It’s crazy.
Brandon: Yeah, and again, this applies to anybody whether or not you’re looking at mobile home parks or multi-family or commercial or whatever, this stuff applies to all of that so, without further ado, this being the longest introduction in BiggerPockets introduction history, let’s get to today’s show.
All right, Mr. Jefferson Lilly, welcome back to the BiggerPockets podcast. It’s been a while. How are you doing?
Jefferson: Thank you, Brandon. It is great to be back.
Brandon: Yeah, well today we don’t have Josh with so you can’t make fun of him like last time but you know, we’ve got Mindy here.
Mindy: Feel free to make fun of Brandon as much as you’d like.
Brandon: He can. He can. So interesting back story, when you were on the show back—what was it, February of?
Jefferson: February of ’15, I think. Yeah.
Brandon: So you came on to talk about mobile home parks and I had never known anybody who had ever done a mobile home park before and I was like, man, that sounds cool. And over the next couple of years, we interviewed a couple more people who do mobile home parks and every time, I’d be like, man, that sounds cool. So in like three weeks, I’m closing on my very first mobile home park.
Jefferson: Man, that’s cool.
Brandon: Yeah, that does sound cool. So now I get to find out if you were just full of it or it really is cool.
Jefferson: We’ve got you drinking the Kool-Aid, Brandon.
Brandon: That, you do. So thank you for the original inspiration to the mobile home park thing. And now, today’s show, selfishly I get to pick your brain on how to make this actually a profitable investment. So that’ll be fun.
Jefferson: There you go. Yeah, that’s fine.
Brandon: Yeah, good.
Jefferson: Tell me about it. How many pads? Is it city water? It is city sewer? And tell me you didn’t buy in Maine. That’s the one state—
Brandon: You heard.
Jefferson: Tell me, where’s your park at?
Brandon: Yes, it is in Maine. And yes, I know Mindy must have told you that. So yeah, it is a 46-spot park, city sewer and pad park. Pad spot, whatever. It is city water, sewer, and garbage. It’s also separately metered so all of the tenants just got shifted over to doing their own utilities. I’d say that it sounds like about half of them have done this shift but they’ve all be converted so the other half, I need to convert over. Half of them are park-owned. The other half are currently tenant-rented. So, park-owned and resident-owned. And yeah, we bought it for $1.1 million and the guy carried 80% of the thing with seller financing on a 25-year, no balloon payment, 5% interest. So that’s how everything worked out.
Jefferson: Nice. That sounds like a great park and certainly a great first park.
Brandon: Yeah, it’s a manageable size and the numbers look solid especially, there’s like eight units that are vacant right now or I think it’s like four pads empty and four houses empty. So once we get all of that up and running, it should be a really good park. I think I projected like a 20something percent cash on cash return each year once it’s up and running. So it feels pretty good there. Anyway.
Jefferson: Good for you. How’d you find it?
Brandon: Actually, telling every single person on earth that I was looking for one. And then my buddy Ryan Murdoch, who was on the BiggerPockets podcast, he actually got the lead from somebody he had bought a house from before or a property before and he hit me up and we ended up doing it that way. And Ryan’s actually being a partner in the deal.
Jefferson: Oh, great.
Brandon: And I’m bringing in another partner as well, another money partner who is actually going to be funding the money side or at least a good chunk of the money side of it. All in all, worked out really, really nice. At least I hope so. So anyway, enough about me. This is not about my interview but yeah, before we go even any further, a lot of people are like, mobile home parks. Come on. I don’t want a trailer park. That’s considered investing in a mobile home park.
Mindy: So I want to jump in and say that before we ask Jefferson, let’s remind everybody that Jefferson was on BiggerPockets podcast Episode 111 so you can get there by going to BiggerPockets.com/Show111. Now, Jefferson, I listened to your show on the way in today and yeah, why would anybody want to buy a mobile home park? That’s where all—
Brandon: The riff raff.
Mindy: That’s a great word. That’s where all the riff raff lives.
Jefferson: Yeah, so you know, there are a couple of reasons. First off, mobile home parks do get, I think, an undeservedly bad rap, sure. There are some bad mobile home parks but frankly, there are some bad regular neighborhoods with site built homes. There are some bad apartments. I don’t think it’s particularly worse in mobile home parks. It’s just that for whatever reason, that seems to be all that the media covers is the bad news coming out of a small number of mobile home parks.
It’s just not news to send a reporter into a mobile home park and say, you know, like hey, everyone paid their rent this month and the kids down the street are playing in their tricycles and the lady’s planting pogonias there in front of her mobile home. That’s never going to leave this park. Okay, back to you for the ten o’clock news. That’s not newsworthy but that’s the reality for 99% of mobile home parks 99% of the time.
So just the fact that they have a bad reputation means the smart money is not chasing these. So right there, when you don't have a huge number of buyers, probably the pricing is relatively low. So that's one reason right there. Another reason is the repair and maintenance. Brandon, as you said, you've got a park with at least half resident-owned homes. I would encourage you for the other half to put those on rent-to-own agreements, basically backpedal out of those homes. You probably don't have to sell them at a great loss but you don't really make a lot of money in the homes and repairing all the proverbial leaky toilets and leaky roofs.
So once you get down to what we call really just a parking lot where you don't own any of the homes, first you help deserving folks become home owners and that's a good thing, but secondly, they're then taking care of all the proverbial leaky toilets and leaky roofs. Lo and behold, when you give a renter a pass towards home ownership and they again become a homeowner, they don't treat it like a renter anymore. You're not somehow doing something evil, shifting all the repair and maintenance burden on it. It's just that the tenants take better care and if the leaky toilet flap for $12 bucks, they can be repaired, they're going to go buy that flap at the hardware store and repair it. It would cost you, the landlord, $120 bucks to send in the plumber to do it.
Anyways, so the repair and maintenance costs are dramatically lower. You just maintain the land, which basically means mowing and snow shoveling for you up in Maine. It’ll be snow shoveling, Brandon. And some sewer unstops. But it’s not that expensive to maintain the land, probably 60-80% of most repair and maintenance budgets safe for an apartment building, go into the improvements, what’s above the ground, not the ground itself. So repair and maintenance budget is low.
And then thirdly, folks generally don’t move the mobile homes. It costs, call it what $4000-$6000 to move a mobile home, so they’re not likely to do that. So you have very stable tenants. The tenants own these homes and because of the cost to move them, they stay a really long time. So your turnover costs are lower, your revenue’s a bit higher because you have less vacancy. So anyways, there’s three reasons right there.
Oh, I’ll throw in one more. The supply of mobile home parks is going away about 1% a year. It’s pretty much illegal to build these anymore and about 1% of the nation’s mobile home parks get plowed under every year. So again, the supply curb is shrinking. That’s a very different dynamic than say, apartment buildings or self-storage or any other real estate niche where they’re always building more. Only mobile home parks have a shrinking supply curb and all those homes have to go somewhere. All those tenants will infill into the remaining parks. Okay, I’m off my soapbox now. What’s your next question?
Mindy: Why are mobile home parks going away? Why are they getting plowed under? Is it just the land is so valuable?
Jefferson: That’s part of it but basically real estate is always being plowed under and put to some higher and better use. You see that, of course, even in Manhattan where they tear down fancy skyscrapers from the ‘30s and the ‘50s and they put in even bigger, even fancier skyscrapers. So that’s a constant that real estate is always being plowed under and developing into something else. It’s just that in pretty much every other niche of real estate, it’s still legal to build more self-storage, more single-family, more apartment.
But we touched on this earlier—because mobile home parks have such a bad reputation and because all those homes are not improvements to the land, those homes all have a title that trades through the DMV just like an automobile. A mobile home will have a VIN number, so it’s wheel estate, as we say. It’s not real estate. It’s wheel estate.
What that means is that there aren’t very many improvements to the land and that means your tax burden, what you pay in taxes, is relatively low and a lot of municipalities, of course, also funds, say the school system. And there are typically a lot of kids that live in mobile home parks other than say, some seniors parks in Florida. But in general, you tend to get a lot of families starting out, a lot of kids. That’s a burden on that local municipality and for it, they get relatively little tax revenue because there are no improvements to the land.
So anyways, so there’s several reasons there. The bad reputation, the low tax revenues, it’s basically been illegal to build a new mobile home park for the last 20 or 30 years. So the supply is not growing and then there’s the normal development of we guess about 1% of the parks every year. So that’s why the supply curb is shrinking.
Brandon: That makes perfect sense. I never thought of it that way, but it makes sense and people, like you said, as they shrink and the demand doesn’t seem to be getting any less anyway, especially if the economy does go down, we see a decrease. That’s actually one of my hopes is that people will shift down to mobile home parks. There’s really nowhere lower to go than maybe moving in with family.
Jefferson: Yeah, there’s some truth to that but again, once folks own their own homes, at least across our portfolio, we now own approximately 2300 pads, our average lot rent is a little over $300. That’s a fairly affordable number for people to pay every month, even in bad times. In our markets, on average, say most of our homes would be three bedrooms. A three-bedroom apartment would probably be $950, maybe $1000 in most of our markets. So we’re helping folks live for roughly a third of what it would otherwise cost them to live.
So yeah, some folks may move down but really, it’s just a great on-ramp for folks that you know, need an affordable housing solution, can’t afford a site to build a house. We’re their path to home ownership and again, once they own it, their lot rent typically isn’t but a fraction of what it would cost them to still be a renter.
Brandon: Yeah, that's something I like about it a lot is that, the problem with affordable housing all across America, and it's only getting worse as we become more and more like the European's model of real estate, it's just going to get worse and worse in my opinion. So like the whole gentrification issue and all that, people are like, the bottom half of the U.S. is losing their ability to afford a place to live. So I feel like that helps with the demand and it should continue to produce strong demands for these mobile home parks.
Jefferson: Someone wiser than I said, “The poor are always among us”.
Brandon: There you go.
Jefferson: There is always demand for affordable housing. Something like 30% of Americans have $30,000 or less household income and that’s really our target market.
Brandon: Yep, there you go. All right, so let’s talk about, because again this is a selfish show for me, transitioning these units. This half that I have that are not currently—there’s tenants. They’re paying, I think $650 a month for rent right now. Lot rent is around $300. They’re paying around $650 rent. I worry a little bit because all of a sudden, I look around that $650 number and then I look at it dropping down to $300 and I’m like, oh man, that kills a lot of my cash flow. Now, is it because I’m no longer doing the repairs and maintenance on that, that’s actually going to make up for that? Is that the idea?
Jefferson: Yeah. So factor in—do two separate P&Ls, one for the land, say your $300 lot rent, and all your land-related repair and maintenance. Run a separate P&L at your roughly $350 house rent and back out all your repair and maintenance there. And then also allocate in something for your time, Brandon, because unless you've already got a staff there, you're getting started out, you probably don't already have an asset manager and a bookkeeper and other people on your staff. If you do, more power to you. You can just expense their direct expenses into it.
But what I found when I got into this business, I basically was in a similar position to you. I was spending a lot of time. I was making money renting mobile homes but I was spending again, still a fair amount of repair and maintenance. Still, I was making money but I was spending so much of my personal time on it. If I had not rented homes, if I had just rent-to-owned the homes, I did both. I did anything for a buck. That was the way I got started. You want to buy a house, Jefferson’s got one for you. You want to rent? Jefferson’s got one for you.
But the rental tenants turn over a lot more. They’re a lot rougher on the house. You can go six months or a year and think, oh, renting’s the best thing? Then a renter is more likely to disappear in the middle of the night and you discover like, oh my gosh, there’s $4,000 damage here and you take that against your previous year’s rent to $350 a month, you haven’t made any money at all. You just won’t know that for a year or whenever they turn over. I’m not saying that folks that rent to own always leave a home immaculate if they don’t go through. We, of course, hope they all go through with their rent to own agreement but they don’t all.
But my experience has been, again, folks that put down more money—you’re probably going to want to take $1000-$3000 down payment on a house. Folks that can come up with that kind of money just tend to be better tenants. They’re more likely to go through and own the home. If they don’t, they’re more likely to leave it in better condition. So I would encourage you to only rent-to-own. Folks that are in there renting, just let them rent.
Don't evict. But maybe you present them with the following option. You say, hey, if you sign this document, and maybe for the folks that are there, it's nothing down, but you can say, hey, you can keep paying your $350 a month for the house. Again, sign the separate lease agreement for the $300 for the lot rent, but say hey, you can keep your house payment at $350 and if you sign this agreement and agree to rent to own it, you take care of all the maintenance, then I'm going to sell the house to you over three or five years. Depends on the age of the homes. I'm suspecting they're older homes.
Brandon: Yeah, ‘80s, I think.
Jefferson: So probably, you’d do those $350 a month for even two or three years. Or you can tell them, hey, if you really, really want to rent, that’s fine. I’ll keep maintaining your home but your house rent is now $450. They have to pay an extra hundred dollars a month if they want to keep renting because you are maintaining all the proverbial leaky toilets and leaky roofs. So I’d present them with that option, let them choose to become homeowners or remain renters at a higher price and you’ll naturally have turnovers of the renters no matter what you do with the rental rates. But anyway, then, going forward, you only rent-to-own those homes. You never take in another renter and your park will naturally evolve over the next two or three years to be a community of all resident owners.
Brandon: That’s cool. That’s exactly what I want to do. So can you explain the difference between why would I want to do a rent-to-own versus flat out seller financing or is that the same thing in this case because they’re DMV?
Jefferson: Same thing.
Brandon: Oh, it’s because they’re DMV-type vehicles.
Jefferson: Yeah, just for a 1980s home in our communities, these are probably metal metal homes as opposed to the newer ones which will be vinyl siding shingle roof and look more like a modern home. But yeah, for the classic 1980s metal metal, we’d probably sell those in our park with financing for about $4,000 or $5,000, say give me a $1,000 down and pay me that $350 a month maybe for the next couple of years. And then you’re still going to collect what, about $7,000 to $8,000 out of that house. Or pay me $5,000 cash and you just own it outright.
But yeah, that’s kind of the way we do it. Put up a website. Advertise on Craigslist. Advertise on Facebook. There’s probably a local whatever town this is in Maine, there’s probably a local yard sale community in Facebook that’ll pull. Probably advertise in the local newspaper. You’ll get those homes moved.
Brandon: I'm making notes right now. Okay, I've got to build a website. Because I just want—I'm across the country so one of the beauties is that when we put this deal together is that the guy who brought it to me, Ryan, lives in the town. He owns a bunch of real estate in the town, property manager in the town, so he's going to be the boots on the ground there. So I'm trying to think, how can I help? And I think I'll end up taking most of that. The website, the advertising, the pushing, that side of things, while he's there showing a unit and trying to collect rent when somebody doesn't pay rent on time. That's kind of how we're segmenting a little bit.
Jefferson: That makes perfect sense. That’s great that you’ve got somebody local and he can oversee the crews, because you will get some of the houses back trashed and you’re going to need to re-carpet. We prefer vinyl but refloor the houses, repaint, I mean he can be the guy getting a couple of competitive bids, overseeing the crew. Is he going to be on-site collecting rent or do you have an on-site manager for this part?
Brandon: So, there was an on-site manager. That person is leaving with the sale because she’s going with the owner’s other parks. I guess he’s got more. So we actually have to decide that. That’s a good topic of conversation. Do I bring in a resident manager now to live there, or do I just say you know what, I’ve got this guy, he can take care of it. We’ll just rent out that office unit as an actual house, make more money.
Jefferson: Yeah, there’s no need to dedicate a house to be an office. Yeah, so we always turn over houses to be just rent-to-own agreements. That’s right, rent-to-own homes. Frankly, we keep very—in this day and age, there’s even very little need for filing cabinets. We scan stuff and hoover it all up into Dropbox. Yeah, so I would turn over any “office” that’s a house on the property, turn that over to a rent-to-own unit. Frankly, even some of our parks have a site-built office, some little cinder block thing, and we’ll convert that into an apartment if we can. We don’t like to rent but that’s an improvement to the land so you can’t sell them off, just that little physical office that you would have to rent.
Yeah, so we’re always looking for revenue so I would put that back out into the rental pool, help some deserving family become a homeowner. Probably then, if your friend’s in the town, have him collect the rent. We install a rent box, just a big old metal, heavy-gauge steel rent box, typically sunk in a yard of concrete so no idiot can drive their truck into it and try and make off with all the money. But a big old “No cash” sign on that rent box. Only take checks or money order and then just have him go on-site several times the first week of every month, collect the rent, get them deposited.
And then there are some other solutions out there. We use Rent Manager now to manage all 2300 pads. That actually is a tenant portal, so if you want to get fancy and use Rent Manager, then your tenants can pay online right through that software package. So you still have to go on-site and pick up some physical checks but maybe you’ll see that you might start getting 25% of your money coming in electronically. That’s nice. And it integrates rate with Rent Manager that way so it kind of limits your bookkeeping a little. If somebody both deposits the money through the software and it automatically updates your accounting that they have paid so there’s no more reconciliation to do. Just a thought, Brandon.
Brandon: That makes sense. Yeah, what I'm using right now with my own rentals is—they're still around, I don't know if they're taking smaller clients like they did for me, I can't remember—but anyway, Pay Near Me, which is a company where all my tenants will go pay rent at 7-11 in cash. 7-11 then deposits it into my account and the tenant pays a $4.00 fee. It's been really, really fantastic for us with our lower-income tenants that we have in our apartments. So that's another option I'm going to look into.
Mindy: I thought I had read that that was a limit of a hundred units, like a minimum of a hundred units.
Brandon: I think that’s what I heard, too, is that they added a minimum, I think. Which before when I signed up—
Mindy: Unless you’re Brandon Turner.
Brandon: Unless you’re Brandon Turner. I think I signed up before they instituted that. They probably realized that one-off wasn’t real profitable for them.
Jefferson: No more Brandons.
Brandon: No more Brandons. I think I had like 50 at the time and it’s been fantastic. Half the tenants, like, they just don’t have checking accounts. I found out with low-income people that sometimes they just don’t have it, so they go to Wal-Mart and get a money order and they would drop it into a box. But then our box got broken into once. We didn’t lose anything. They just broke into it and realized there was no cash and then that was it. But I didn’t want that to ever happen again and so we switched it over and anyways, yeah, I’ll definitely be implementing that, online payments or Pay Near Me if I can. So that’s all good.
What else do I got for you picking your brain? Mindy, I’ve been hogging all the questions if you want to throw anything in there.
Mindy: You kind of have.
Brandon: I know
Mindy: It’s like you act like this is your show.
Brandon: This is not my show. This is clearly Mindy’s show but Mindy, I know you wrote down some questions here in our notes.
Mindy: I did write down some questions. So, my parents live in an RV and they travel around the country building churches. And when they’re at a church site, it’s through this big group and the church has to provide electric and sewer and water for each site when they’re on-site, but they’re not always on-site. It’s a really long story, but my dad had to go back to work for a few months and they parked their RV in a kind of a half and half RV and mobile home park. Do you have any mobile home parks where you allow the more—I don’t want to say transient, because it’s not really necessarily transient, but the RVs, the true RVs, not the mobile homes. Are there any benefits to that? Is that like a not-cool thing? That was a great question. So eloquently worded.
Jefferson: Well, Mindy, I won’t refer to your parents as transient.
Mindy: They are. They’re totally transient. They don’t even own a house anymore. They’ve owned the RV for like ten years and they love it.
Jefferson: There you go. That’s total freedom. That’s great. Okay, so RVs, as you know, have engines in them and as we say, those cash flows drive off whereas a mobile home is basically a giant box that gets permanently tied down to the land, big three-foot long oggers that go into the ground. It’s a permanent water, sewer, electric, and gas connection just like a real house. RVs are kind of plug and play, you just sort of plug in the water like a garden hose and you plug in the electric like a big old oven or something.
Anyways, when we see a park like that—we’ve got a great park in Superior, Wisconsin that came. It’s about 150 pads. There were about ten that had RVs in them. We didn’t assign as much value to those pads. We felt it was still a good deal, frankly, even if those ten RVs drove off the day after we closed. Fortunately, they didn’t. Some of them did and then some others came back and you know, a little give and take.
But yeah, that’s a big difference between say buying a pure RV park and this gets into issues of zoning and lot size. The lot sizes for RVs are often much smaller because RVs are smaller so you can’t always convert one into the other. Again, for zoning reasons and for reasons of physical infrastructure. That’s really a separate discussion. But we don’t like RV parks as much. Not because of the transients that come and go out of it. But we don’t like RV parks, again simply because those cash flows drive off and a lot of RV parks have people that are there for one night or two nights and they pay in cash and then who’s there to collect all the cash?
Mindy: That makes a lot of sense.
Jefferson: Owning an RV park is a perfect business for someone who like your folks might someday just want to retire, they could buy their own RV park, live in it in their RV and then they’re there every night to collect the cash, to collect the nightly payment. You know that all the revenues are getting in the bank. It’s a perfect sort of retiree business. It is harder to manage from a distance. And again, always, the cash flows are more transient so I would not pay the same price per pad for an RV park that I would pay for a mobile home park.
Again, a little different business. A little bit more like the hotel business versus the apartment business. That’s kind of the difference between RVs and mobile home parks. We like the more permanent cash flows. We like the mobile home park model. But you can generally put an RV on a mobile home pad and for instance, like that park in Superior, we have actually got more than ten RVs in there now.
So we didn’t pay for that. That’s basically free money to have some RVs move in for six months, whatever. We’re happy to have them. As they turn over, we’ll backfill with mobile homes that will be permanent cash flow. But right now, in the short run, sure, if somebody shows up with an RV and says hey, I want to pay your lot rent and hook up, yeah, we’re fine with that.
Mindy: Okay. How do you feel about the new fad of tiny houses? It’s not really so much “new” fad anymore. It’s a couple of months old but—I don’t know how I feel about that. I lived in an apartment with my husband when we were first married with 405 square feet. It was plenty of room for us, but these tiny houses are like 100 square feet. I don’t even, like how do you turn around? I’m not into that fad but if that’s your thing, I think it’s awesome.
So what is your opinion of the tiny houses and can you put tiny houses on a mobile home pad? I know people have a hard time finding places to park them. Can you double up on a mobile home lot and put two tiny houses there? How does that work that might solve your problem of those empty lots, Brandon?
Brandon: That was like 20 questions there, Mindy. I don’t know.
Jefferson: Boom boom. I just got hit by Mindy’s waves.
Brandon: It is the Mindy show.
Mindy: Brandon was hogging so much in the beginning.
Jefferson: Okay, so here’s a couple of things. So tiny homes are technically RVs. There are like wheels under there and they are not subject to HUD. Housing & Urban Development started regulating the construction of mobile homes in June of 1976 so everything since June of ’76 has to have more insulation, can’t have aluminum wiring, has to have copper wiring. And I’m not saying that tiny homes don’t have good insulation or have aluminum wiring, but my point is, for a mobile home to really be a legal mobile home and go into a mobile home park, it has to have been built since June of ’76 and it really has to be of a certain size.
Tiny homes get away from that regulation because they’re so small. I think it’s sort of anything under like 500 feet, HUD doesn’t regulate. So what you’ve got is a product that’s not legally a mobile home. Legally, it’s an RV. If your city and county is really strict, they may prevent tiny homes from coming in and because they’re an RV and a local government could say, oh, sorry, we don’t want transient RVs, you can only have mobile homes in your park. It’s rare that that gets enforced but just understand that could happen to you. You’d probably want to talk to a local city official if you’re thinking of growing a mobile home park with tiny homes. You want to make sure you can really do that because a tiny home is an RV.
Anyways, so the other issue, though—well, a couple there. You probably couldn’t put two on a single lot. That would typically violate zoning. You can only have one residence per lot in a mobile home, whatever it is, mobile home, RV, tiny home. You can only have one per lot. I’d be fairly certain most city and counties would start enforcing that if you brought in two or more on a lot.
Anyway, and the third thought that comes to mind is that tiny homes really appeal to a radically different customer than most mobile home park developers would. Most folks, again, we touched on, they’re going to be making $30,000-$35,000 a year in household income. A lot of them have kids. They’re just getting started out. There’s no way they could afford a tiny home. Many of them are $70,000-$100,000. And then furthermore, they’ve got two or three kids. The math just isn’t going to work in a 300-400 square foot footprint.
So we appeal to affordable housing customers. They make $30,000-$35,000 a year. They want to get a three-bedroom place, 1200 square feet for you know, $600, $700, maybe $800 a month. That’s going to be a very different market than tiny homes which tend to be driven more by retirees and specifically eco-conscious retirees that feel great guilt about their carbon footprint and what not.
Brandon: I think you’re looking for the word ‘millennials’.
Mindy: Hipsters, millennials.
Brandon: Hipsters and millennials.
Mindy: Yeah. I knew a guy who bought a tiny house and he did not live in it long.
Brandon: I’ve got a good friend that’s building them right now.
Jefferson: It tends to be more a coastal thing. You see tiny homes on both coasts. You don’t see them in Wichita, Kansas. The concept is unheard of.
Mindy: But there’s so much land in Wichita, Kansas.
Brandon: That’s funny.
Mindy: You don’t need those for tiny homes.
Brandon: One of my buddies is making a tiny home right now. Him and his wife, they’re like 23 years old. They absolutely love it. He built a rock wall on the outside of it so he could climb the rock wall around the house. But like they’re a young couple—
Jefferson: I’m sorry, like a climbing wall?
Brandon: Like a climbing wall, yeah. So anyway.
Jefferson: Okay, great. It’s their house.
Brandon: It’s their house, they can do whatever they want.
Jefferson: I just don’t expect seeing any in my parks.
Brandon: No, no. And the problem is that they actually have said, they can’t find a place to put the tiny home. Like, they’re like parked at some guy’s house right now but they’re not really supposed to be and they don’t have water, sewage, and garbage hookups so like they have to empty a bucket. It’s you know, like—
Jefferson: It’s not really a house. They’re living in a shed.
Brandon: They’ve got no running water.
Jefferson: So do they have to buy their own land?
Jefferson: You know, if they could get a half acre of land, improve it, put in a well, put in a septic and put their house on their own quarter or half acre of land, maybe that’s a solution for them.
Jefferson: Again, it’s a great concept but it’s not really a factor in at least the mobile home park world.
Brandon: Sure, that makes sense.
Mindy: I built a playhouse for my kids. There’s electric in there. I mean, there’s not electric in there. So if it’s under 120 square feet, you don’t have to have it inspected.
Mindy: It is a 118 square feet. And I feel okay putting electric in there because my father-in-law’s an electrician. For like a thousand years and actually he did it.
Brandon: When I’m in Denver, can I come hang out in your playhouse thingy?
Mindy: Yes, yes. It’s super cool.
Brandon: I’ll just hang out there.
Mindy: You don’t need a hotel. You could just stay in the playhouse. It might get chilly. I’ll give you a blanket.
Brandon: You’ve got a heater, I’ll just put a little space heater and electric blanket.
Mindy: There you go. Perfect.
Jefferson: Brandon, between Mindy and myself, if things get bad for you, you’ll always have a roof over your head. Don’t worry. Just call us.
Brandon: Thank you. So good to know. This is like the best show. All right, so let’s shift gears here. We talked a lot about mobile home parks but some people listening, they don’t really care about mobile home parks. But we do care about real estate investing as a whole. And so I want to talk about some of the things that will apply to any real estate investor, specifically a couple of things that you’re doing.
One, when we talked to you last time, you talked a lot about—you were building up your business. It was you and I think your partner and you were in there swinging in the trenches. Today, you’ve got kind of an operation going. I mean, you brought on team members and all that. That is something anybody, whether they’re looking for mobile homes or whatever, when they want to scale, you have to bring in people. So can you talk about that, what have you done in the last couple of years to scale? What’s the operation look like today and tell us about that.
Jefferson: Yeah, so when we got started, as I called it, it was mobile home park 1.0. It was Brad, my partner, and myself doing everything, our own bookkeeping, QuickBooks and spreadsheets, putting our own ads up on Craigslist to market the properties, answering many of the phone calls ourselves. We managed the properties.
We’ve now gotten to what we call mobile home park 2.0 where we’ve hired on folks that in turn do that. So Brad and I are managing, not the properties, we’re managing people that manage the properties. Some of our key hires and by the way, we made most of these key hires too late. We did not really hire ahead of the curve. That is my biggest point of advice to your listeners is hire ahead of the curve.
But we brought on a couple of key points here. A controller, a lady who’s been in the business of real estate accounting generally, not specifically mobile home parks. But she’s been doing real estate accounting for more than 20 years. And that’s more than enough experience. But we’ve got, again, an experienced controller, so she just makes sure the books are right. So for instance, we buy a park, okay.
What's our opening balance sheet? Some of that is non-depreciable land but some of it is depreciable pavement, water and sewer pipes, fencing, signage. This is your opening balance sheet. So all of that has to be logged in and then of course, that triggers the correct amount of depreciation. At least we believe it is now the correct amount of depreciation now that we've got her working for us.
She also just makes sure expenses are coded correctly so if I have to deal on a emergency basis with a vendor and buy $400 worth of pipes at Lowe’s out in Wichita. That shows up on my credit card. She’ll pick through the credit card and say, hey Jefferson, what’s this $400 and I say, oh, that’s the Lamp Lighter Mobile Home Park and that’s for piping for House #123. So you know, expense it or put it on our books appropriately.
So she produces all the P&Ls, all the balance sheets, all that stuff that then ultimately helps us pilot our business correctly because now we know what homes we’re making money on, what homes we’re not, what the overall park profitability is. So that’s what she does. And then ultimately all that goes out to our investors. So Brad and I obviously could be doing that ourselves. We used to do that ourselves but now we have her so we can do other things with our time like find new deals to buy.
So anyways, hiring on a controller was a key thing. And then in just another couple of weeks, we’ve got an accounts receivable person starting. Now, you wouldn’t normally think of that as being a key hire but the mobile home park business is really fundamentally a collections business.
Again, we have approximately 2300 tenants, all of them owe us say $300 a month. So that’s about a $600,000 a month run rate of rent that we’ve got coming in. We need to make sure that everybody actually pays. And the first line of defense is the managers to make sure that all the tenants have paid. But this accounts receivable person now will oversee and check every lot and for instance, make sure that okay, we did get the rent paid. It was late. Did the manager actually enforce the $50 late fee?
So a lot of it really is revenue assurance. It’s above and beyond just receivables. It’s really insuring that we have a culture across our portfolio where the managers are in fact collecting all the rent on time or charging late fees and again collecting those late fees, if not. That’s another key hire.
And then a third I’ll mention is we hired on a lady to do all of our asset management. So she’s spent a decade with two of America’s top ten 10 largest mobile home park operators. So what asset management means, at least for us, is she’s overseeing the reinvestment back into the properties.
So Brandon, what you may find for instance with yours is, again, you’ve got some homes that need to be rehabbed or vacant. So are you going to spend $3,000 and do you know, a so-so job rehabbing them or are you going to spend $5,000 or $6,000 and do a really nice job? There’s no right answer there. You just need to know your market and decide to what extent you’re going to improve a home. Or your park may need to be repaved. So you probably want to get a couple of competitive bids because you’re going to spend $40,000 to $50,000 repaving. So that sort of reinvestment back into the properties is what we call asset management.
Again, stuff Brad and I were doing but now we have this lady doing it for us. Again, we can focus our time on higher and better usage of our time. So anyway, getting our financial side of things nailed and then getting our operations side of things nailed has been basically what we’ve been up to really over about the last 12 months. And we probably should have been starting even almost at the time we had our first podcast with you a couple of years ago.
But that’s what we’ve been building. Mobile home park 2.0. We’re about to bring on some other folks just to do home sales and marketing on Craigslist and in local newspapers and things. That’s going to be a dedicated person that will do that sort of marketing and sales all across our properties. Anyways, so that’s where we’re at.
Brandon: Can that person be local to you or can it be anywhere in the country, I mean just looking?
Jefferson: Yeah, that can be really anywhere. Our finance people are down with my partner Brad down in Orange County. Again, I’m up here in San Francisco and our properties now are coast to coast. We own from Washington State over to North Carolina down to Florida, most of it is in the Midwest.
Mindy: But not Maine.
Brandon: Not in Maine.
Jefferson: Not in Maine.
Brandon: Run away.
Jefferson: I hear there’s some new guys that just bought a park there though. They may not know what they’re doing. It might come up for sale in another three months. We’ll see.
Brandon: We will see. All right, managers. What about, you mentioned the managers having to make sure the rent was paid and the late fees are issued. Do you have a manager for every park or what is that?
Jefferson: Yeah, we have a manager for every park and that’s almost always somebody that lives in the community and we look for folks that not only live in the community but own their own house. So that means they’re likely to be more stable, more committed to the community.
And we look in particular for folks that have particularly nice homes. It doesn’t have to be a brand new home but we’re looking for a home that’s clean, probably been painted if it’s an older home. We want their front lawn to be cut. Those are people that show pride of ownership. Those are excellent candidates for being your manager.
Those are the kinds of people that typically that we look for. Again, in our world, managing means collecting the rents and filing some evictions. It’s not getting into asset management, all the reinvestment back into a park, we handle at headquarters. All the check writing comes from headquarters. We never give a manager a checkbook or even petty cash. All the investment in the park is centralized. They just focus on the top line of our business, getting the rent in the bank and filing evictions as needed. That’s our definition of a mobile home park manager.
Mindy: And do you pay them or is it like a deduction in rent? Do you actually give them a salary? It doesn’t sound like that’s a huge chunk of time. It certainly isn’t a full-time job from where I’m standing.
Jefferson: It’s rarely full-time. You’d need to have a park of probably a couple hundred pads or greater to get to full-time and the average size of our park is probably right around one hundred pads. We did just buy a two-park portfolio in Wichita of 500 pads and that is a full-time manager and several full-time maintenance guys. But that’s a behemoth of a park and it’s institutional grade and it’s pools and clubhouses and the lawns are cut immaculately. That’s a whole different ball of wax when you get up into a park of that size and quality. But yeah, for your typical sort of 40, 50, 80 space park, probably somebody on-site.
We typically give them free lot rent plus we pay them about $10 a month per pad. So Brandon, you’ve got something like 46 pads so they’d get about another $460 a month in additional to free lot rent and then we pay them an additional $5 a month for any park-owned home. So that might be, you’ve got another 20 homes there, Brandon, times five is another $100. So we’d pay free lot rent plus about $560 a month to a manager for a park like Brandon’s.
Brandon: Okay. And do they do any lawn care or anything like that?
Jefferson: That would be additional work for additional pay. But yeah. We have a couple of managers that do that or up in some of our parks in the upper Midwest towards the north where we have snow-plowing, yeah. So we’ll occasionally hire managers to do additional work for additional pay but that would almost certainly not be included in their compensation.
Mindy: So is lawn care typically the responsibility of the person on the lot or is that typically the responsibility of the park itself?
Brandon: Good question.
Jefferson: That’s typically the home owner’s responsibility for their lot but a number of our parks have like a playground area or just sort of a grassy area near where the entrance is. It’s common to find common area land in a mobile home park that needs to be paved—sorry, needs to be mowed.
Brandon: Yeah, yeah. Well, let’s talk about the pave.
Jefferson: Well, you could pave it but then you’d have no more mowing.
Brandon: Let me ask about the paving thing. Have you had to redo roads inside of mobile home parks? That feels super expensive.
Jefferson: Yeah, it is expensive. This was our park in Raleigh/Durham, North Carolina. We knew this going in. Our diligence was good enough to discover that a third of the pavement was basically gravel. It had been really bad—it was probably badly done to begin with. It was on a hill. It was at the bottom of a hill. There was a lot of run-off. Anyways, so we knew going in that a third of the park was going to have to be repaved and in fact, our bank made us do a holdback, I believe of $50,000, specifically to get that paved. So we did, we did it right. It actually worked out to be, I think, closer to a $70,000 expense. That’s about a 90 space park so we were paving in front of yeah, roughly 30 homes. So call it, yeah, somewhere around 2,000 per pad, was a rough ratio of what it cost, at least in that park to get it paved.
Anyway, so we spent the $70,000 and the bank then sent us $50,000 holdback. That basically increased our loan by $50,000 and wrote us a check back for $50,000 after we had photos and had proved that we had done the work. So, it's rare that you would do it. I don't believe we've done anything other than some pothole repairs in our other roughly 22 parks.
Brandon: What about flood zones? When I was looking into buying a mobile home park, almost every property I looked at had at least a part of it. And this one even like part of it in the very, very back, might be considered flood areas. So what are your thoughts on that?
Jefferson: They tend to scare banks more than they scare me. Keep in mind most mobile homes are already mounted up about 30-36 inches up off the ground. So a lot of flood zones are places. And of course, it floods rarely and when it does, it might only flood four, six, eight inches. So you just need to look at it carefully and really say, what are the odds that we’re going to have six feet of flooding here? And the odds of that are relatively low. That would be really only parks right in the dead, dead center of a flood zone that would ever get to potentially anywhere near that high.
You know, you pray it never happens, but if it does, again it is easier to repair mobile homes. You can, of course, if the worst happens, just haul it out and bring in a new one or maybe you’re just cutting out the bottom foot or feet of the floorboards around the bottom and you’re redoing the inside of the house, you’re redoing the bottom couple feet of sheetrock, if that’s what got wet and moldy. So generally, it’s easier, I think, for mobile home parks to recover than apartment buildings from floods. Then again, you’ve got a much higher threshold literally of about 36 inches before you have any problems with floods in a mobile home park.
Brandon: That is a great answer. That’s what I was thinking. Yeah, you know, when I was looking, there was one that I really liked. I fell in love with this park or the idea and numbers of the park, anyway. I never thought but everything was great about it until I found out that it was right next to a big raging river and I looked at pictures. I happened to Google this town name and then flood and I see pictures and pictures of massive floods. Just like over the house floods and I was like, yeah no. Okay. So I left that one.
Mindy: Do not buy next to the Mississippi River, Brandon. That thing floods every year.
Brandon: I will not. I grew up next to the Mississippi River.
Mindy: Yeah, then you’d know. So in my town, we had a thousand-year flood right after I moved in.
Mindy: Yeah, I moved in. My gutters were all nasty. I removed them. The next day, it started raining and two days later I’m at Home Depot trying to buy up every piece of gutter they have because it was awful. But there were two mobile home parks that were right on the river and it was a thousand-year flood. This place never ever floods. We live in Colorado. We didn’t even get moisture ever.
So one park had about 12 pads in it and they just wiped out the whole park. They removed every mobile home and now they’re going to turn it into, I think, a regular playground park. And they won’t allow them—they won’t allow people to come back in and move in next to this river again even though it never floods. Like this was such a freak occurrence.
The other mobile home park on the river was fine. It came up to 36 inches, or not 36 inches—it came up like 12 inches but you’ve got the 36 inches so it was okay. But if you look at the river now, it’s like four feet down from where it did flood. So we did get a lot of water.
Brandon: You know, part of this whole discussion goes to like, when people buy real estate, it’s always scared me, the idea of buying one or two properties. Because freak things do happen occasionally. If you put all your eggs in one basket—I’m going to buy one fourplex and that will be my property that’s carrying me to retirement. There could be a freak occurrence, especially out here in the West Coast where an earthquake, which insurance doesn’t cover unless you have earthquake insurance, could wipe out one of my properties. If I only have one thing.
So when I looked into mobile home parks, I didn’t even go into this business going I’m going to buy a mobile home park. I said, I’m going to buy mobile home parks. I’m going to create a business and eventually create a fund or raise money and do the whole syndication model or whatever because I don’t want to own one park that could something freak happen and lose it. And I know you’re kind of doing the same thing, Jefferson. You’re actually doing a fund right now, right? Can you just talk about that particularly, like what does that even mean and how can real estate investors use that?
Jefferson: Sure. So we’re just about to launch Park Street Partners fund 3 to go out and buy a dozen mobile home parks. So it’s obviously the mobile home park business but it’s slightly different than doing individual deals when you invest in a fund because as a limited partner, your risk is spread out. You own part of 12 properties, maybe 15. We tend to buy nationwide so folks would get diversification across a bunch of different cities and states.
And that way, if you ever do have a whoopsie and your park floods, cash flows go to zero, or you discover you know, hey, we’ve got toxic waste to clean up for half a million bucks—whatever your worst nightmare is. It would be rare even then that you would have to go back to your limiteds to do another capital call. You’ve almost certainly got enough cash coming in either just in the bank that hasn’t yet been deployed or you’ve got enough cash coming in from existing properties that maybe you suspend your payouts for a quarter while you deal with the issue. But then you resume the next quarter paying out your earnings.
Anyway, so we like funds. We think it’s better for investors because again, they get that sort of diversification. Brad and I like it because that way, we know how much money we have in the bank and we know whether we need to go look for a couple of really big parks or you know, maybe just a couple of mid-sized or smaller parks. We’ll see what the fund turns out to be but we like the fund structure. I think it benefits both limited partners and general partners.
Brandon: All right, so let’s say I want to build a fund. Let’s say I’m going to make the Brandon Turner Fund here and I’m going to go out and buy let’s say small multi-family properties because I like those right now. So I’m going to go out and buy—I’m going to start a fund. I’m going to raise $5 million dollars from whoever I can raise it from. I had obviously registered something with the SEC, right?
Jefferson: Yeah, you should. If you're raising money from something other than just friends and family. So if you're dealing with people you already have a prior existing relationship with, you can do anything you want. Just form an LLC, write up your own operating agreement, you know, raise money. But again, we've got, for instance, our own mobile home park investors podcast. We get 12,000 downloads a month. That doesn't mean we have a pre-existing business relationship with those folks.
So we've registered our funds with the SEC. It's a 506, I believe, Reg-D registration, which basically just means you tell the SEC, hey, we exist and we're going to be advertising widely like on our podcast. Or you could even take an ad out on Super Bowl. Whatever you want. But in exchange for being able to advertise widely, you can only take accredited investors, folks with a million and up net worth, that's exclusive of their primary residence. So it's got to be a million or more of other investments and assets or they've got to make $200,000 a year if single or $300,000 a year if married.
But if they have either that net worth or that income—they don’t need both—but if they meet one of those thresholds, then they’re an accredited investor and yeah, then you just go about things the normal way and raise money. But you can’t raise money from proverbial widows and orphans. Folks have to prove that they are well-to-do and presumably sophisticated enough to understand the numerous risks from investing with you, Brandon.
Brandon: That makes sense. And that’s kind of where I see myself headed. When I looked at this one park that I’m buying, this is a test to me. I don’t want to sound like I’m doing a flip and leave, but I’m doing this to see, do I want to get into the Jefferson Lilly model? Do I want to become your competition? Do I want to build a business around this? I like the idea of it. We’ll find out. Maybe I’ll go into apartments instead if I find out I like those more but I like that—apartments have a little more competition right now. Okay, so I’ve got the fund. I’m building, it’s the Brandon Turner fund and I register, let’s say, and I start building. I raised $10 million dollars. So now I’ve got $10 million dollars raised. Do people then give me that money like right away or do we wait until I have a deal and wire the money? When do I get the money and when do I start paying any interest on it?
Jefferson: So that’s all up to you. Those are all deal points to be negotiated.
Jefferson: The way we do it is we start paying out a preferred rate of return right up front, or we start accruing it. We’ll actually pay it when we have profits and Brad and I won’t take anything out until we get our investors caught up and paid first. But the way we do it is, yeah, we tell folks yeah, invest now. If you’ve got $50,000 or a million or whatever, put it in our fund now. Frankly, we don’t want to have a deal lined up in a couple of months, go back to our investors and then have them say, oh yeah, but I found some other great deal. So I can’t invest. I can only invest half as much. I’m sorry.
It’s a little different when you’re raising money from institutions. You’re raising money from like the Colorado Public Teachers Retirement System. Those folks can commit and earmark money for you. But frankly, your average John Doe who might just be investing five or six figures—if they see something better, they’re likely to do some other investment. So we don’t want to have to go back and chase folks down. We just say invest now. The fund is open. You’ll start accruing your preferred return now.
Some of those deal points may change with our third fund. We’re blessed to have a lot of people that have heard of Park Street Partners that are now hounding us by e-mail, phone, and texts wanting to know when our next fund opens. We didn’t start that way, believe me. But anyways, those are all deal points but I certainly for a first fund advise just accrue it, pay it out and get the money in the bank right up front and then go find a deal.
Brandon: You know what I love about the fund, too, is I’m doing my first syndication deal as well right now. I’m just a small, what do they call them, KP—whatever. Like I’m a small part of the general partner. I’m a general partner but I’m a small part of it, with my buddy Ben Leibovitz. So we’re putting together a deal right now.
So what scares me, or makes me nervous—I don’t know if scare is the right word—is that, exactly what you said, is that we’ve been putting this together for a couple of months now. We’ve got all these people committed. We’ve overcommitted 150% or whatever it is to what we need to raise. However, nobody is giving any money yet. We don’t see the money until like closing table and then anything could happen and that freaks me out, which is why the fund thing makes it sound—the fund sounds more fun to me.
Jefferson: Yeah. Our first deal was that way. We were kind of scrambling to get the money raised and we had folks just send it in to the title company. But at closing, we were oversubscribed about 50% and here’s a little tip. Don’t kick anybody out of your deal. Just scale everybody back. You want everybody still in your deal so then presumably you do well for them and then they tell all their friends. They’re a little upset that they didn’t get all of their money in. It was only two-thirds but keep everybody in your deal. Don’t kick anybody out. Just scale down.
Brandon: I love that tip. I never thought of that but that’s fantastic.
Mindy: Yeah, that’s really interesting. So when you say scale them back, instead of—I say I’m going to give you $100,000, you instead only accept $75,000 from me.
Jefferson: You just at closing will send you back $25,000 and we send you a signed and updated subscription agreement that says you actually have $75,000 in the deal.
Mindy: Oh, that’s interesting. I like that tip a lot. I’m not even doing syndication deals yet. I’m not sponsoring them yet.
Brandon: Yeah, I like that a lot. Okay, so now we’ve got this fund. How does this break down, and I know this can vary in deals, but do I just pay—do I say hey, I’m going to give you guys 8% or 10% period forever or do you get a piece of all the deals? How does that all factor in?
Jefferson: Yeah, so it’s all to be—they’re all deal points to be negotiated. The way we’ve done our funds is we’ve paid out say an 8% preferred rate of return and we pay out 50% of all additional profits.
Jefferson: So Brad and I have to return more than 8% for us to get a split, the first 8% goes back to our investors. Now, the way our fund works is that—you can think of it like a loan. So anything above the 8% pays down their capital balance. And then if and when we say refinance and pull out big dollars, 100% of those big dollars go back to our investors. So in the long run, which maybe is year three and four, by then, our investors should have all their capital back and that 8% preferred rate of return goes away. It’s like a loan and we’ve paid back, but they still own half the deal forever.
So Brad and I have effectively at that point bought into half of the deal. They still own half, effectively for free at this point. They’ve gotten all their initial investment back and they still get half of all the profits and appreciation out of that deal. That’s the way ours worked. You can imagine very complex situations with more complex waterfalls and who gets what amount of money between 8% return and 18% and if it’s more than 25% return, it’s this. It’s that. We try and keep our funds simpler and aligned.
For instance, we don’t charge a management fee. We do take a 2% acquisition fee but after that, our only compensation comes from that profit split. So we’re very aligned with our investors. We’ve got to get them paid first before we’re participating in any of that profit split.
Brandon: That makes perfect sense.
Mindy: Okay, I’ve got a couple of questions about what you just said. So you said preferred rate of return and you said preferred rate a couple of times. I’m not familiar with that term. Is that like preferred stock where different people are getting different rates of return or what does preferred rate of return mean?
Jefferson: Yeah, so what it basically means is if you are to invest $100,000 and let’s say our deal this year earned $15,000 in profit. So you would get the first 8%. There’s your 8% preferred rate of return on your $100,000. So now, the deal made $15,000. We paid you $8,000. So there’s, what, $7,000 left. That, we then split 50/50. And you’d get another $3,500 on top of your $8,000 so you would get $11,500 all in. And then Brad and I would get the other $3,500. We’re dealing, generally, with much larger numbers than this but I’ll just keep it simple with $100,000.
Mindy: I don’t need your pidly little $100,000, Mindy.
Jefferson: Mindy, the next year, let’s say we refinance it and we pull out enough money that we can pay you $100,000, all of that would go to you. Now, it’s just a 50/50 split. You’ve got all your money back. Let’s say the deal now earns $20,000 in the next year. You get $10,000—you get half of that, and Brad and I get the other $10,000. You’ve got all your money back but you still own half the deal. You’re still getting a return of now half the profits out of that deal.
Brandon: What if you refinanced and let’s say Mindy put in the $100,000 and you could only refinance enough to get her 50% of that back? So now she’s got $50,000 in. She’s still got 50% of the $50,000.
Brandon: Okay, I have never heard of anybody doing it this way.
Jefferson: You go for $4,000 would be 80% on the $50,000 and then we split the remaining.
Brandon: Yeah, I think that’s fascinating.
Mindy: Brandon, you can do anything you want.
Brandon: I can do whatever I want.
Mindy: You can set it up however you want.
Brandon: I’m going to set it up so I get 100% all the time forever and the investors get nothing. Can I do that?
Mindy: Oh, my God. Can I invest with you, Brandon? That’s a great deal.
Jefferson: I’m going to listen to your podcast.
Brandon: I will give a high five to whoever invests in that deal right there.
Mindy: Wow, a high five and zero percent return, sign me up twice.
Brandon: All right. One thing, and Mindy, I know this is your question you wrote here but I’m going to ask it because I’m rude. You can ask my next question but, do you have a timeframe? So when are you going to sell these properties or are you holding them forever?
Jefferson: We do have a timeframe. The funds are ten years. What we found, Brandon, was when we were talking to investors about investing, they all kind of wanted to know what the life span of the fund was. That gives them some surety that they will get their money back at some point. So we found it very difficult to go to the market and say, oh, the fund just goes forever because what your investors hear is I’m never getting my money back. That’s not the case but that’s what they hear if you don’t say, oh yeah, the fund has a ten-year life. Then, investors kind of know, okay, at least after ten years, these guys are going to be forced to sell everything and get me my money back.
So we’d advise kind of anywhere between a five and ten-year life span. And you can always re-negotiate, right? You know, when the fund is up, if all the limiteds are like, hey let’s keep the party going, this is a great business, you can always just extend your fund at that point and keep extending it if the limiteds all want to do that.
So you still have the option to even take it longer if everybody’s happy. But yeah, you’d probably need to put a finite life on your fund. At least until you go public. And then of course, people can always buy and sell their interests on the public markets. But short of being public, you’ll probably need to put a finite life on your fund.
Brandon: Is that the plan eventually for you, go public, do you think?
Jefferson: Who know? There’s some talk of some other larger partnerships that may go public and that would set a nice path and precedent for us maybe to go public someday. Also, public companies tend to have stock that they throw around. Who knows, maybe we get a very interesting buyout offer from somebody larger. We’ll see. We’re not counting on it but there’s a non-zero chance that something like that happens.
Brandon: All right. Cool.
Mindy: A non-zero chance. I like that answer. So Brandon said I could take his next question. I am going to read his mind. How are you finding parks today? Brandon took forever to find his mobile home park. He even sent me—there was one in my town that was listed for $3 million dollars. What was it, 20 lots?
Brandon: Something like that. It was crazy.
Mindy: It was ridiculous. I went and drove past it. I went, well, I don’t think anybody got shot today. Actually, it’s not that bad.
Jefferson: Upped the purchase price right there.
Mindy: Nobody got shot so there you go. Brandon, your property didn’t get—nobody got shot in the last week?
Brandon: Nobody got shot.
Mindy: There you go. Worth millions. So how are you finding parks today?
Jefferson: Yeah. And Brandon, how long have you been looking? It’s been about two years. Is that it?
Brandon: It’s been about two years. No, it was like—so I decided, I committed back in January 1st of 2017, I said I’m going to buy a mobile home park this year. That was commitment date. It’s been less than a year. I started looking and started feeling things out and I will close on the 28th of December, 2017. So it went down to the wire.
Jefferson: Well, that’s awesome. Because it took me, I think, 17 months to close on my first park from the time I first got turned onto this space and things started clicking, until I actually closed my first deal. So you’re ahead of me, Brandon. Fantastic. Congratulations.
Mindy: Yeah, but you didn’t have Jefferson Lilly to coach you along the way, Jefferson.
Jefferson: So we find parks a number of different ways. There is no panacea. The most successful path so far has been brokers. We go to all the trade shows. We meet all the brokers there. We do other, of course, phone calls and e-mails and stuff. For those big trade shows, we typically host a cocktail hour and we invite all of the brokers to come get liquored up on Park Street Partners. So all of that is maintaining top of mind with brokers. So we found that to be where we get most of our deals.
That said, we have bought off publicly available websites like LoopNet. We tend not to pay the high prices that get listed on some of those public websites but where we can get a deal at a more reasonable price, say a third less than some of those widely shopped deals can begin to make sense. We also do some outreach directly to park owners. We’ve mailed out postcards. We make follow-up phone calls. So that’s produced some results.
And then again, we have our mobile home park investors podcast. And for instance, our deal in Raleigh-Durham, North Carolina, came from a couple of guys that knew about this off-market park for sale. They had listened to our podcast and they just called us up. We always are happy to partner or pay referral fees. I think we paid those guys something like a $75,000 referral fee for that deal.
Mindy: I know of a mobile home park in Longmont, if you’re looking.
Brandon: $3 million dollars.
Mindy: $3 million dollars, 25 plus a house. We’ll talk after the show.
Brandon: All right, so you’re doing a variety of things.
Jefferson: There’s no panacea. We do a little bit of everything.
Brandon: All right.
Mindy: Is there a particular size property you’re looking for or that you won’t look at? Is there something too small? It doesn’t sound like there’s something too big if you did a 500-lot property.
Jefferson: Yeah, where we’re at now, not to sound cocky but there’s probably nothing that would be too large for us. So on the smaller side of things, we probably would be looking generally for 50-space parks. It would really depend on how much money we can prudently invest.
Let’s just say a typical 50-space park on city water, city sewer, in a decent metro is certainly going to be 20, maybe $25,000. So we’re going to be investing—the total purchase price would be a million, a million and a quarter. So we’d be investing a quarter million, maybe $350,000 and again obviously borrowing 75%. Anyways, so that might roughly be what the low end would be. Now, if it were a really sexy park on the water in California, who knows. A ten-space park might be a million bucks or more. It would be in California.
But anyways, let’s just say for most of the Midwest, it’s probably 50 spaces. That said, if it’s a market that we’re already in, places like Wichita, Kansas, Oklahoma City, Tulsa, now Superior, Wisconsin. We’re in Lakeland, Florida. We’re in Raleigh-Durham, North Carolina. The markets that we’re already in, we’d consider something much smaller. It could be a 10 or 20 space park. We’d just sort of bolt it onto our property that’s already there.
Probably the tenants from the smaller park would pay their rent over at the larger park and probably the manager from the larger park would now just pick up an extra 10 or 20 pads to manage. We’ve actually done that with our Tulsa—we’ve got two parks in Tulsa. One of them is much larger and that’s the way we co-manage those couple of parks. So again, if it’s a market we’re already in, there might almost be nothing too small.
Brandon: All right.
Brandon: Okay, my last question before we go to the Fire Round—are you typically getting 25% down payment? Is that typical for banks you’re seeing right now and the fund provides that down payment?
Jefferson: Yeah, we get financing from a number of different sources. Regional banks are going to be right in the sweet spot for smaller and mid-sized deals. Let’s say purchase prices of half a million up to maybe $2 million. When you start getting to $2 million and up, those are big enough deals that you can get CMBS financing—collaterized mortgage back security financing, which is this fancy Wall Street debt that’s better, cheaper, and longer than bank financing. You can also get some agency debt from Fannie and Freddie, the federal government or government-guaranteed agencies also do write mortgages on larger and typically middle to better quality parks.
So it depends a little on the size and quality of your asset but there are things other than bank financing that you can get. All of it, on average 75. Actually, we just did a CMBS piece where I believe we got a 77% loan to value. So sometimes you can do a bit better. And then of course, Brandon, as you know, there’s always seller carry rate. That’s all across the board.
It sounds like you’ve gotten about 80% financing, which is great, in seller carry. You’ve got a really nice piece of debt there for your park. So anything is possible with sellers. Just bond with them and find out what their needs are and see if you can work out something where you put down relatively little and borrow relatively long at a reasonable rate the way you have.
Brandon: Yeah, one more thing, I think I mentioned earlier that helped with this park a lot that I’m excited about is in negotiation, which we just did a podcast with Chris Voss, who wrote Never Split the Difference, and so I tried to use my negotiation skills and this was honestly more Ryan Murdoch than myself, but we negotiated the price. He did not want to go on price at all so we got them from 6% down to 5% for interest. We got 25 years with no balloon and then we got them to take the first year and do interest only. Because there are some rehab to be done the first year so I didn’t want to lose.
So after we had already come to terms with everything, we were almost done. We were all on the same page and it was like the last minute, I said hey, go ask them if we do interest only the first year. That seems reasonable considering we’d lose money if not. And the guy was like, oh yeah, that makes sense. So it made no difference to him. It helped us go from—we would have probably broke even actually the first year to now making an extra $20,000 the first year, just in interest. So yeah. So anyways, you can negotiate all sorts of stuff.
Jefferson: Good for you.
Mindy: And 5%–
Brandon: 55 is fantastic on a commercial loan for 25 years with no balloon. I’m not going to get that from a bank ever.
Jefferson: With no personal recourse?
Brandon: I honestly don’t know.
Jefferson: You don’t know if you’re on the hook?
Brandon: I’m pretty sure I am. I’m pretty sure there’s going to be a recourse. The fact that we never talked about it makes me think that we just—I don’t know, I guess I can negotiate that point now. I’ve got a few weeks.
Jefferson: Go for no personal recourse and no arm for seller carry. No personal recourse is the norm but—
Brandon: That’s good to know. This podcast is all worth it right here. I’ll send you your consulting fee later. Let’s shift gears here and head over to the world famous Fire Round.
It’s time for the Fire Round.
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All right, this is the Fire Round. This is the part of the show where we ask you questions direct out of the BiggerPockets forums. And today, Mindy scoured the forums because she wanted to ask you some questions about mobile home parks. Go figure. So let’s see what Mindy has chosen for us today. Mindy, do you want to start it?
Mindy: Yes I do. I would like to know how much I should budget for insurance on a mobile home park. And what am I insuring as the owner of the mobile home park?
Brandon: Great question.
Jefferson: Okay, great question. So basically, mobile home parks are two different things. The real estate and the wheel estate mobile homes that sit on the land.
Mindy: I love that term.
Jefferson: So, the real estate, you don’t really need to insure. It’s very rare, even if you get hit by flood and tornado, it would be almost unheard of that either of those events would actually lift pipes up out of the ground or pull pavement up off the ground. So the actual ground, the real estate, is virtually impervious and we don’t really insure it. The risk of loss is very low.
Now, what may get damaged, of course, is your cash flow if all your tenants, heaven forbid, get swept away in a flood. Or let’s say their homes. Not the tenants. So you can get and we do advise and we do get, I believe, one year’s worth of business continuity insurance. So if the worst happens to one of our parks and our cash flow, everything goes to zero, that insurance company writes us a check for whatever basically last year’s NOI was. So that makes us whole for one year and then we scramble, of course, to bring mobile homes back in and try and get the cash flowing again.
So again, don’t insure the land. This is my unprofessional advice. I’m not an insurance broker. I’m just telling you what we do. We don’t insure the land. We do insure the business, the cash flow. Now, for any homes that we own, the wheel estate, that we own—you can’t insure the tenants’ homes. It’s not legal to insure something you don’t own—
Mindy: The resident-owned homes.
Jefferson: For your own homes, we do insure those. I believe we get a relatively high deductible, which in this business is $1,000. So we’re fully covered for all the damage to our house above $1,000 and it varies if you know, you’re in Oklahoma, it’s going to be higher. Call it 1.5%, of the insured value. So say, a $20,000 home, your insurance would run about $300 a year basically to insure that. In places farther north, frankly, like Wisconsin where you don’t get very many floods or tornados, I think it’s closer to 1%, like $200, in a place like Wisconsin, to insure a $20,000 used mobile home. But anyways, we insure those for replacement value with a $1,000 deductible.
Brandon: All right, what about liability? Somebody trips and falls. Is there insurance on that kind of stuff?
Jefferson: Oh, I’m sorry. Yes. So we do have general liability. I believe it is a total of $2 million dollars per year maxing out at $1 million dollars per occurrence. So basically, if we had two slip-and-falls each with a $1 million dollar judgment in a year, that would max out our insurance. So far, thank heavens, we’d had no such thing. But yes, we do get general liability insurance again, at that level. $1 million, $2 million dollar cap.
Mindy: I was going to ask who does this insurance. Is that what you were going to ask, too? Like, where do you go to get this insurance?
Brandon: I was not.
Jefferson: So there are folks that specialize in writing insurance on mobile homes and mobile home parks. We use a couple of guys, Kurt Kelly and Dan Greenfelder. We use mostly. We may have also dabbled with a couple of other folks but it’s mostly those two guys. They both specialize in manufactured housing insurance. Again, both for the real estate and for the wheel estate.
Brandon: That’s fantastic. I was going to ask for that business continuity, for a supposed hypothetical 46-unit property for around $1 million dollars, what’s a rough estimate that somebody pays for that? $1,000, or $10,000, $5,000 a year?
Jefferson: I think the business continuity yeah, I think it’s on the order of a percent. Let’s just say if you paid $1.1 million, probably your park had about $100,000 in NOI?
Brandon: Yeah, I think so.
Jefferson: So you pay about a 10 cap or 11 cap. I think that runs about $1,000, about a percent. So they’re basically figuring the odds of getting hit are about 1 in 100. Something like that. About 1%, I think. Again, it will vary with where you are nationwide and what the risk is that maybe your park gets flooded or not. Obviously, that insurance is higher if your park is partially in a flood zone.
But yeah, get a couple of competitive insurance quotes. We generally only deal with insurance companies that I think are at least like double A rated. I think triple A is the highest so we’re dealing with double A or triple A rated insurance companies so basically we can be relatively sure that they’re not going to go out of business on us and not pay a claim. We don’t deal with lower-ranked insurance companies.
Brandon: Okay, good tips. Next one. I am thinking of building my own mobile home park. Is this wise?
Jefferson: No, don’t do it. Unless you’re telling me you’ve got vacant land provision to be a mobile home park, like in downtown Denver or downtown Chicago or some really major—if you’ve got that on the land, frankly, you’re not going to develop it into a mobile home park. So what most people don’t quite grasp is that even if you have all the provisioning, and again, it’s very hard to get this these days. It would almost certainly be grandfathered land from 20 or 30 years ago.
But if you in fact really can develop a mobile home park, let’s think through the logistics. We actually did a whole podcast on our show specifically entitled “Why You Should Never Develop A Mobile Home Park”. Basically, you go ahead and put in all that money, you’re probably going to be spending $20,000 per pad for the land plus all the development. You have to put in the roads, probably put in sidewalks. You have to put in water, sewer, pipe, maybe gas, maybe electric.
Anyway, you’re probably talking about spending, investing $20,000 per pad and what you have at that point is an empty mobile home park that’s not cash flowing. That’s not a good thing. And now, because it’s so rare that people move homes into parks, you almost always have to provide them yourself. So now, you probably have to come up with another $20,000 or $30,000, maybe $50,000 if you want to do it really right. You have to come up with $20,000-$50,000 per pad to go buy used or new homes, bring those in, set them up, and then get those on rent-to-own agreements.
So most people don’t think all the way through to this second part. There’s no point in having an empty mobile home park. You’ve got to double your development budget then get into the house business fully, own all those houses, try and sell them. Believe me, it’s almost always easier to just buy an up-and-running, cash flowing park, the way you’ve done, Brandon. Maybe back-pedal out of the houses but just get down to just owning the land, buy in-place cash flows, is my message.
Mindy: Okay. After—I got that question before we started this.
Brandon: There you go. Good job. All right.
Mindy: Can you give me some advice on tenant screening for mobile home parks? Is it any different, in your experience, than for single-family homes or apartments?
Jefferson: So I’ve never owned any other kind of real estate other than mobile home parks so I can’t be certain. I don’t think it’s different. Basically, the way we run our screening is tenants all, of course, have to produce a driver’s license or some valid government-issued paperwork showing that they’re legally. We check their background. We make sure that they have no violent felonies in the last ten years. If it’s 11 or more years, we figure, that’s okay. They’ve been clean for a decade.
Frankly, doing dumb things like DUIs or even spousal abuse, we don’t like it, but that’s basically allowed. We just don’t want anybody that shows a propensity to do violence to strangers. Like they walked into a bank with a shotgun, you know. So for that kind of violent felonies, there just can’t be any in the last ten years. We also don’t take sex offenders. That’s not a protected class, at least not in the states that we’re in.
Mindy: I was just going to ask that. Can you discriminate against registered sex offenders?
Jefferson: You can. Or we say, we can affirm that we want to build a community with no sex offenders. Keep in mind also, folks that are sex offenders tend to have to stay away from kids and virtually every mobile home park has a lot of kids in it and the lots are 50 feet wide and the sex offender would be within 50 or 100 feet, probably, of kids. And sometimes they have to be farther away. I don’t know all the regulations but anyways. So yeah, we don’t take sex offenders and we don’t take anybody that’s had any violent felonies in the last decade.
And beyond that, then, if they’re clean, we’ll look to verify their income. We probably want that to be at least two and a half times, maybe three times of the rent. So we’ll verify that they’re employed and then of course, we’re all looking for that almighty down payment. Can they come up with say, $1,000 down on an older 1980s house? Might be $3,000 or potentially $4,000 on a brand new house. But if you’ve run those background checks, they’re employed and they’re not violent felons, they can come up with that kind of cash, then they’re likely to be a pretty good tenant. Then we take them.
Brandon: There you go. All right. Number four. This is kind of a loaded question but also, we're going to go with it. I'm a new mobile home park investor. I'm looking for some methods for due diligence when considering the purchase of a mobile home park. So just any insight for a new guy.
Jefferson: Yes. So we’ve done two podcasts on exactly that. We’ve done one entitled “On-Site Due Diligence” and one entitled “Off-Site Due Diligence”. So on-site—first off, you’re going to do your off-site. That’s just like hey, a deal comes across your desk, you’re going to want to look up for instance, what is the average house price in that community. We like to use a website called BestPlaces.net. So we can just put in Oshkosh, Wisconsin and boom, there it is. We see what the average house price is in that town. We’d like it to be $100,000 or greater. We also look on that website to see what average household income is. And we like that to be $40,000 or greater.
We’ll also run a test ad on Craigslist and we like to see about 20 responses or more in a week. When we put up mobile home for sale, we’ll have the seller send us like a photo of a home that might be vacant. We’ll just run the test ad to try and drive traffic into their community. Who knows, maybe if a home gets occupied before we close on it, that’s a good thing. But anyways, so we’ll run a test ad as well on Craigslist.
On-site then, we’re looking to like meet a couple of residents casually. We’ll typically drive through the park, roll down the window, and just say hey, can you tell me what the lot rent is here? And of course, if the seller of the park says, oh, the lot rent is $350 and the tenants are saying oh yeah, it’s $250, that would be a problem. So we’re looking to just validate what the lot rent actually is. We’ll ask then tenants, just say like, hey is the manager here any good?
Now, understand there’s always tension there between landlords and tenants and so it’s not surprising when something is negative. But if it’s negative like, oh, that landlord manager is always hassling me to pay my rent, that’s actually a good thing. If it’s more like, oh, the manager is sleeping with some tenant and that other tenant, they never make them pay their rent because they’ve got a personal relationship going. If we hear that kind of thing, you know, that tells us probably all we need to know about the manager. That manager won’t be continuing with us.
So we do that kind of thing. We’ll drive through competing parks in the town just to see how full they are, how well managed, what their lot rents are, and then we’ll also for instance just go into the police department and say, hey, we’re thinking of buying Sunny Acres Mobile Home Park. Is it a bad park? How does it compare to other parks? Usually, the police say you know, we’re in there every month or so but it’s more domestic violence rather than drugs and it’s no different than any of the other parks. So we consider that a clean bill of health if we don’t hear that it’s the drug park in town. And that’s kind of some of the stuff that we do on-site.
Mindy: I find it interesting that you actually physically go to a location that you’re about to drop $1 million plus dollars on. What a great tip. I’m in the forums all day every day at BiggerPockets.com/forums and I see people over and over, oh, I bought this property site unseen and there were problems. Well, Southwest Airlines is really cheap. You can get a round trip ticket to almost anywhere from almost anywhere for under $500. Even if you’re paying $30,000 for a property, is it not worth $500 more dollars to go check out that, oh, it’s a burned out crack shack. Maybe that’s not worth $30,000.
Jefferson: Go check it out.
Mindy: Yeah. Thank you for that tip.
Brandon: I actually did debate a little bit. I debated a little bit because I got my partner, Ryan. He’s there. He lives in the town. He is the partner that’s on the ground.
Jefferson: If your partner’s seen it, that’s okay.
Mindy: But there are somebody else’s eyeball on it.
Brandon: But since I’m putting the deal together essentially and I’m bringing in a partner to help fund the deal, I thought it would be good to do it. So I’m paying $700 for a round trip ticket tomorrow. I’m actually going tomorrow to check it out. So anyway.
Mindy: Plus, you get to meet Ryan and you get to go to Bangor, Maine.
Brandon: I know. I’ve met Ryan before but I get to hang out with him. I’m actually staying at his house. That’s going to be fun.
Mindy: Oh, nice! So I was in Bangor this summer and we drove through. Stephen King lives downtown.
Brandon: Me and Stephen King are going to hang out. Okay, that’s not true.
Mindy: Really. Ah. That would be so cool. So yes, Stephen King has a really cool house. His fence is like bat wings and spider webs and like totally, when you drive down the street, you’re like, oh, there’s his house. But it’s like right downtown.
Brandon: He’s like a low-profile celebrity.
Mindy: No, he’s not. But I was talking to Ryan and he said everybody kind of leaves him alone.
Brandon: That’s funny. All right. Well, that was the end of the Fire Round. Now, we’re headed over to the world famous Famous Four.
All right, the Famous Four. These are the same four questions we ask every guest every week and we’re going to ask them to you. Jefferson, number one. What is your current favorite real estate related book? Other than anything—I don’t think you’ve written a book yet, have you?
Jefferson: I have not.
Brandon: All right, so other than the book you’ve written, which you haven’t.
Jefferson: Maybe someday. So, Sam Zell has just come out with a book called Am I Being Too Subtle? It's a very good book. Sam Zell, for those who don't know, is Chairman of Equity Lifestyle Properties. The ticker is ELS and they are the world's largest mobile home park owners. So he's got obviously a publicly traded REET and he owns a 150,000 pads. He's big.
Brandon: So a couple more than you.
Jefferson: Couple more. So, his book, I’m reading it. I’m not done with it but I like it a lot. It talks about his background and his folks fleeing Nazi Germany all the way through his rise going to law school, quitting his first law school job, buying I think his first apartment building and just how he got into real estate. I would advise folks to read Am I Being Too Subtle by Sam Zell.
Mindy: Okay. What is your favorite business book? Non-real estate related.
Jefferson: I really like Snowball, the biography of Warren Buffett. I think that’s Alice—I’m trying to remember her name. Anyway, I met the author but yeah, very good book. It doesn’t just cover Buffett’s business dealing and business thinking. It gets into frankly, some of his personal shortfalls. He had some strained relationships with his wife and his kids, I think, from time to time. He was very focused on building his business and their trade-offs in life and I think that book does a pretty fair job highlighting not only his brilliance but frankly some of his weaknesses as well. So I really like Snowball.
Mindy: Yeah, it’s nice to see the, I don’t want to say downside, because he’s Warren Buffett. I’m a huge fan of Warren Buffett. But it’s nice to see that it’s not all rainbows and unicorns.
Brandon: Yeah. All right next one, Mindy.
Mindy: What are your hobbies besides buying mobile home parks?
Jefferson: Now, I spend a lot of time—I now have three kids. I think I had two, I guess, since we spoke last. So I’ve got two boys and a girl and it’s just a ton of fun spending time with them. I took them, I think, yesterday to the playground for three hours and just watched them run around and around. Well, not my littlest girl but the boys. Anyways, so yeah. Just spending time now with family. This is a fairly forgiving, fairly profitable niche of real estate and gives me a fair amount of flexibility to do stuff like that and just take off for an afternoon and just take the kids to you know, to the park.
Brandon: That’s awesome. I love it. All right, well last question from me. What do you believe sets apart successful mobile home park investors or any investor from those who give up, fail, or never get started?
Jefferson: I’ve seen a number of folks get side-tracked. They never get into this business. They hear our podcasts or they read a book about this business and they love it. And I’ll spend some time with them and then like I bump into them a year later and their story is oh yeah, I love mobile home parks. I used to do single-family fix and flip but the month after I talked to you, Jefferson, I found the best single-family fix and flip deal ever so I’m doing that and then my buddy, he found a good quadplex to buy so yeah, yeah, yeah. But next year, I’ll get out of that deal and by next year, I’ll be in the mobile home park business.
So you can call that distraction or inertia, but yeah. A lot of people who find this niche come at it, not the way I did. I came at it with no prior real estate investing. A lot of people have already done real estate investing and it’s just so easy to keep doing whatever you were doing because you know it. So, right there, that means a lot of people fail to get into the business.
Once you’re in it, again, it’s pretty profitable. Pretty forgiving. I’ve only ever met a couple of people that really had like wipeouts, like 100% loss of their capital. In all of those couple of cases, it didn’t have to do with the park per se. It wasn’t that oh, all the tenants up and moved. It was that they like way overpaid and they couldn’t make their debt service. Or one lady had a real sort of environmental problem in the town and the whole town’s water supply got poisoned. None of that had anything to do specifically with this niche. So if you get into it and you don’t overpay, then you’re likely to do at least fairly right.
And if you buy it right and you’re willing to put some elbow grease, some capital, as I think you’re going to do, Brandon, into rehabbing some homes, bring in some homes, and in-fill some fully constructed vacant pads, then you’re likely to do quite well. You’ve just got to break your inertia and distraction, get focused on this, get into it and start working it.
Brandon: That’s such good advice. Such good advice. All right, Mindy, take us out.
Mindy: Mr. Jefferson Lilly, where can people find out more about you?
Jefferson: So we’ve got a couple of websites. Our company’s website is ParkStreetPartners.com. We’ve got information there both for folks thinking about getting into the business on their own, we’ve got some resources there. Or for folks that might say, hey, I just want to make a passive investment and co-own mobile home parks with these guys, we’ve got information on our fund there and again, in early 2018, we’re going to be launching our next fund. And we’ll probably do funds roughly every year. Then again, I’ve alluded to our podcast. It can be found at MobileHomeParkInvestors.com. You’ll find links to the podcast on iTunes, Stitcher, I believe also Google Play.
We also have their links to our LinkedIn group. We’ve got a group of almost 4,000 people. It’s the biggest of its kind on LinkedIn trading tips and tricks. So join our LinkedIn group. And then finally, on that webpage, we also have a link to our calendar. We try and put in the big industry of events and some of the public company earnings calls so people can just sync our mobile home park investors calendar right into their mobile phone or computer and be abreast of upcoming industry events. So there you go. The podcast, the LinkedIn group, and the calendar, all at MobileHomeParkInvestors.com.
Mindy: Brandon, we should go to some of those industry events.
Brandon: I should.
Mindy: Get liquored up by Park Street Partners.
Jefferson: Park Street’s buying. It’s Vegas. That’s coming up in April. We’ll see you there.
Brandon: That’s awesome.
Mindy: Is it in Las Vegas this year?
Jefferson: It’s in Vegas usually the last weekend of April is the big show in Vegas and then there’s also a very good, slightly smaller show in Chicago usually the first week of November. So we’re always at both of those. Those are the MHI events, which stands for Manufactured Housing Institute. And that’s our industry’s big nationwide lobbying group, obviously trying to get things passed or undone, like Dodd Frank in Washington, D.C. and again, all the annuals. So check out, I think it’s just MHI.org. So I would also advise for folks. You don’t necessarily have to join that prior to buying your first park but maybe once you have, you might want to at least attend some of the events and maybe join that national group.
Brandon: I love it.
Brandon: I just might do that. All right well, Jefferson, this has been fantastic. Like really, really good so I am definitely going to take—I have a million notes so I am going to take it and apply it to my life. I hope people do, too. So thank you.
Jefferson: Whatever your next deal is, Brandon, you can call. We might pay you a referral fee or we’ll partner with you on it. We’re open for business at Park Street Partners.
Brandon: I like it. All right, thank you, Jefferson, very much and we’ll see you around.
Mindy: Thank you, Jefferson.
All right, that was a fantastic show. I felt like it was totally selfish, like most of these are, but you know.
Mindy: Yeah, it kind of is. Isn’t that why you started it? You wanted to ask people direct questions.
Brandon: That’s why I started BiggerPockets back when I was seven. Okay, the podcast, yeah. That’s me being selfish and greedy but hopefully you guys can learn something as well and for those people who stuck with us for the entire hour and a half long interview, you guys are awesome. So thanks for hanging around. Anyway, Mindy?
Brandon: I’m excited for this mobile home park venture with you.
Mindy: I’m very excited. This is really awesome. 46 units. It seems like a nice size but not like an overwhelming size.
Brandon: I agree.
Mindy: 20 of them are already owned by somebody else so we don’t really have to do much with that. So I’m kind of excited. Not kind of, I’m really excited. But it’s been a long day.
Brandon: It has been. All right. Well.
Mindy: It’s been a really long show. Thank you.
Brandon: It has been a long show. Thank you.
Mindy: For letting me step in.
Brandon: Yeah. Anyways, all right, guys. Thank you for being a part of BP. Come follow us on social media. Twitter.com/BiggerPockets. Facebook.com/BiggerPockets. Instagram.com/BiggerPockets. And you can find me and Mindy on those sites as well so search around.
Mindy: All over.
Brandon: All over. All right, guys, thank you so much for being a part of BiggerPockets.
Mindy: Thank you, Brandon.
Brandon: Bye, Mindy. It’s been fun. For BiggerPockets.com, my name is Brandon and this is Mindy, signing off.
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