All Forum Posts by: Jack Martin

@Mark S. the way we approach that is we don't call capital until it is needed. Investors can complete the onboarding process and sign docs to save their spot in line, but the capital call doesn't take place until a deal is about to close escrow. That way, you get to keep your capital and have it deployed on your behalf until it is called. As long as there is sufficient advance warning, that has proved to work best. 

As it relates to pass through of depreciation, I would agree with @Brock Mogensen that those benefits should be passed through to LPs and the GP should only receive a portion if also invested as an LP alongside everyone else.

All the best, 

Jack

@Fayez Jangda I would agree with the comments above. The first thing you will need to get your arms around is why the property has such high vacancy.  Is is because the current owner is not engaged? Or is it because the market simply will not support higher occupancy? If it is the latter, move on and find another deal. You cannot make a property work in a location/market that will not support filling spaces. 

The first red flag on this deal is the lot rent of only $150. In my experience, markets that cannot support lot rent of $350 or more are tough when it comes to filling vacant spaces. Quick way to find out if this owner simply is not engaged is to call all the mobile home parks in the area around the subject park and find out how much the lot rent is.  If you find the competition to be at a similar rate, I would punt on this deal. If it is $350 or more, then it is probably worth looking into it further. 

All the best, 

Jack

@Account Closed mentioned, good to see you share your plan as well. IMHO, I think you will likely be right on all those predictions...it's just a matter of timing.  

With respect to sub-prime mortgages, the problem is not created when those products become popular, rather the problem occurs when those loans become due. Adjustable rate mortgages (ARMs) with short term maturity (3-5 yrs) will be popular when fixed interest rates are high. Like last cycle, buyers want to get into a home and to qualify for the DSCR they will need a lower payment, hence the attractiveness of an ARM. Those payments will adjust in 3-5 years and a high % of those buyers will default. When the defaults get too high, the bubble will pop. Looking back at history as a comparison, we are in the early stages of creating that bubble as interest rates have been extremely low and these ARMs have not been necessary.

Speaking of history, for those of you who'd like to gain perspective from one of the best historic real estate cycle authors, spend $40 and pick up a copy of Philip J Anderson's book called the "secret lives of real estate and banking". That will give historic perspective and help with understanding macro real estate markets. History would suggest the RE market has more legs, even if the upward trajectory in interest rates prove to cool off the market temporarily. 

As it relates to the other predictions, I would tend to agree. Conditions don't look good for risk assets. 

All the best, 

Jack

I would echo what @Mario Dattilo with the caveat that if you have a fully stabilized park in a primary or secondary market, then 3rd party management could be suitable. Otherwise, prepare yourself to build your own property management, construction management, and asset management in-house. That can be difficult to do until you have reached some level of scale, but the truth is that no PM company will have the same urgency as you do as the park owner. 

To be kind to 3rd party PM companies, they can't really afford to be aligned with your urgency.  You can count on a good 3rd party PM company to collect rent, pay bills, hire/fire onsite staff, and do the bookkeeping, but everything else will be on you. They simply don't have the strength to manage capex projects, renovation of POHs, sales of POHs, etc.  For you to stay on budget and on schedule, it will be best for you to manage those in-house. 

All the best,

Jack

@Dan Golden do a lot rent survey of similar quality parks in the area and you will find out what number to use. 

@Mike Miller I would echo what @Jim Pfeifer shared above. IMHO, there is more flexibility with an investment that includes cost segregation and bonus depreciation (vs 1031) as you have the entire calendar year to allocate. Also, the recapture is at a flat rate, so depending on your tax bracket you may be able to create some tax arbitrage there. 

Keep in mind that some property types will garner a higher amount of bonus depreciation than others. Bonus depreciation is derived from the portion of the property's value with a 15 year depreciation schedule (or less). Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". The best examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from the building(s) but rather from the improvements to the land. In a mobile home park or RV park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that provides an indication of why an extremely high percentage of the property's value is allocated to the land improvements.

In a syndication, after a property is purchased, a cost segregation study is performed by the syndicator's tax professionals. In that study, the value of the property is segregated into land (which is not depreciated), buildings (which are depreciated on a 39 or 27.5 year schedule), land improvements (15 year schedule), and other smaller items like personal property. When the bonus election is taken, 100% of the allocation to the "15 year or less items" can be taken as a passive loss in the year the property was purchased. 

Properly executed, an investment in this kind of property can garner passive losses equal to or greater than the amount of capital invested. Those passive losses can be used to offset the gains you have incurred (or gains you expect to incur) as long as the gain AND the investment where bonus depreciation is being take occur in the same calendar year.

A few words of caution: be careful not to let the "tax tail" wag the dog. Each real estate type has different intrinsic performance characteristics, so make sure you understand the property type's risks and potential as an investment separate of the tax benefit. 

In that same vein, if you choose to invest passively in a syndication for bonus depreciation benefits make sure you vet the sponsor and understand the investment vehicle before you invest. Bonus depreciation is great, but when you combine that with great investment properties that produce cash flow and appreciation, that is the winning formula.

All the best,

Jack

PS - I am not a tax professional, rather surrounded by some good ones who assist us with this strategy on assets we acquire for our MHP investment fund. I would also acknowledge @Yonah Weiss as he is an expert on this front and chimes in on bonus depreciation threads here on BP.

@Jared Bauer I would echo what @Steve S. shared above, especially in the current market where good deals are difficult to find. Investing with an experienced syndicator can provide benefits investors may not receive if they choose to go the DYI route, including:

• Access to better deals: Syndicators are experts at finding great deals that never become available to the general public.
• Lower investment amount: Similar to the way you can purchase shares of public equities, investing with a syndicator enables you to purchase shares of much larger properties than you could on your own.
• Free up time: Passive investment allows investors to focus on the important things in their life while the syndicator does all the day-to-day work.
• Lower risk: Investors leverage the syndicator’s experience to avoid making costly mistakes. Additionally, the diversification that comes with a fund investment can spread out potential risk that could be present in a single property.
• Higher returns: Larger properties create economies of scale that result in better cash flow. It is not uncommon for investors to make more money investing passively than they would have if they acquired a property on their own.

All the best, 

Jack

@Aaron Bihl there are some lenders that specialize in MH loans to individuals, but they are quite difficult to find. Here are some links to a few national lenders for MH:

https://teamworkmtg.com/

https://mhlending.credithuman.com/

https://www.crmfunding.com/index.html

@Adam Jaggers on the surface that strategy should work for you, but the first thing you will want to confirm with your tax professional is that the tax benefit you would receive from bonus depreciation will offset the gains you incurred. 

Keep in mind, some property types will garner higher bonus depreciation than others. Bonus depreciation is derived from the portion of the property's value with a 15 year depreciation schedule (or less). Therefore the property types that are the most favorable to generate bonus depreciation will be those with a high degree of what the tax code refers to as "land improvements". Examples are mobile home parks, RV parks, and golf courses where the value of the property is not primarily derived from the building(s) but rather from the improvements to the land. In a mobile home park or RV park, most of the value is in the underground infrastructure, roads, landscaping, amenities, pools, fencing, pads, utility pedestals, etc, while only a small portion of the value comes from a building. In a similar fashion, if you can imagine how much landscaping and underground infrastructure is in a golf course as compared to the clubhouse, that will give an indication of why an extremely high percentage of the property's value is allocated to the land improvements.

When a property is purchased, a cost segregation study should be performed, wherein the value of the property will be segregated into land (which is not depreciated), buildings (which are depreciated on a 39 or 27.5 year schedule), land improvements (15 year schedule), and other smaller items like personal property. If the bonus election is taken, then 100% of the allocation to the "15 year or less items" can be taken as a passive loss in the year the property was purchased. Properly executed, an investment in these kinds of property can garner passive losses equal to or greater than the amount of capital invested. 

This can be executed with a direct investment yourself, or with a passive investment in a syndication with a sponsor who is taking the bonus election. If you invest passively you will receive your pro rata allocation of bonus depreciation on your K1 along with the other investors. Either way, you should be able to garner passive losses equal to or greater than the amount of capital invested. 

Those passive losses can be used to offset the gains you have incurred (or gains you expect to incur) as long as the gain AND the investment where bonus depreciation is being take occur in the same calendar year. 

A few words of caution; be careful not to let the "tax tail" wag the dog. Each real estate type has different intrinsic performance characteristics, so make sure you understand the property type's risks and potential as an investment separate of the tax benefit. In other words, be careful not to invest in a poorly performing property simply for the depreciation. In that same vein, if you are investing passively in a syndication for bonus depreciation benefits make sure you vet the sponsor and understand the investment vehicle before you invest. Bonus depreciation is great, but when you combine that with great investment properties that produce cash flow and appreciation, that will be the best formula. 

All the best,

Jack

PS - I am not a tax professional either, but surrounded by some good ones who assist us with this strategy on assets we acquire for our investment funds. I would also acknowledge @Yonah Weiss as he is an expert on this front and chimes bonus depreciation threads here on BP. 

@Chris Keil that will likely require private money. Focus on people who already know, like, and trust you. Share your business plan, your strategy with the park and your plan to replace their capital. Also, have a contingency in mind if those plans don't come to fruition.  

When using private money, the most important question for you to answer is, "How can I be confident I will get my money back?"  After that, the return they stand to make will be important in their decision making process, as well as how you plan to communicate with them while their money is invested.  

All the best, 

Jack