All Forum Posts by: Daniel Ryu

@Andrew Lackey

- We used postcards. Those worked. MHP owners will keep them in a drawer even if they don't contact you right away.

- A buddy of mine in TX said visiting directly worked too. 

I haven't done postcards in a while but I'm about to start again. Feel free to reach out if you want to continue sharing ideas.

@Anthony Dadlani

Feel free to reach out if you'd like to discuss the MHP industries - check out my bio for my on my background.

@Erin Spence

Thanks for the resource! I'll be reaching out as well

@Brenden Mitchum

Forgot about listsource. Thanks for the reminder.

@Tatiana Spence & @Darnell Simon

Best of luck on your mobile home park investing journey!

I worked with a private equity group buying mobile home parks and oversaw purchase of about $30m in assets across the midwest and southeast.

To get a better sense of where the gaps in your knowledge are, let's say that a mobile home park had 100 Lots and was 100% full.

Each resident owned their own home and was paying $300 / mo in lot rents.

Based on reviewing the seller's books, you determined that about 30% of revenue would be going toward expenses.

Let's assume 100% collections and 100% occupancy going forward. There's no cap ex needed and no closing costs. 

After talking to brokers, you found out that typically mobile home parks in that area are valued at 10% Cap Rate. 

• What's the market value of the property?
• What would your cash on cash return be for Year 1 of ownership?

If you can answer that question, then the next step would be to add in a few factors:

• What happens if half the residents are renters and paying an additional $300 in MH rent each month, on top of lot rents?
• How do you calculate an IRR, assuming a you sell in 5 years at 10% Exit Cap Rate with 5% Year over Year increases in lot rents?

In general, underwriting mobile home parks is similar to underwriting any asset. 

The biggest difference would be in how to treat the MH income streams, as appraisers and banks don't give them the same value as they do for the income generated through lot rents (and neither would sellers).

I also have a YouTube Channel where I post about the industry. A lot of the content I've posted is geared more toward general news and insights but starting next week I'll be posting more info on how to underwrite mobile home parks, the difference in how MH income streams and lot rent income streams are valued, finding deals, etc. Hit subscribe if you'd like to stay up to date.

Ps. There are many 'shortcuts' to valuation - ie. multiplying number of occupied lots x lot rents x a value multiplier (60-100). Those methods work but all valuations in investment still boil down to one basic principle: How much should we pay today for future cashflows? Calculating that requires use of some basic finance metrics (such as IRR or discounted cashflows) to compare apples to apples.

Hope this helps!

@Jacob Blackett

Remember the Holdfolio Presentation you did for the Seoul Real Estate Investing Meetup a few years back? You guys were definitely in early on the crowdfunding trend.

Hope you and Sterling are doing well

Let me know if you come across any interesting mobile home park deals near Columbus, Ohio.

@Eric Pritchard

Speaking of fees.. if you want to see more detailed examples of fees that a syndication might charge:

https://www.biggerpockets.com/forums/30/topics/800525-open-door-capital-brandon-turners-mobile-home-park-fund?page=1

Some posters have included screenshots from an MHP syndication.

@Kevin Mason

Provided in both formats, along with a very extensive documents library (purchase contracts, offer letters, sample leases, etc)

@Eric Pritchard

Lots of good general advice above.

To your specific questions:

1. Do deals need to be off-market?

No. Investors may prefer that as there's a higher perception of getting a discount to value. However most investors will want to see what their cash on cash and IRR look like over the period of the hold.

2. No money out of pocket?

The only way to do this is to partner with someone(s) as GP who will provide the funds. Funds you will need before closing: Legal fees to set up your syndication (Private placement memorandum, Operating Agreement, Subscription Agreement) - neighborhood of $10,000. Earnest money deposit - roughly 1% of the purchase price. Due Diligence Expenses: 3rd party tests - appraisal, survey, phase 1, and possibly Property Condition Report. Expenses for travel for onsite visit. If you hire a 3rd party to help with due diligence that will also cost you. You could end up spending thousands on due diligence... and then have to walk away from the deal because you find something that kills it (ie. infrastructure issue). This is money you'll need to pay upfront before you get any money from investors, which would come at the end when you close. 

3. Asset class?

Where could you find the deals that you could execute on and provide your investors the returns required? For me that would be in mobile home parks. For others, it might be apartments, etc.

4. How to "earn" money?

Syndicators will often charge fees: 1-3% on Acquisitions (typically 1%), 1-3% for Asset Management (1-3% x Equity investment) on an annualized basis, 1-3% on Sale / Refinance, provided all funds have been returned to investors, 3-6% Property Management Fee of monthly collected revenue. These fees all assume you have the scale necessary to charge these and still make investors returns work.

However Syndicators will also generally promise a preferred return (5-10%) of the Equity invested, paid annually.

Your best bet:

1) Identify the value you will bring to the relationship

2) Look for someone with the funding who needs that value

3) Form a partnership with that person to be the GP on the deal

Good luck!

@Adam Johnson

Not much to add to Frank's comment other than to ask a few questions that might help:

A) "Long story short, we were developing a ton of leads for prospective tenants to move homes in and/or buy homes that we owned and were selling (we don't want to do rental homes)."

- How were you generating those leads?

B) "We converted almost zero leads."

- How did you try to convert leads? What was your process?

@Max Fesser

All good advice above.

You're probably aware that at the end of the day, returns are set by investors and what they expect. But you're probably wondering what the general 'market' is. I wondered the same when I first got started.

One great way to research is to sign up to receive other people's PPMs. Then you can start to develop a baseline for 'market' expectations. 

Keep in mind that you might be comparing KIAs to BMWs - what I mean by that, if an investment group is primarily focused on Midwest turnarounds, they'll likely offer 8 prefs or higher. But if you're focused on West Coast stabilized, you're more likely to see 5 prefs.

The equity split will also depend on the sophistication of the syndicator and the type of investors that he/she is working with. Working with PE folks or finance people? Then maybe you apply an IRR hurdle before the promoted interest is earned and a clawback to protect the investor in case the hurdle isn't met at exit.

Or you might simply apply a Cash on Cash preferred return before the promoted interest split. 

I'd start with some of the biggest funds - what do they offer. What do publicly traded ELS / SUN REITs offer? 

In theory, investment returns are based on alternative uses of money. So by knowing what the alternative return structures look like, you can best position yourself with your investors. It sounds like your investors also need to be educated on these issues and you can bet, at some point, when you start to talk actual numbers, they'll be curious to know how it compares.

@Gitit Hefetz

1. As a general rule of thumb, MHPs are good investments because they offer solid risk adjusted returns.
2. Part of the thesis that has attracted many investors to the MHP asset class is the growing need for affordable housing and limited supply. There are about 45,000 parks in the US & that number is decreasing every year. For every 1 park developed, 10 are destroyed to use for other purposes.
3. Why don't we develop more? Several reasons but the most economical are typically: 1) Cost to develop vs higher and best use of the land vs buying an existing park 2) Local resistance b/c MHP residents cost more in taxes than the property returns to the city in terms of property taxes (Charles Decker, Duke PhD MHP Researcher)
4. Average market lot rents should be closer to $500 / mo based on the rate of inflation since the 50s. Instead, average lot rents are closer to $300 / mo
5. Accelerated depreciation

Those are some 'big picture' metrics that are working in favor of MHP owners. You also have strong cap rate compression that has occurred over the last decade. Whereas at one point, buyers were looking to buy at 10% cap rates, now expected cap rates generally fall between 5-9%

With regards to COVID 19 / Recessions:

• In general, the rent collections for MHP seem to be strong compared to other asset classes
• Studies of Sun / ELS REITs (largest publicly traded REITs focused on MHPs) show lower volatility during 2009 Crisis as compared to other asset classes (retail, commercial, SFR, apartments, etc). I believe only Storage was lower.
• Sun / ELS REITs returns have been very strong since 2009 - see my linked in profile for the exact numbers. 
• In 2009, 50% of all new MH tenants were former SFR tenants

But we are only in month 2 of the current situation.

While generally rent collections have been positive, there can be wide variance in markets (ie. @Kristina Sparrow above has seen a 20-30% in bad debt collections). I've heard of one Vegas owner who has experienced 10% Collections for his MHP.

If you believe in the big picture demographics that support MHP investing, then I think it's definitely worth your time and effort to learn and look for deals.

As far as is 'now' a good time to plunge in - the data that I'm seeing is not seeing any type of discounting for MHP yet. One owner I just talked to told me he thinks his properties are worth more now b/c of he's been weathering the storm (compared to retail, etc).

Marcus and Millichap and Northmarq both reported 5x drop in transactions - brokers are holding back deals as they wait for things to settle. The CMBS market for loans has completely dried up.

So in other words - there's no rush at this particular moment. Much of the MHP investor world (and real estate in general) has been put on hold.

(I also produce a weekly show on the MHP industry - you can see my bio for my youtube link)

@Samuel S.

You can definitely keep the POHs and have a "flat apartment" as it's sometimes referred to! ^^

The reason why most people avoid POHs:

• The time / pain of managing the MH (ie. the whole "don't want to fix toilets").
• The spread between the home rent and lot rent might not be enough to cover R&M of the MH - it's a 'ghost stream of income' then in the end, when you factor in time, expenses, etc, comes out close to $0 NOI.
• Generally, if the tenants own the home than there's a higher pride of ownership.

So if you can overcome those management issues and also control costs so that the MH can bring you money, then keeping the MH as rentals can make sense. Others in rent control states, might keep them b/c the lot rents have rent control on them, but there's no rent control on what you charge on the MH portion.

However, from a financial perspective, lenders will not allow you to cap the MH portion of the rent. So when you tell the lender you have $400 rents / month, they'll ask - but what's the lot rent portion? And what are the expenses associated with the lot rent? They'll want to see it separated out. If you tell them it's all rentals, they'll want you to provide some type of local market lot rent comps to set a value. The same will go for appraiser and future buyers. Also for larger deals, to qualify for agency debt, there might be requirements about the % of MH. Before it was 20%.. now that standard has loosened. CMBS was much more accommodating but for now that type of debt has gone bye bye.

Also from a property tax perspective, you'd want to present the case to the assessor that your park's value is based on the lot rent and not all of the rent. That can help keep your property values lower. You'll be paying MH taxes (ie decal taxes) separately, so no use in getting double-taxed. So if you're purchase price is $300,000, then dividing that out some way so that land portion and home portion is separated out. 

Generally valuation metrics work like this:

Annual NOI from the Lot Rent / Cap Rate = Park Price

POH valuation theories:

* NADA value x a discount rate

* Gross Rent Multiplier: Total Annual Income x (usually between 1-3)

* Annual NOI from the POH portion of the rent / Cap Rate (typically starting around 15%)

I'm talking in generalities some of which might not apply to your particular purchase. Every deal has its own nuances - these are just some nuances to be aware of. 

We almost lost a deal going back and forth over how to value the POHs vs the Land (allocations). Both sides were operating under what turned out to be some incorrect assumptions about tax liability - both for the Seller and for the Buyer. In the end, we decided the deal was good enough and we went with the Seller's allocations and the deal closed.

So in the end, what works may differ then what's the norm.