All Forum Posts by: Jack Martin

Hey everyone, I ran across this older thread and thought I would offer some guidance.  

First of all, what Paul mentioned above just needs a little more clarity.  In the private syndication/fund space, the most common types of funds you will find are 506b and 506c.   

To keep it brief, a 506c will allow the syndicator to advertise their offerings publicly, but will restrict participants to accredited investors only.  If you search public platforms for opportunities to invest, you will find mostly 506c offerings and they will come with those restrictions. 

Conversely, a 506b will not allow the syndicator to advertise publicly, but will allow them to accept non accredited investors.  It is true that 506b syndicators generally start raising capital from friends and family.  However, they are not restricted to friends and family as Paul mentioned above.  What is required is a prior relationship between the syndicator and the investor before an investment is made.  

Prior relationship can be developed over a period of time (at least 30 days) and a number of touches (meetings, phone calls, emails, etc).  This requirement is intended to protect both parties from making a quick decision and give enough time to do proper due diligence. 

Also, if you are a non accredited investor, you should not invest in an offering that was open at the time you first met the syndicator.  Again, this is intended to protect the parties from the pressure of jumping into an offering.  

Remember the most important part of your experience as an investor will be the PEOPLE you are investing in, not just the DEAL you are investing in.  If you are not an experienced accredited investor, take the time to understand the syndicator's strategy, their business philosophy, their track record, their investment model, and their approach to reporting to you as an investor, before you invest. 

With all that said, there absolutely are opportunities for non accredited investors in the Mobile Home Park space.  They are just a little harder to find because 506b offerings do not allow for public solicitation. 

All the best,

Jack

@Miles Presha a town of 1100 people, an hour away from a major city presents too much economic risk IMHO.  Consider when the next recession occurs, where will your tenants get jobs?  They may have to move to find work.  And if they leave, what will attract people to come to this small town during a recession?  I like to use the Walmart test.  They are extremely smart and only place their stores in locations where their customers (which happen to be your tenants) will always have a job, even during a recession.  If there isn't a Walmart within a reasonable driving distance, then it is reasonable to consider that there may not be jobs there during a recession.  I don't know about you, but when I acquire a park, I really like the idea that my tenants will have a job to pay the rent. 

@Kyle Eckert that looks like a decent deal for a 27 space park.  Conservatively, if you just use the 22 spaces that are currently filled and only credit the lot rent, that is about a 9 cap deal (at a 40% expense ratio).  Assuming you can sell the POHs, fill up the 5 vacant spaces, and recoup your costs on those, you should end up with about a 12 cap deal when you are done, as long as you can bump the lot rent to $300. Plus you will have the income from the sale of the POHs.  A couple variables for you to consider on your purchase negotiations is the capex needed at the park level and the condition of the POHs if you end up having to repair them.  

Also, on a deal with that many POH and vacant spaces you don't want to buy the park and not be able to sell homes, so make sure to take the time to ferret out the demand for homes while you are in escrow.  Call all the surrounding parks and like a prospective tenant/buyer, and ask what the lot rents are, how the utilities are paid, and whether or not they have any vacant lots or homes for sale.  Ask them how many homes have sold in the last 6 months.  If they have some for sale, how much, what size, and will they carry financing? Best case for your demand is your competition is 100% full with a waiting list and they don't have any homes for sale, yet they are getting calls every day from people ready to buy.  Worst case for your demand is your competition has several vacant lots and a dozen homes for sale with zero down seller financing and haven't sold one all year. Once you have a pretty good idea of what the market is like for the competition, then run a test ad with a "pretend" home to sell and find out how many calls you will be getting once you buy the park, and what kind of buyers will be calling. 

All the best! 

@Autumn Rankin this is basically a MHP development deal and I have to warn you, those are tough.   You will need to have deep pockets, a LOT of patience, and be willing to work for free for several years.  Before you commit to a deal like this, consider what could go wrong with it.  First of all, there is no income.  And before you can even have the opportunity for income, you will need to install new utilities.  Then, you will need to find homes, move them in, set them up, market them, sell them and likely carry paper on them, all to get your lot rent of $400.  Then go do that again and again, and again, until the park is full.  It's about the most difficult MH deal to do.  

That may come across as kind of harsh, but I just couldn't sit here knowing how those kind of deals end up going and not share candidly.  

However, if you have a deep rooted desire to learn an expensive and hard fought lesson in MHP, then at least don't buy the park with cash.  Talk to the brother and get him to agree to be the bank and defer any payments/interest until you have filled up the existing 16 spaces.  You can use your capital to fix the utility lines and bring in homes.  As long as you can recoup your investment of 1/16th of the cost of the utility lines plus the cost of acquiring, repairing, transporting, and setting up each home, through the sale of that home, then at least you would be breaking even each time you sell one.  Do that 16 times and you have no money in the deal, but you now have 16 tenants paying lot rent and you can start applying part of that to pay off the brother. 

With all that said, I just think there are better opportunities out there.  I would encourage you to look for a park that has some income the day you buy it, and some upside you can work toward while you operate it.  

@Jarrod B. there is no perfect "back of the napkin" formula for quick valuation of a park because each park has so many variables and location has such a huge impact on value. With that said, you should be able to get a pretty good idea whether you should continue to pursue a deal with some simple math. Start with the current lot rent (ignore the POH rental if there are any that come with the deal) and multiply by the number of spaces that currently have a tenant paying rent. Multiply that by 12 (months) to get to the gross annual income. Depending on the location, amenities at the park, cost of landscaping (the variables are large trees and lots of grass), the utility metering, any daily or weekly RV rental spaces, and how you approach management, (just to mention a few of the major items) you will have an expense ratio of anywhere from 35% to 55% of the gross. 35% is pretty lean especially if you use a 3rd party manager, but just as an example, it would likely be appropriate for a park that has no amenities, very little landscaping and regular maintenance expenses, all tenant owned homes, no RVs, and 100% of the utilities billed to the tenants. 55% is more appropriate for a park that has a full amenity package with a pool and clubhouse, sport courts, a laundry facility, lots of grass and mature trees for shade, and maybe part of the park is used for daily/weekly RVs and your onsite staff expenses are high. (it's difficult to peg an exact number here without looking at a deal, but you get the idea) Once you have your arms around where the expense ratio should be, take the expenses out of the gross, which will give you your net operating income (NOI), which you then can divide by the market cap rate. That should get you a general idea of current value.

The upside for you will be in the delta you can compress related to vacant lots, market rents, utility metering and recapture, and shaving expenses where they make sense (again, just to name a few main areas).  If you assume POHs, there is upside in the sale of those to existing or new tenants.   You will want to do the same valuation exercise with conservative projections to see where you can move the park performance to, once you own it.  

With all that said, if you are just getting started, it would be smart to lean on a local expert in MH. If you can't find a local MH investor, don't be afraid to approach the owner or manager of a park nearby that looks to be well run. You will find that people generally are excited to share their wisdom. Just ask them.  

There are so many variables in MH/RV parks that can wildly effect valuation, it is critical that you not only understand them, but you take a conservative approach to expectations of the upside as well. Don't make the mistake of stressing your pro forma just to make a deal work.  That will just have you wishing you had not acquired the park.   

@Lane Kawaoka feel free to connect here through BP or through my website.  I will share the highlights of what our experience has been as it relates to acquisitions of MH/RV parks with the rest of the community here as well.  Although you might think the MH/RV space flies under the radar and there is likely to be less competition, you will find that the market is competitive, similar to your experience in MF.  In primary markets, you will be competing with the gorillas in this space, including publicly traded REITs and more recently, Blackstone. That competition drives cap rates down (I have seen deals trade in the 5% cap range) and creates an atmosphere where you are competing for deals that are being sold on unrealistic pro forma's.  If you have patient capital that will be satisfied with a sub 6% yield, then you can probably compete with the gorillas in primary markets.  If not, shifting your focus to secondary and tertiary markets will likely be a better strategy.  However, I have to warn you that shift creates operational challenges that you will have to solve, particularly in the area of a smaller labor pool for management, maintenance, and capital improvements.  The bottom line is you will find better yields in smaller markets, but it needs to fit your operational style and strengths.  If you intend to take a hands-off, 3rd party management approach, I would not recommend smaller markets.  If you are willing to take a hands-on approach and commit a significant degree of time and energy toward building the right local team and gaining momentum in the first 6-12 months of ownership, then you should find success there.  

@Darrell D. like Bob said above, if you would like to "have your cake and eat it too" look for a fund or syndication that will distribute cash flow along the way AND share the equity growth as well.  Also, since we are talking about retirement investing in this thread, consider an investment that will perform over a long period of time.  If you look back at historic performance of all the different strategies and asset classes, I think you will find that even a first position note can turn in to a bad investment if we experience a market correction.  

The key is to invest in an asset class that will produce cash flow, even through a recession. I prefer mobile home parks, as they tend to produce very stable cash flow and can even experience a bump in cash flow during a recession if they are run by a good sponsor. 

If you choose the right type of investment, with a good sponsor who's goals are aligned with yours, you should be able to have your cake and eat it too.  And it will taste good:)

@Robert Harris there is some solid advice in this thread.  I would echo what @Jay Hinrichs and @Ellis Hammond have said, and would add some additional perspective:

First of all, it will be important for you to avoid the shiny object syndrome, and commit to a strategy.  Investing (of any type) tends not to work if you dabble, so I would advise you to ask yourself some 10,000 foot questions related to your overall mindset before you dive in. 

Assuming you are committed investing in real estate, here are two important questions you should get clear on before you navigate your entrance:

1 - Do you want to be an active or passive investor?  There are pros and cons to both, but in general, active investors make real estate their career. They work at it every day, study it from every angle, make mistakes and learn from them, and manage or wear all the hats required to run a real estate business.  Passive investors take the approach of finding really good active investors who already have the experience, and partner with them.  Are you looking for a career in real estate?  Or do you want to put your money to work with an expert and keep doing what you're already great at today?  This is a question of lifestyle and career focus.  

2 - Do you want to invest short or long term?  Again, there are pros and cons to both.  In general, short term investing will allow you to build your capital up, but you'll want to consider the tax ramifications, the market risk you could be exposed to, and the risk of becoming a deal junkie where you are not building cash flow.  Long term is a much more disciplined, patient game of building generational wealth.  For most beginning investors, short term is sexier, while long term investing can feel slow. This is a question of mindset. Short term gains vs. building cash flow and wealth. 

Those are very basic and general descriptions, but it is important to take the time necessary to get clear on your answers to those two questions first.  Do some serious soul searching and try to visualize your life ten years from now as you answer those questions. 

Here is why you'll want to get clear on those first:  Your answers will help you choose the right strategy.  Your answers will also help you choose the right type of real estate, since each asset class has intrinsic characteristics that fit one investment strategy better than another.  

Once you have gotten clear on active vs. passive, and short term vs. long term, there is a wealth of content here on BP that should help guide you to choosing the right asset class.  Search the forums and blogs for key words related to your answers and you will find great guidance.  Also, don't hesitate to reach out to people who are experienced, connect with them, and pick their brains. 

When you are clear on the asset class that will fit best, and are committed to an overall strategy, only then should you begin the careful deployment of capital. 

All the best,

Jack

@Daniel Shafer there is some great practical advice in this thread.   IMHO, the character of the sponsor is the most important item to vet, before you spend time digging into the deal.  Common sense would suggest if you have a sponsor lacking in that department, even the deal of the century could turn out to be a bad investment.  @Ian Ippolito gives some great advice (above) on research you can do from your computer.  Something to consider adding to your evaluation is a handful of references who've had prior experience with the sponsor. In a 15 minute phone call, you will learn more about the sponsor than you ever could elsewhere.  Also, prior investors won't give a glowing testimonial unless they have had a great experience.  Keep in mind, if you take this step, you'll want to ask for several references who've had many years of investment experience with the sponsor, not just a new investor who is getting into a current offering.  If they resist your request, that should be a red flag as well. 

@Luis Barberi I would echo what @Arturo Borges has shared as it relates to trusting the syndicator.  Trust is paramount to sleeping at night, and I can't stress that enough. It does no good to place capital with someone who has a great project with 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 ever 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 talk to others who have had an experience investing with the syndicator already.  Simply ask the syndicator if they would be open to connecting you to a handful of investors who have 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 over time.  

Some items to touch on while you talk to prior investors:

- How has the overall experience been while you have been an investor?

- How accessible is the syndicator?  If you have a concern, are you able to talk to them?  Do they return your calls?

- How often do they communicate?  And do they have a communication plan? 

- What does the reporting look like?  Is it limited to progress photos? Do you get to see a P&L?

- Are they transparent?  Even when they run into a problem? 

- Are they on time with delivery of tax documents?  

Your overall experience investing in a syndication involves much more than the yield you could achieve.  If you take the time to share some phone calls with a handful of prior investors, you should get a pretty good handle on what your experience is going to be when you invest. 

All the best,

Jack