Business model

[Dustin Hope]

What do you guys think of my business model

Our Business Description

We buy mobile home parks and mobile homes to fill the need for affordable housing. We buy only for cash flow in areas that offer a stable or growing market. We buy mobile home parks and mobile homes in emerging or stable markets. We buy only for cash flow in areas that offer a strong backend. My goal here is to buy B and C assets in A, B and C, areas. If the area is good and solid and we put money into the investment, we know the area is going to support the rental increases.

What Is The Issue That Your Product / Solution Will Address?

Statistic shows most of the apartments are going up so high that the working class person cannot afford it. We expect them to increase for the next 3-7 years.

What Is The Size Of The Market Opportunity

The household income for 20% of all Americans is under $20,000. That's 60,000,000 people. Based on the government's suggested ratio of housing costs to total income - about 33% -- these families can afford around $500 per month. But the average apartment rent in 2010 was over $1,000 per month. So where can you live for $500 per month? There are only two options: low rent apartments and mobile homes sited in mobile home parks. And, as a result, the demand for mobile homes has never been higher.

How Do We Look For A Mobile Home Park For Sale?

Now real-estate is microeconomic, not macroeconomic, these big reports are macroeconomics for the whole city, I don’t look at that. I am only looking at the demographic area that affects the property that I’m going to buy. Before I do any numbers on a property, before I look at what the seller has to say, we want to know what the area looks like. Because I can change the park, I change the tenants, I cannot change the area.

How Do We Compare Parks In The Area?

The next thing we do is evaluate where the rents are, and how the park I am evaluating compares to other parks in the area and what I plan to do with it.

The A class communities or four stars park rating are the really high desirable parts of town and its going to have a lot of extra amenities to it and the landscaping is going to be over the top because people have more money than they know what to do with.

The B class communities or three stars park rating are the good working class communities, if I had to look at the landscaping and cars, there are probably two cars to every family, and the landscaping is going to be very uniform, because everyone wants to keep up with the “Joneses”.

In a C class neighborhood or two star park rating it probably has 65% percent ownership and has enough to stabilize the market. This is where you get the real personalized landscaping. You may see yard gnomes, plastic flowers, statues, it might not be your taste but you know these people have pride of ownership.

In a D class neighborhood or one star I prefer not to buy parks that are really bad, they usually require too much time and effort up front to get them to minimal standards.

My ideal park is buying a B or C park. If I can start with a two star park, it’s got good enough bone structure to it that I can build upon it from there preferably in an A, B, or C area that is actually ready to go up in value.

How Do We Evaluate Rent?

Now once we decide the class of the park that lets us know where our rents should be in comparison to the rest of the area.

As far as tenants, I am okay with taking any tenants when I buy the park, because I can change it.

But depending on the kind of tenants I have, that would reflect on how I do my rent increases.

If I am working with C class tenants, these are your true working class tenants, and they have verifiable income and they have jobs. It helps me to stabilize the property because they tend to stay in the rental market for a longer period of time.

Your B class tenants are usually in the rental market, because they have had a life changing circumstances, bad credit for example, bankruptcy, foreclosure, they have good jobs. They have stable income, but they are going to stay in the rental market probably for the next three to five years until they can rebuild their credit.

I try to stay away from the A class tenants because they are people that are getting ready to buy a home at any time. They may be just waiting for the market to change, and as soon as it does, they are going to be gone.

If the tenant is a D class tenant that is undesirable and I think I want to move them out, then I am not going to show a lot of rent increases from year one to year two, because I know once I start enforcing the rules, these people are going to leave and I am going to have vacancies and have to clean up those units and bring new people in.

Ways of Structuring the Deal

Scenario 1

There is several different ways we can structure the deal.

If it is a smaller property, one thing we like to do in order to bring in the financing is that we will get a mortgage for the underlining financing which is usually somewhere between 70 to 75% of the value of the property. That will be the underlying mortgage and then we will try and get the seller to hold the second or we will bring in a private investor to hold the second. The way we protect ourselves is we actually write a financing contingency to the contract stating that either the seller or the private investor must make this loan within so many days after the close of escrow. We take our cash to the closing or will have a partner to bring the cash to closing. The cash is going to stay at the escrow office. Once the closing happens the seller will get their cash for the 70 – 75% that they are going to get. The second part is going to stay here because in our contract we said that person is obligated to repay us or obligated to make a loan. So once the time period passes the second closing takes place that either the seller or the private investor gets a second mortgage on the property. And we get our cash back to be able to go out and do another deal over and over again. So this is one of the more simplified ways we do deals with our debt partner.

Scenario 2

We could also bring in private investors for those second mortgages. Depending on the risk in the deal, we may pay them anywhere from 8 to 10% interest secured by real estate. So that is just one way we do that type of deal.

Scenario 3

When we have larger deals, we set up what is called a REG D syndication so we are strictly SEC compliant and we put together our deals using high net worth individuals. Now the way we structures we always have set up two separate LLC’S. The first one in the big “blue box” this LLC is the one that the property will be titled and deeded into. This will be a manager managed LLC and the reason we do that is so that we can protect our money investors by making it manager managed, the money investors are protected from the liability of the operation. Then we have very strong operating agreements. And those operating agreements are what protect the investors from each other. For instance we have a clause that states if a member wants to sell their shares they are more than welcome to do that. There is a policy they go through in the sales process, but they can’t sell their voting rights, that way we prevent a hostile takeover and preserve the integrity of the investment and all the investors involved.

Now in order to provide that kind protection of the LLC has to be manager managed. So with coming up with that we set up a second LLC called the founders LLC and that founders LLC is set up specifically to be the managing member of this LLC. We set the second LLC, one for asset protection because this second LLC does not hold any assets. So if as the member manager is sued it does not hold any assets, there is nothing for anyone to recover.

The number one managing member up here is usually the group sponsor that is the person that has the experience, they have the net worth, they have the skill to be able to operate, and make the decisions in operating the property.

That is usually the role we take in the transaction and as the group sponsor I am willing to give up a portion of my profit of the deal to a high net worth individual who signs on the loan. Now all they have to do is to show their net worth and liquidity at the time of loan application and at closing. In exchange for signing on the loan they become a full partner in the deal, they share in the cash flow, the appreciation, and the principle pay down throughout the life of the project. Last box:

Scenario 4

So if someone brings a deal to us, they have checked all the background bringing the numbers together, but they just don’t have the net worth and liquidity to get the deal done, that is when we bring them in as a partner in the deal with us. We will give them a small portion of our share of the deal, that’s basically a wholesale fee, but instead of them getting a check, they get cash flow, appreciation, principle and pay down, they get to take their share of the depreciation through the life of the project.

The Property

When we analyze gross potential income we are going to take the lower price of the park rent that we are looking at, or the surrounding market rents in the area.

When We Get To Vacancy

We use the higher of the park vacancies or market vacancies. So, by the time we get to the rental income the core basses of our analysis, it’s from a very conservative approach.

On Other Income,

We don’t want to be paying too much for a property based on things that may be going away in the future. We don’t include any late fees, one time fees, pet fees, anything like that. So, we only use long term sustainable income. We have to be able to verify 12 months or more of income deposits before we are going to include it.

How Much Money Do We Need To Have?

We do not know, until we get a deal.

How Much Money Will We Make?

It all depends on the transaction of the deal.

When Would We Get My Money Back?

3 to 7 years

Other Income

On any other income that we are including on our analysis were going to go back and were going to look at 12 months of bank deposits to make sure that money was really coming in.

Taxes

On the taxes, we want to be prepared for any increase in taxes that we may need to pay if we put money into capital improvements.

Insurance

On insurance, we always get three kinds of insurance, that way we protect all of our investors that will be in the deal.

First kind is replacement insurance that will replace anything that is damaged from an insurable claim.

The second is liability insurance so that we can protect ourselves from slips and falls, and people getting hurt.

And the third kind is income replacement insurance, so that if we would have an insurable claim that does damage the insurance company would reimburse us for the loss of our income.

Therefore we would have the cash flow to be able continue paying the mortgage payment.

General Administrative

The next thing we have is general administrative. This includes any cost we may anticipate in running the office, also is we want to have a software program on line, this would be included in there. That way it allows us to have better control of what is happing at the office operation.

Management Fee

Then we have a 4% management fee is put in here to protect the investors. The lender will make them have a property management company oversee the operation, to make sure they comply with the rules and regulations. If the lender does not require it, the property fee will be paid up to the group sponsor, who puts the deal together.

Utilities

The utilities we verify 24 months trailing so that when we go into a project we already anticipate the highs and lows of the utilities cost.

Marketing

Marketing, that is going to depend on what we have to do, if we go in and change the name, we are going to go in and build those costs in up front. Our goal is once we get the tenants that we want, we have the tenant base, the class of tenants we want, our goal is to switch some of that marketing down into payroll because extraordinary customer service is what retains tenants, and is much for profitable for us to retain tenants than go get new ones.

Contract Services

We are going to make sure that any contracts that the landlord has currently in place that we can get done for the same price and we are also going to make sure that we don’t have any long term obligations.

Payroll

If it is a very small park it will probably be covered in the 4%. If it is a larger park, say about 100 units you can normally afford 40-60 hours of payroll so then we would probably start having people on site whether that was a leasing person or maintenance person or a (split between the two) depending on what we are going to do at that individual park at the time.

Expenses

That gets us to our total expenses so you can see we spend a lot of time and effort making sure the operation is going to be profitable from day one.

NOI

When we get to the net operating income this is how we determine the value of the property. From that we have to subtract from the capital reserves.

Capital Reserves