All Forum Posts by: Adam Johnson

I own a park and will buy more as the right deals come along.  I prefer parks close to or larger than 100 pads for the reasons Joel commented on, I value my time.  That size park can afford to hire part or full time people to deal with a lot of day to day issues.  They do require some effort, but don't have to fill your schedule either.  I avoid small parks, say less than 40 pads, unless they are close to other properties I own.  Same reason, so I can use people I already have to deal with day to day stuff.

@Drew Buckner, Ken has given you a boatload of good information here, so I will skip right to my perspective.  I currently own one park and I am actively seeking more.  I would caution you against starting out with raw development.  The biggest reason I say that is that you start out with 100% negative cash flow from day one and you likely won't see break even cash flow for quite a while (years potentially).  All development costs are out of pocket, then you get into the sales mode.  You will have basic operating expenses the entire time as well.  I recognize that the upside potential is there, but if you go bankrupt mid-way, you haven't gained anything at all.

I was very fortunate.  We bought a park that needed an intensive management turnaround, the seller simply quit paying attention to what his so-called "manager" was doing.  We bought it right, worked our butts off, and have realized a very strong gain with more upside to go.  When we bought it, however, we had cash inflow on day one.  We pumped money in and continue to do so, but if we overextended ourselves with improvements, we could simply pull back on the throttle for a few months and let the rents get us back on track.

Our park has 40' wide lots.  So far I've resisted 16' wide homes, in part due to their higher cost and higher transportation cost.  We certified as retailers and have had customers inquire about 16' homes.  If they want to buy it, I will sell it. However, for our model homes, we intend to stick with 14' wide homes.  Regarding lot size, it is worth noting that many zoning ordinances require wider lots and in some locations, the requirements essentially force multi-section homes.  Some municipalities are "anti" manufactured housing, so read the ordinance carefully before buying any land.  If there is an existing park, you may be grandfathered.

A pitfall to be aware of with zoning laws - on occasion, I have run across zoning laws that disallow bringing in a replacement home once a home is removed or destroyed. This is really bad if you buy a park and can't replace homes or infill vacant lots.  Eventually you will own a really expensive site that you can't rent without redeveloping into something totally different.  In short, do your homework!

With private water and sewer systems, you will need to know and understand the rules to operate them as well.  We own a park on well and septic.  We have an outside contractor come in daily to perform required testing.  That likely costs the same for a small park as it does for a larger one.

The biggest challenge you face is the size, it is small.  BUT, that doesn't mean it is a bad deal.  Have you approached the seller about financing it for you with a lower down payment?

Do you own/manage other property nearby?

What you are describing sounds more like a start up business than a real estate transaction.  There are lenders that finance these deals every day.  You are likely not speaking with the right person at whatever bank(s) you have contacted so far.

I would start with local/regional banks in your area.  Sit down with the branch manager, describe your plan in summary, and ask if they can put you in touch with their small business lending person.

Be prepared to write a full business plan including 3-years of financial projections.

Best bet is to contact the local municipality - Town, Village, or City - whichever is appropriate for the location of the property.  Personally, I don't like to ask questions that make it obvious what I am trying to do right away.  I like the old saying "loose lips sink ships".  You might tip somebody off to a great idea too soon and they might beat you to it.

What I generally do is ask to see the zoning map in order to determine what the zoning class is.  It will be some variation of residential, commercial, or industrial.  Once I know that, I look up the zoning ordinance for that specific class.  Many of the zoning ordinances are available online, but not all.  Some of the zoning maps are available online, but not as commonly as the ordinance, so you may still need to drive to the municipal office to look at a physical map.  They are generally color coded.

Once you know and understand what that specific zoning class allows, you will likely have your answer.  If you don't find your specific use under the zoning class of the subject property, look under other zoning classes.  If you see it listed there, you may find it more challenging, depends on how the ordinance is written.

I also like to look at ordinances that apply to all classes, sometimes they will bury a generic code in there about lighting or signage that may have a direct impact on what you are trying to do.  Reading the codes is about as exciting as watching paint dry, but extremely important, especially before you buy.  

I will sometimes also ask the clerk if there are any amendments in process, too.  My office/shop was rezoned shortly after I bought it.  They snuck in some language that specifically excluded self storage from the new zoning code.  The prior code allowed that use by special use permit.  Thankfully, that was a secondary plan, but it would have been nice to not have had my hand slammed in the door on that option all the same.

Comment back after doing a little homework.  Knowing these answers first will help me/others guide you on what to do next.

Good luck!

Quick thoughts:

• know the creditworthiness of both the tenant as well as the national backer.  You will have to gain comfort in both.
• Are the buildings easily repurposed in the event the single tenant leaves?
• Do you have reserves for if/when one of the tenants leaves to carry the property with zero income until you find a new tenant?  What about any potential build-out cost related to placing a new tenant?
• 7 years remaining on a lease is a bit risky, in my opinion, for a single tenant property.  Consider a 10-year mortgage (unless paying cash) to pay down the mortgage fast enough that you could potentially cash-out refi if the tenant moves out in 7 and you need money to carry it vacant and place a replacement
• Are the properties too unique to be appealing to another occupant?  If they are shaped like a giant igloo, for example, how appealing will that be when trying to attract replacement tenants
• Just because there are only 7 years left on the lease, doesn't mean they won't renew.  Know and understand clearly what terms me already be locked in by a renewal clause in the current lease.
• As far as everything else needed for due diligence - know and completely understand every current and future potential expense/issue with the property.  Trust but VERIFY everything.  Don't worry about offending the seller, you need to turn over every stone
• Know what, if any, systems of the building you are required to maintain (roof, HVAC, plumbing, etc.).  If the tenant is responsible for any or all of these, are they being maintained properly?  What is the age of these systems?  What is the estimated remaining life of them?

This is nowhere near a complete list, but gets you started in the right direction.

I think the rate is where it needs to be.  I would ask bank 2 if there is an option to renew at the 5th year and simply adjust the interest rate to market at that time.  Find out what determines whether they will or won't.  Also, is the amortization the same between the 2?

Without knowing enough, I like option 2 better for 2 reasons - rate is fixed for 5 years is the strongest reason, lower rate is the 2nd strongest reason.  

Interest rates are going up over the next few years, very little doubt about that.  So fixing the rate longer is better, in my opinion.

Also, assuming the amortization is the same, locking in a fixed rate for the longer term keeps you fixed long enough so that you start making headway on the principal balance.  If you look at an amortization, the first few years are really heavy in interest and really light in principal paydown.  By fixing for a longer period, you get further into the amortization, which puts you in a better equity position in case you have to/want to refinance for whatever reason.  Better equity position increases the likelihood of getting approved for the refi with little or no out of pocket money to close.

Option 1 isn't bad, but option 2 looks better at first glance.  Keep both banks talking, though, let each know you have another bank interested and see if they are willing to improve their terms (longer fixed rate primarily).

Personally, I like mostly 15 year amortization, but I have a few at 20.  You sacrifice cash flow, but pay down the principal quicker.  I have cashed out of a few mortgages on refi's already, giving me capital to invest into more (and larger) properties.

Portfolio lenders have beeen mentioned, I agree.  My guess is that you are talking with a large, traditional bank that will likely sell the mortgage to Fannie or Freddie shortly after the deal closes.  To do so, it has to fit in their neat little box of criteria.  The mobile homes won't fit.

You need to find a commercial mortgage lender or a (most likely) smaller local/regional bank that holds mortgages in their own portfolio.  Ask if they do that first, saves time.  If they do, put on your salesman hat and show the banker the numbers.  Sounds like you have other things going on too, so this will be a perrson you want to stay in touch with long term for future deals.

Don't be too surprised if they mention a 5 or 10 year adjustment, that is common in commercial real estate mortgages.  There is a difference between balloon and adjustment too.  An adjustment allows the lender to adjust the rate to an index at that period of time.  Because rates are low now, it will likely mean a rate increase, but I don't worry a ton about that because I also buy properties with strong cash flow.  Rent increases will almost certainly cover the higher payment if the rate jumps a little.

Read and understand the terms on the commitment letter from the commercial lender and ask questions if you don't.

The water is likely going to be the most variable too, so more difficult to budget in.  You are wise to keep an eye on every line item, just be open-minded in your approach to handle each item.  Good luck!