All Forum Posts by: Brad Johnson

Hello Mason. 

For questions 1 and 2, which are really the same question: Your tax benefits will be governed by the operating agreement for the syndication. The tax benefits don't necessarily have to tie to the pro rata ownership percentages. However, for most of the syndications I see you would receive your pro rata share (investment divided by total deal capitalization) of the net income which would include both depreciation and mortgage interest. 

3. Yes - you should receive a K1 from the sponsor at some point before the the tax deadline. Most sponsors that I know target deliver of K1s before March 31st. 

21st Mortgage lends on mobile homes, I don't believe they have a park financing arm. 

Financing mobile home parks can be challenging depending on the size of the park, the occupancy and the number of POH (park owned homes). 

There are couple financing options:

• Regional Banks
• National Banks
• CMBS (Commercial Mortgage Backed Securities - aka Conduit Loans)
• Life Companies 

A park below say $1.5-$2.0 million in value will likely need to be financed by a regional bank. National banks typically want to finance large commercial deals. CMBS lenders can finance smaller deals as they are going to package the loans and sell them to Wall Street, but they generally don't like to go under say $1.5mm in debt proceeds. Also CMBS lenders tend to like deals with higher occupancy (say 80%+) with not too many park owned homes.

There are a couple Life Companies that love mobile home parks but they are really relationship driven and they are going to want larger, stabilized deals as well. 

Therefore, the majority of mobile home park deals will be financed by regional banks. You're best bet here is cold calling every regional bank within say 100 mile radius of the mobile home park you're looking to finance. Not a fun exercise, but this is the only way to ensure you've explored all financing options on a smaller park. 

Alternatively, you can hire a mortgage broker that specializes in MHPs. However, as they are typically paid 1% of the loan amount, they too prefer larger parks and may or may not spend much time working on smaller deals. If you're park is located in a small market, they might be able to help if they happen to know small banks that are willing to lend there, but they are unlikely to call every regional bank. If the park is located in a larger metro area, they probably have connections with several banks and will save you a ton of time (and perhaps secure you better terms).

If you pursue all these avenues and still strike out, then you have a compelling reason to go back to the seller and request he/she offer seller financing. If they won't (or cannot) then move on to the next deal.  

@Rohit Jindal 

As mentioned, this is a niche investment that most banks will not lend on. That being said, the banks that have experience with parks, love them. Most will not underwrite income stemming from park owned homes and many will not lend on parks with private utilities. 

Banks do not underwrite appreciation. They want to make sure the investment has sufficient debt service coverage (net operating income / principal & interest). Most like to take the last three years of historical financials and average the NOI to see if the property can support the LTV you're asking for.

Banks look backwards, investors look forward. 

Best of luck. 

While the seller might have good intentions (simplify the transaction, save money on closing costs, title insurance and legal fees), but this is typically a great way to dump undisclosed entity problems to an unsuspecting new buyer. 

You absolutely need to get a new LLC, if the seller objects, you can offer to pay his side of the closing costs, but I would go through your due diligence findings once more as this would be a red flag for us.

Best of luck.  

Need a lot more info to give you a proper assessment, but the seller (or broker) is clearly understating expenses. Bill is right, most stabilized parks will be in the +/- 40% expense load range. However, you've mentioned that this park has park owned home rentals. If there is a sizable percentage (20%+) of park owned homes, I would expect expenses to be closer to 50%. The difference is due to the increased maintenance, turnover and insurance costs associated with park owned homes relative to lot rent only tenants. 

Best of luck! 

I believe self directed IRAs are compelling vehicles to make passive real estate investments, but there are certainly trade offs. 

A SDIRA investment would forgo the benefit of non-cash expenses (depreciation) but would enable the investor to defer taxes until IRA distributions are made. This enables the investor to grow their portfolio with additional tax-deffered funds, which can be used to purchase larger (or additional) real estate investments. Depending on your situation and your investment, this might more than make up for your inability to offset taxes via depreciation.

Furthermore, the illiquid aspect of direct real estate ties nicely with the "illiquidity" of your IRA account. You can't cash in your IRA before you hit retirement age without taken a stiff penalty and you can't simply trade away your real estate when the mood strikes you.

The longer term nature of real estate and IRA investments enable investors to stay calm in the face of temporary setbacks / challenges and allow ample time to execute a turnaround or investment strategy. Of course this isn't as applicable for IRA investments made in housing flips, but for those individuals investing in larger multifamily or commercial buy and hold RE investments, SDIRAs can help you gain exposure to direct real estate and realize superior cash flow returns relative to most other passive investments.

One final note - Our investors seem to prefer Equity Trust, but I'm sure most of the larger custodian's are quite good. 

@David Hughes 

Unfortunately, this 2nd mortgage is essentially mezzanine debt and I've yet to talk to a bank willing to take a 2nd on a mobile home park. As all things, cap rates are subjective so underwrite it to a value that meets your return objections and then make that offer. Don't worry about what the seller is asking for.  I highly doubt he's being flooded with offers (even low ball offers). 

If / when he comes back with a no or counter, than perhaps you can make a slightly higher offer with a meaningful seller second mortgage. I would push for a very low interest 2nd that extends well beyond the term of the assumable loan. 

Ask for the promissory note so you can include any pre-pay or defeasance (yield maintenance) fees in your analysis. 

Your capital budget for homes is too light - unfortunately you're going to have a hard time finding 36 homes sub (post HUD) $7K homes that you would want to put into your park. Many of those will likely need another $3-$8K rehab budget just to make them comply with laws.

Also, perhaps I missed something but I believe you're suggesting a ~95% LTV total financing (the $1.36mm assumable + $435K 2nd mortgage) of the purchase price. That is a scary proposition (especially for your first park). You will have no margin for error, and just about 100% of your NOI would need to go to servicing the first and second mortgages (Not sure how you got to $10K month free cash flow based on the numbers you've provided - $150K NOI). Therefore you'll need to come up with additional capital for reserves and to purchase homes.

Also, I would encourage you to have a minimum of 1.5x debt service coverage and over capitalize the deal to ensure that you have enough to cover a capital improvement hiccup "Hello, this is your property manager, good morning, how are you? So.....a couple of the sewer lines just caved in, what do you want me to do?" and enough ammo to go out and buy solid homes that won't fall apart on the highway during transit and make you the lead story on the 5 o'clock news. 

Bottom line - I would probably move on, but perhaps you should toss in an offer at $100-$200K over the assumable note to see if he's willing to deal. You never know maybe he's getting tired of running it. 

We focus mostly on family (all-age) mobile home parks and rely heavily on craigslist ads. Robert is right, a search engine optimized website is also a critical element of a comprehensive MHP marketing strategy. A website targeted on a long-tail keyword such as "ABC Florida City manufactured housing community" would be fairly easy to rank in the top 1-3 rankings in Google. 

Is there a particular reason you're worried about marketing at this point? Is there substantial vacancy in the parks you're looking at? If so, I would dig deep to try an understand why. Or are you concerned with re-tenanting upon rollover? The average tenant term (occupancy period) for family parks is pretty lengthy and even more so for tenants in senior parks. 

To answer your original question:

Many of the all-age mobile home park investment structural advantages / fundamentals still exist for 55+ communities. 

• Lower tenant turnover
• Lower capital costs
• Lower operating expense loads relative to other RE asset classes
• Accelerated Depreciation
• Strong demand via continue economic pressure on the middle / lower class + boomer retirement with insufficient savings 
• Higher cap rates relative to multifamily assets of comparable quality

A few differences of 55+ vs family parks:

• Smaller customer base (perhaps not true in Florida)
• Higher operating costs due to increased amenities (clubhouse, pool, shuffleboard, gym, RV Storage, etc.).
• More organized tenant base with more time - might push for rent control 
• Far fewer bad tenant problems - likely fewer collection / eviction issues 
• Likely easier to finance as there are typically fewer park owned homes and the communities are more visually appealing
• Lower going cap rates so one could argue higher risk, but lower exit cap rates so if you can dramtically improve the parks operations, you'll make a higher multiple for every marginal dollar of improved NOI.

If you can find a solid, reasonably priced senior park with a clear path to increase NOI via rent increases, brining in additional homes and/or via operating improvements (expense reduction, sub-metering W/S, I certainly wouldn't pass on it just because it's a 55+ park.

We've recently started accepting self directed retirement funds for our mobile home park investments. Thus far, it has been a smooth experience. 

A direct wire of the investment funds into escrow after the investor has reviewed the PPM (private placement memorandum) and signed the subscription agreement (part of a 506 Reg D private offering) is a little cleaner than taking SDIRA funds, which adds additional steps) but not by much. 

Our investment platform is geared towards longer term holds vs flips; therefore self directed IRAs and funds geared towards retirement are a good fit for us. This is especially true of properties that we plan to refinance and return investor principal (vs. an outright  sale) as under that scenario the investors would no longer have equity at risk and could hold the cash flowing property indefinitely - which is my favorite type of retirement investment (playing with house money). 

No SDIRA horror stories yet. 

From the investment sponsor point of view:

Equity Trust has been the easiest to work with thus far. They are responsive and their DOI (Direction of Investment) forms / process is fairly straight forward. While they certainly won't help you conduct due diligence on a deal or sponsor, they do have seem to have a couple protocols in place in an attempt to help their clients avoid outright fraud. To be fair, they are not without flaws, but when they make a mistake or have delayed funding, their customer service has been quick to fix the problem.