@Debbie Mayerson to add to what @Randy Bloch suggested above, the question becomes whether you aspire to be active or passive as an investor in mobile home parks?
As Randy mentioned, mobile home park investing requires specialized knowledge and experience and you’ll need to become adept at many things that are not found in other real estate. This starts with finding deals, since most parks do not hit the public market, and determining what parks to pursue. A good MHP investment has just as much to do with understanding what parks “not to buy” as it does “parks to buy”. Assuming you are skilled in those areas, you will also need to understand valuation of parks, so your end result is an acquisition of a park at a price that will allow you to be successful.
Then comes due diligence and acquisition. Understanding what items to investigate and how to navigate due diligence to eliminate surprises is critical. MHP's are very unique so don't make the mistake of assuming a list of due diligence items from other real estate will be sufficient. If you plan to get a loan, it will be important to understand the right lender for your park since all lenders do not lend on parks, how to correctly build a package for the lender, and what may be required to qualify for the loan.
After closing, you'll need a smart strategy to add value to the park while also improving the resident experience at the same pace. Ensuring that your residents continue to enjoy living at the park is a critical component of the long-term success of the park. Also, what capital improvements will have the most impact on the park, when you should execute on them, and properly budgeting for them.
Understanding the right kind of contractors to hire is critical, especially if you are filling up vacant spaces and/or renovating mobile homes. Experienced mobile home contractors can eliminate a lot of risk and potential nightmares that come along with using the wrong contractors.
If the park is large enough, hiring onsite staff will be an important step. This includes marketing, interviewing, and hiring the right team to help you run the park. MHP management and maintenance requires specialized knowledge, and hiring great staff is not as simple as knocking on doors until an existing resident says “yes, I will take the job”.
Mobile home parks have unique regulations that need to be understood and adhered to around the sales of homes, seller financing, and other local and state guidelines. Simply the fact that the residents own the homes introduces a whole new set of challenges that other real estate doesn't have.
Using the right management software, bookkeeping correctly, and using the right accountant who understands mobile home parks, cost segregation, and bonus depreciation will all be important.
With all that said...
For some investors, gaining exposure to the MHP asset class through a passive investment can be a better fit than acquiring a park themselves.
Passive investments in mobile home parks involve a sponsor (an experienced MHP operator) and a group of investors. The sponsor finds the park, underwrites the park, performs the due diligence, and raises capital from investors to acquire the park.
Once the park is acquired, the sponsor is responsible for repositioning the park through a strategy designed to increase the performance and the value of the park. This includes everything related to physical improvements, optimizing income and expenses, and properly managing the park to ensure regulatory compliance and resident happiness.
Along the way, investors receive the benefit of cash flow and tax benefits from the park, and when the park is sold, they receive a share of the profits. Some of the benefits of partnering with an experienced MHP sponsor are:
- Access to deals: Experienced sponsors can find deals that the general public never even knows about.
- Lower required investment: Rather than having to fund the purchase of a whole property yourself, most passive investments allow you to invest a smaller portion.
- Low time commitment: The sponsor handles all the day-to-day work.
- Lower risk: Investors can leverage the sponsor's experience to avoid costly mistakes.
- Economy of Scale: Sponsors tend to buy larger properties. Larger properties create economies of scale that can result in higher and more stable cash flow.
- Returns: It's not uncommon for investors to make a better return being passive than they would have if they took the plunge themselves.
- Direct access: Unlike traditional investments, passive real estate investment offers direct communication with the people responsible for the performance of your investment and the properties themselves.
- Tax benefits: Investors can receive the same tax advantages that come with ownership of real estate, such as depreciation. Keep in mind, some asset classes are more tax efficient than others. (such as my personal favorite, mobile home parks)
- Retirement-account friendly: Passive investments can be a great fit for retirement accounts because they are hands off and don't violate rules related to prohibited transactions and self-dealing.
- Fund Diversification: Similar to the way a mutual fund behaves, a real estate fund diversifies the investment across a group of properties instead of a single property. This results in reduced risk and blended performance across all the properties in the fund, and can also create the opportunity for compounding returns by reinvesting cash flow distributions back into the fund.
Keep in mind, passive investors are exposed to both deal risk and sponsor risk. Deal risk can be mitigated by choosing a sponsor who has a track record of good deals, and can potentially be further mitigated by investing in a fund. Sponsor risk can be mitigated by doing a good job of vetting and (IMHO) is the most important step in evaluating any passive investment.
If you choose to take the passive route, the most important thing is to get the sponsor right. Passive investing is more about the right people than it is anything else. Trusting the sponsor will be paramount to you sleeping at night, and I can't stress that enough. It does no good to place capital with a sponsor who has an attractive pitch to find out later they can't be trusted. Making sense of the investment and understanding their track record is important, of course, but I believe you should be confident you have the right sponsor above all else.
One way to approach this is to look for sponsors who use professional administration. In that environment, most of a passive investor’s concerns related to honesty, transparency, accuracy, and timeliness are managed by the administrator who is a neutral party. It’s like having a referee that is overseeing the investment to ensure the sponsor continues to do what they promised and to make sure there is no funny business going on. In some cases with professional administration you also have access to much deeper vetting of the sponsor that will include personal background checks covering things like bankruptcy, judgements, litigation, criminal history, and other red flags related to a sponsor that you would want to avoid.
If that is not available, another approach is to talk to investors who have had an experience with the sponsor already. If the sponsor is willing to connect you, there is nothing that replaces a conversation with someone who has already built that trust with the sponsor over time.
Be careful not to get blinded by just the projected returns. Your overall experience in a passive investment involves much more than the returns, so when you find a sponsor you like, do yourself a favor and get clear on what your experience will be like AFTER you have invested.
How accessible is the sponsor? If you have a concern, are you able to talk to them? Do they return your calls? Are they transparent? Even when they run into a problem? Does the sponsor have a communication plan? How often will you receive reporting? How are they delivered? What will the reports cover? How often will you see financials? When will you receive tax documents? How often will you receive distributions? In the sponsor's history, have the reporting and distributions been on time?
The purpose of investing passively is to leverage a sponsor's time, expertise, and ability to source great deals, but your overall experience will be driven by the answers to all the questions above, so make sure to cover that in your vetting process. Otherwise, any return you might make simply will not be worth it.
All the best,
Jack
