All Forum Posts by: Jack Martin

@Shawn C Steider I would echo @Brenden Mitchum with respect to demand. A park like this might have amazing upside in filling spaces, especially if the reason why they are vacant is due to the seller being unmotivated.  However, if the reason is lack of demand for that location, then there is nothing you can do to solve that. 

A quick back of the napkin says this is a deal worth pursuing tho: 19 x $245 x 12 months = $55,860 less expenses of 40% (estimated) = $33,516 NOI which should be more than adequate to service the debt, plus do some upgrades to the park. With that said, the expenses may initially run higher than 40% since there are only 19 occupied spaces and the entire park will still require M&R.

I would perform a demand study to determine if you can fill the 31 vacant spaces with a permanent resident. If that turns out to be the case, you likely have a great deal on your hands. 

Call the parks within 5-10 miles of this one, that are similar quality parks. Ask them what their current lot rent is and what else is included/excluded? Ask if they have any rentals in the park and how much those rent for. Ask them if they have any homes for sale in the park and what the details are, and how many homes have sold recently. Do they finance? How much do they require down? What kind of credit do they require? Ask them if there are any vacant spaces in the park and what incentives would they offer if you brought your own home into the park. From those calls, you will have learned what your competition is related to lot rent, the sale of homes, how many POH they have, and what incentives you may have to offer as you sell homes.

Next, you can advertise a home for sale yourself as a "test ad". Place ads on every platform you can where home buyers could be looking for an inexpensive home. The goal of these test ads are simply to find out how much interest there is in the market for the homes you will be selling once you purchase the park. Make sure to advertise in all the available channels you can find so you can perform a true test. (craigslist, FSBO, zillow, etc. as well as placing signs on the street corners in the area) You should be receiving a high volume of calls if you expect to fill a high amount of vacancy at a park.

If this seems like too much for you to bite off, consider partnering with an experienced MH operator on your first deal. That could be a win-win for you. Earn while you learn. Brendan might have an interest in that.  

All the best,

Jack

@Diana Walcott when you evaluate a park for acquisition, separate the POH rental income from the lot rent. With your example you would pay 562k for the park, and then you could also pay the seller a set amount for each POH.  When you sell the POHs to the existing tenants (or new ones) you will recover the price you paid for them and you still have the same value remaining in the park. 

The difference is now you have resident OWNERs, not renters.  That is what creates the stability of cash flow in a MHP, which is also the reason why lenders like to see 90% of the homes owned by the residents.  

@Dale Snider I also would echo the low expense comment. Your expense ratio will be higher than a MH park (which average about 40%) depending on how many transient spaces you still have, the hours of operation you keep for your onsite staff to accommodate new arrivals, and the amenities at the park that create additional expense. Also, most RV parks are master metered for electric, so that will be different than a typical mobile home park. And, don't forget that some parks will have a "peak" season, "shoulder" season, and an "off" season, all with different rental rates and historic occupancy, particularly if the park is in a location that caters to snow birds.

The nature of RV parks can vary across a wide spectrum. A park with 100% PMs (park models) can look, operate and perform similar to a mobile home park, while a 100% transient park with daily/weekly rental traffic, will operate and perform more like a hotel. Those are widely different investments requiring a different set of management skills, operational philosophy, and risk assessment. To take that a degree further, a 100% transient RV park in the middle of nowhere alongside a major freeway will likely always be a 100% transient RV park, where that same park in a good location in a strong MSA could be transitioned over time to a PM park where tenants call that a home. So location will be a major factor in determining the potential strategy for the park. Location, location, location.

Depending on the location, residents may stay for a night, a week, month, or a season, and in some cases RVs are even used as a long-term housing solution. Just keep in mind that RV parks with mostly rolling stock will experience volatility due to seasons and market cycles.

What is important to understand is the volatility of the income. You don't want to acquire a park with expectation of a certain amount of income that will service the debt, and then have a COVID type event or a recession empty your park overnight.  

All the best!

Jack

@Jeff Bodenmuller the variables in MH/RV parks are too numerous to dive into every detail, so you might consider spending the money to take a course that walks through all the variables before you jump in. However, I will share a general perspective from someone who has owned over a thousand MH/RV spaces.   

Our approach to due diligence begins with determining if the value of the park is in line with the seller's price expectations. Again, to properly value a park requires a fairly deep understanding of how they will operate, given all the potential variables. Some of those variables are the size of the park, number of vacant spaces, number of POHs, number of vacant POHs, number of MH spaces, number of RV spaces, the park amenities, the age of the park, underground infrastructure age and condition, park location, size of the market, value of SFRs in the market, city water or well, city sewer or septic, other utility sources and whether or not they are direct billed, deferred maintenance, cost of management, and more. I won't dive into that evaluation here, since this is about due diligence, but just keep in mind every park is unique and without understanding all the variables, it's possible to misinterpret the value of the park.

With that said, if you determine the value is there, then it's time to start due diligence. To highlight the basics of DD, we like to break those up into 4 areas: financials, initial walkthrough, compliance, and paid inspections/services. If you are seeking to keep the initial out of pocket expenses low, begin with the items that require just your time, but not money. Get familiar with the financials to determine how the park is currently running, and then do an initial walkthrough so you know what you have. If everything is still a go at that point, spend time on the compliance to make sure there are no deal killers. After that, you will need to spend money on the inspections, surveys, environmental, etc.

Financials - Review of the financials can be tricky, particularly if the current owner has not kept the books correctly. But the goal here is to underwrite how you would expect the park to operate and see if that lines up with what the seller is demonstrating. This is where you can begin to see where there are operational inefficiencies, cost overruns, or areas where income can be improved. Sometimes you can do this prior to opening escrow, but there are cases where a seller will not deliver financials until you commit and put up EMD.

Initial Walkthrough - Confirm the number of spaces, the general condition of the utilities at each space, the status of the home on each space (POH, TOH, vacant, RV, etc.) and the condition of the rest of the park and amenities (roads, clubhouse, office, pool, etc). We also like to sit down with the current manager and go through everything related to how they are running the park (collecting rent, problem tenants, sales of homes, marketing efforts, recurring maintenance items, problem areas in the park infrastructure, etc)

Compliance - this includes everything related to city, county, and state compliance to continue to run the property as a park. That includes zoning, (including a zoning letter to confirm legal use) building, permits, sales tax, licensing, etc. In addition to that, we like to check with the police, fire, insurance, sex offender status, and anything that might affect the operations of the park. The goal is to avoid surprises, understand what challenges may be present, and what impact the results of inspections may have on our future operations of the park.

Inspections - If all of the above checks out, now it's time to start spending money on paid services. Inspections should include electrical, plumbing, and septic/sewer contractors (to address the underground infrastructure) but also can include pool, home inspections, asphalt, and more, depending on the park and what the sale includes. The main goal here is to always work with contractors who are familiar with parks. That is not always easy to find, but trust me, it is worth making 50 calls to find the right contractors who work in the park arena and understand them. When you meet with the contractors, make sure to have them help you understand what you have, what will be required to repair and maintain what you have, and what you should be budgeting for future capital improvements, if needed. A survey and phase 1 will likely be required if you are getting debt, and smart to get those done either way just for peace of mind, but those will cost money as well.

Congruent with the due diligence items above, we are also putting together the strategy for the park, performing our rent survey, running our market demand study, and creating the budget for the project.

All the best,

Jack

@Mark Rairdon I would recommend always separating the park from the POHs and other personal property by way of a bill of sale for tax purposes. A simple way to accomplish this is to add a Schedule A as the Bill of Sale to your PSA that addresses everything that comes with the park and assigns a value to it.  Your accountant will LOVE YOU if you take the time to do this. 

For example: 

The following personal property shall be conveyed by Bill of Sale for the property known as __________________

Then list what is included in the sale (this can be done during your due diligence period, but to be signed at closing by both buyer and seller)

The mobile homes: Cavco 14x64 Model XXX, office equipment like the computer, printer, desks, file cabinets, landscaping equipment like: John Deere Serial/Model XXX, EZ Go Golf Cart Model XXX, landscaping tools and equipment, stoves, fridges, freezers, patio and dining hall furniture, etc.  Assign a value to each and have the seller sign the bill of sale at closing so everyone agrees on the value of the items on the bill of sale.  

You could take it to the next level and assign a value to the land improvements and buildings as well. On a larger park, I would recommend a formal cost segregation study for this, but an 8 unit park is too small for that to make sense, so you can also assign a value in the bill of sale to include:

Landscaping shrubbery & trees: 35 mature trees approx. 20’ tall each, pool equipment, roads: XXX square yards of asphalt paving, sidewalk and curbing, electrical pedestals, concrete pads, underground utilities for electric, sewer or septic, pool, clubhouse, etc. 

Ask your accountant for guidance on this front, and if your accountant doesn't know what cost segregation and bonus depreciation is, consider replacing them with one who does. MHPs are one of the most tax efficient real estate assets and taking this step will allow you and your accountant to have an accurate assessment of value when depreciating at tax time.  

All the best,

Jack

Another question to consider that I forgot to mention is, "do you have a succession plan?" If the sponsor passes away in the middle of the investment, what happens?  Are the LPs left to figure out that mess on their own?  Or has the sponsor been proactive and thoughtful about a solution and established as succession plan that will be triggered upon their death or incapacity to continue?  

@Sterling Clifton good perspective offered in this thread above. If you are seeking to be an active investor wherein you are finding the finding deals, performing all the tasks required before and after closing, overseeing day-to-day management and capital improvements, and managing the overall performance of the investment, then you can either use your 200k to do a smaller deal yourself, or form a JV with like minded folks like you that also want to be active investors and have the appropriate skills to accent yours.

If you are seeking freedom of time and want to leverage someone else's experience, then a passive investment with an experienced sponsor may be a better fit. However, before you jump in, it will be good to be aware of the benefits and risks that will be present. Passive investing with an experienced sponsor can result in many benefits, including:

• Access to deals: A good sponsor 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 can result 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.

With all that said, 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 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.

As you connect with sponsors that resonate with you, take the time to develop a relationship with them. 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 deal to find out later they can't be trusted. Making sense of the deal and understanding their track record is important, of course, but I believe you should develop TRUST before you invest. Developing that trust with someone you don't know may seem like a challenge, but if you approach it correctly, you should be able to achieve a pretty solid foundation before you engage.

One way to approach this is to look for investments with 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 that the sponsor continues to do what they promised.

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.

Also, 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.

If you are able to connect with existing investors, ask them how their overall experience has been? 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?

If the investment has professional administration, you will have access to the answers to those questions, but also 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, plus other items that investors rarely consider like ensuring that the properties are actually titled correctly, property taxes are paid, and insurance is current.

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

It may be difficult to achieve this within a park, unless you have a really strong relationship with the owner of the park.  This is because park owners do not like to relinquish the control of their spaces to a 3rd party owner.  

However, an effective way to exercise this strategy is to buy the park yourself and convert some of the POHs to vacation rentals. Acquiring the right park will be critical as the demand for vacation rentals will be contingent upon amenities at the park.  

For example, we have a resort style RV park with mostly permanent park models that has a nice clubhouse, pool, spa, sport courts, fire pits, and a cool community vibe with the existing residents. When we acquired the park, there were 5 POH units that came with the deal. Instead of selling those, we chose to use them as vacation rentals, which allows prospective residents an opportunity to "test out" the park for a season before they buy a home.  It also gives us as much revenue in 3 months as we would have for an entire year had we sold those units instead. Since we own the park, it is much easier to execute on that strategy. 

@Luke Grieshop due to the restrictions related to public solicitation, you won't see 506b offerings advertised out in the open. However, if you read between the lines, you should be able to find sponsors like that here on BP. You can also get recommendations to 506b sponsors locally in the Phoenix area from other investors, accountants, attorneys, and real estate brokers.

With that all said, keep in mind the most critical variable in your experience as a passive investor will be the PEOPLE you are investing in, not just the deal you are investing in. As you connect with sponsors that resonate with you, take the time to develop a relationship with them. 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 pro forma to find out later they can't be trusted. Making sense of the deal and understanding their track record is important of course, but I believe you should develop TRUST before you invest. Developing that trust with someone you don't know may seem like a challenge, but if you approach it correctly, you should be able to achieve a pretty solid foundation of trust.

The best way is to target sponsor who use professional 3rd party administration that verifies the sponsor, their background, their track record, and their performance. Essentially, their role is to be the neutral party "referee" who's job is to ensure accuracy and report transparently.

Another way is to talk to others who have had an experience investing with the sponsor already. Simply ask the sponsor if they would be open to connecting you to their existing investors who've known and invested with them for a long time. There is nothing that replaces a live conversation with someone who has already built that trust with the sponsor over time. If a sponsor will not allow you to talk to existing investors, that should be a red flag to you.

Also, one of the most often overlooked components of a syndication is the reporting. 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.

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? Historically, have the reporting and distributions been on time? Also, who does their accounting, and are checks and balances in place to prevent misappropriation of funds, cooking the books, or human error? 

Your overall experience with passive investment involves much more than the yield you could achieve. If you take the time to gain clarity on those items, you should get a pretty good handle on what your experience is going to be like.

The purpose of investing passively is to leverage the sponsor's time, expertise, and ability to source great deals, but if the experience is going to cause you to lose sleep at night, any return you might make simply will not be worth it.

All the best,

Jack

@Michael Lesavoy I would echo what @Brian Burke shared above.  Shortcuts often lead to painful and expensive outcomes.  You and your partners may be friendly and aimed in the same direction today, but history has proven that dynamic has the propensity to change, so guidance from an experienced attorney would be well worth the expense to avoid pain.  If all the partners chip in, that should be a reasonable cost to insure long-term happiness in the partnership.