Surviving Recessions with Cash Flow Assets with Walter Johnson REIA 472

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now, here is your host, Dr. Allen Lomax.

Hello, enlightened investors, and welcome back to Real Estate Investing Abundance.

I'm your host, Dr. Allen.

And I'm so pleased that you have decided to join us once again today. Your presence is always a pleasure. Today we are going to be talking about why I wouldn't invest in mobile home parks if I were you today. And with us is an expert on this topic, Walter Johnson. And he is a renowned Entrepreneur, real estate investor, and keynote speaker. Walter's career initially began in finance, evolved into entrepreneurship and real estate investment, showcasing his adaptability and drive to excel. Walter founded Sonus Capital, a real estate investment firm that provides opportunities for individuals to invest in mobile home parks across the country. His journey from humble beginnings, facing obstacles in real estate investing, to achieving success has served as a source of inspiration for many striving to reach their own financial goals. So Walter, welcome to the show. We're glad that you can be with us today. And let's just start off, why we should look left when others That is actually a—

that's a great start to this podcast. I would say you do the opposite in accomplishing your goals. So, I would say, remember, I don't know, this has probably been the last 20 or 30 years as well, but single-family homes were the thing that actually invested. And then they, you know, we've seen what happened in 2008. 2008-2009 recession, values actually, you know, plummeted. Actually, a lot of things plummeted, but especially single-family homes. Now, what the trans— I think after that were apartment buildings, right?

Yeah.

Actually, you know, crypto and all these other things, Bitcoin. Well, when everyone's looking that way, you, you know, I highly recommend that you look the other way to find some investments that is not as crowded so you can actually make money. I wouldn't say be a trailblazer, so to speak, because, you know, the, the, the investment's already there. But when other people are looking one direction, look the next.

Well, that seems to be good advice in a lot of areas. Certainly in multifamily, it's been really difficult to find deals that pencil out really for the last 2 or 3 years or so. Because it is just such a crowded market and so many potential buyers have gone out there and they have really overpaid. And I suspect that in the next 5, 6 years we're going to be finding individuals that weren't capitalized well enough to sustain those overpayments of properties. So the tide will probably turn. I mean, that is real estate. It goes in cycles just like anything else does. Tell us a little bit about yourself, Walter. We gave you an introduction there, but tell us about your company and what it is you do and how it is that we can find you.

Sure. So I, I created— well, before Sonos Capital, there was Sonos Capital, was a fund one, and that was actually my own money. So I bought apartment buildings, and, uh, this was actually before you know, the height, I would say, before was pre-COVID, of course, and before, before low interest rates, you know, lower than what they, what they were, or higher than what they were during the COVID times. And I started buying, uh, you know, apartment buildings, duplexes, fourplexes, and bigger units, 16, 20, 25 units, from directly from sellers because that was my, my experience. But what I learned was I did something. I had a mentor that told me about mobile home parks. He wasn't a mentor. He was actually a friend that mentored me in the, I guess, the education of mobile home parks.

Mm-hmm.

He didn't own any of them, but he was in the business. He actually sold homes to park owners. So, I learned a lot about him. So, what I did was that I sent a mailer, and I kid you not. I think I paid like $1,200 for a mailing piece just to test it out. And on that mailing piece, I made about 6 figures flipping my first mobile home park.

Wow.

It was a, you know, it was a double escrow. So I was like, wow, okay. Now, that wasn't my intentions. My intentions were just to get a feel for how, you know, getting information from mobile home park owners to kind of get my feet wet. As far as, you know, what is really out there. So I did well. The reason why I sold it, because I, you know, I wasn't expecting that, but I did well. And that's actually how I got my start in parks.

And are you still in parks today? Is that where your primary interest is?

Oh, that's— yeah, that's the only thing I do. So I— so after that, not just because of the money, is because of the, the opportunity buying, uh, value-add mobile home parks. So I switched that in 2000 I went full-time parks in probably 2017-18.

Okay.

Yeah, sold my last apartment building in 2016. It took me a while. And so that's all we do is mobile home parks.

Okay.

Well, how do you— how do you prepare for recessions? Or how I should say, how do we prepare for a recession?

Buying cash flow assets. So when we look at the previous recession, what, what transpired is that if you actually have, let's say, a single-family home and it plummeted in value, you're underwater. You're actually— you have a negative net worth. Well, if you actually buy, you know, let's say a cash-flowing mobile home park, you know, I wouldn't say— and essentially you don't care what the value is because it's actually cash flowing.

Mm-hmm.

So you can actually survive in a recession if it's bringing you 20, 30, $40,000, $50,000 a month in a recession, I think you and your family are actually going to do okay. Versus, let's say, some land or some single-family homes where you bought for $300,000 and it's worth, you know, $600,000 at the peak. Now it's actually worth $250,000, but you, you know, but you owe, you know, what it's worth. Now you don't have any— now you're holding on to a liability. So that's— yeah, it's just cash flow assets.

Well, and And not only is, is the— I suppose when you got started anyway, the, uh, the mobile home market wasn't crowded. Has it become a little bit crowded over the last few years, or are there still opportunities there?

No, there's still opportunities. So, so yes and no with that question. It has become crowded, and the reason being it actually got crowded— one, we have the, you know, the internet, it's a lot of buzz. But 2 is that during COVID when The government injected a ton of money into the economy and injected it into Wall Street. Well, Wall Street actually didn't have any place to put their money. If you look at what was actually defaulting, what was actually had high vacancies, we actually had apartment buildings which had eviction memorandum, which means you couldn't evict anyone. So those were plummeting, right? The values were plummeting. Office buildings, of course, are plummeting.

Mm-hmm.

And several other real estate, you know, hotels were not doing so well. So there's a ton of money got injected and a ton of attention went to the mobile home park space for cash flow and opportunities.

Where do you, where do you see that going in the next few years?

I think it's going to— I think we still have a window of opportunity to actually gather some opportunities. Yes, there are actually big companies That have a lot of money that are coming in. But that's just any, any industry, I would say. But, you know, it's— yes. Is it harder to actually find a deal than it was 2, 3, 4, 5 years ago? Yes. But are there deals out there? Yes. We're actually looking at one now. And so I'm actually going to do a webinar to show people what a deal looks like and what a deal doesn't look like. And it's just for education purposes. But yes, there are actually deals out there.

Well, since you just mentioned a webinar, can you tell us about the webinar and how we can get in on that?

Yes. Yeah. So, I get a lot of people that— several people that actually look at what we do and saying, I don't know how to pick what a deal is and what a deal is not. So, the topic of the actual webinar is going to be about 10 to 15 minutes. minutes, and we're just actually going to talk about a deal, saying this is what a deal looks like, this is what a deal doesn't look like. So people that are actually interested in mobile home parks, when they're out there, at least they have some, some ammunition to actually work with.

Yeah. How do we find that?

Um, I'm actually gonna— yeah, I'll put it probably on social media and LinkedIn. I'll send you the link as well.

Okay. What are you finding for, uh, for cap rates, generally speaking? I know it varies from area to area, but But what are you finding there?

Yes, and that's actually— that's one I'll give you, that little tidbit that we'll, we'll focus on here in a, uh, in a, in the webinar, is that usually what I'm looking at— I just looked at it right now— but usually you can find some 7, 8 cap rates. We look for 10s, but even if you actually find a 7 or 8 cap rate, you can actually usually decrease the expenses and increase the rents. I would say not day 1, we're probably month 3 And you can turn that 8 cap into a 10 cap. So those are things you can actually look for. Usually mobile home parks, you're, you're going in at a 10 cap. That's a little bit tougher than it used to be, but if you can actually raise the rents, increase, uh, or decrease the expenses, you can actually get that up to it pretty easy.

Do you generally— are you generally finding opportunities where you can actually cash flow from day one?

Oh yeah, oh yeah, absolutely. We don't buy parks that, that we don't cash flow, not at all. So it's not like a single-family home store, you're breaking even, or there's a little bit negative cash flow, but you bought it and you have— when you bought it, you have $50,000 in equity when you bought it. We don't— no, that's, that's not what we do. We look at the, the— our, not our, our motto is— our business model is that if we never put a new home in this park But we bought it day one, it has to be cash flowing about 18-20% at least cash-on-cash return.

Okay. And is— does that also provide value-add opportunities, or—

Yes.

And, and what, what is the— what are generally the terms that you, that you are looking for? For, for For the value-add proposition?

We're looking at, uh, so currently right now I just actually looked at a, a national trend from north, east, south, and west of the, of the U.S. as far as what's the occupancy of manufactured housing, mobile home parks. Currently right now it's in between 92% and 90% occupancy. So what we look for is we look for anything that has between 60% and 65% occupancy. To over time increase that to 85%, 90%, 95%. And that's our value-add play.

Are you finding challenges in getting financing at 65%? Because in the mobile— in the multifamily industry, that would be a very challenging prospect.

Yes, at times, but that's actually a play as well. So then that's one of the things we'll discuss on a webinar. But yeah, so when you actually find something that actually has lower occupancy, there's some— I don't think there's a lot of lenders that actually go that low. They actually want to stabilize. However, you can actually get great seller financing on low occupancy and stabilize it. And that's actually a good thing in today's market because most likely the seller actually still wants that income. You can get a better rate from that seller than you can actually with the bank.

Well, are you finding a lot of mom-and-pops that are still in the mobile home business? Is that where you're primarily finding these opportunities?

Yeah, you can still find those, or you can— yes, absolutely. So you can still find those, or you can find someone that actually owned it, you know, a mom-and-pop from 10 years ago, and they just wanted— that's what they, they probably did, a 1031 exchange, and they actually want to sell that Retirement, they're older, or they want to do something else with that cash. Yeah.

Do you have any criteria in terms of population centers? Uh, do you— are you purchasing these in rural areas as well as urban areas, or what's your criteria for that?

I would say secondary markets. When you actually look at the urban areas, they're really expensive. And let's just go back to what you said was actually the cap rates. And when you're actually in urban areas, those cap rates can be pretty low. We're talking about 4 or 5%. That's hard to actually make something work at 4 or 5%. And the, the, uh, price per space is actually relatively expensive. What I found out is it's a sweet spot, is probably the secondary market.

Mm-hmm.

The rural areas, they can be okay, but now you're dealing with— you're competing with a cheaper house, a cheaper single-family house. So they can actually go, let's just say FHA 3.5% on a, you know, $85,000 house in a rural area, or 10 or 12, you know, or 20% on a manufactured home with lot rent in the same area. So yes, I would say the secondary market is a sweet spot.

Enlightened investors, if you haven't done so already, be sure and click that like button and also click that share so others can take advantage of the content. And finally, be sure to subscribe so you don't miss a single one of our upcoming episodes. Well, there's different, different theories on mobile home park investing. Some people stay totally and completely away from park-owned homes and others have found ways and means to work with that. What is, what is your position on that?

I would say, I mean, that's actually— some people like the extra cash flow. I would say my personal experience, my personal and professional experience, I don't want to deal with a park-owned home. And the reason being because the, the expenses actually eats up the profits. Now, you may not— you may get away with it for a few months Saying, hey, I made an extra, you know, $1,500. But, you know, the water heater goes out or the roof leaks or, you know, the tree falls on the actual house and that just eats up your profits.

Hmm.

Or you actually have to, you know, replace the toilet because it's, you know, it's clogged up, you know, with a diaper or a, or, you know, Beanie Baby. I don't know. But, you know, that happens. And then that's, that's actually just, it just Devastates the, the cash flow, right?

So a lot of parks out there have park-owned homes. Some are totally all park-owned, and then there's oftentimes there's a mix of those. So when you're purchasing those, what do you do with the park-owned homes?

Uh, sell them for cheap or give them away. It depends. Yeah, because when you buy a home— or excuse me, you buy a park with That comes with homes. Now that's actually on your insurance and your premium goes up, right? Because that's, you know, your liabilities, you're insuring a lot. But when you actually— and then that eats up your cash flow as well. But when you actually give them away, you can give them away for $2,000. You can actually just give them away just saying, here, you know what, you're actually paying $800 a month for this park-owned home and the lot rent. How about I cut it down to where you—

Yeah.

I'll give you the home, you just pay $700 in lot rent. And they're like, okay, well, I got a $100 a month discount and I have a free home. So that actually works as well. Or you just give it away, just saying, hey, do you want this home? We're looking at selling it, we're going to put it up for sale in the next 30 days. Do you want this home for $2,500 or $10,000 or whatever the case may be?

Well, in that case, so you would be underwriting So you're underwriting with the cost of the home, and then you are going to reduce that by giving it away. And you're— they were paying $800, you're reducing that to $700. And yet even doing that, you're still able to cash flow from day 1?

Yes. So I don't underwrite with the actual value of the homes, and I don't underwrite with the actual extra rent in the park-owned homes. I underwrite strictly on lot rent. So I— so since I actually had the finance background and, you know, was a, uh, how commercial lending works in mobile home parks, they actually do not include the park-owned rent is because they can't use it for collateral. So it's just strictly lot rent.

Okay. That's all interesting. So in secondary markets, what, what are you looking at? Populations of, uh, of, I don't know, 100,000, uh, and or greater? Is that kind of—

Yeah, I would say that.

What your sweet spot is there?

Yeah, I would say that. I would say that's safe to say. I would say a higher, um, I would say a higher home price. I would, I would definitely say that. Yeah. I would say something with some traffic. You look at employers, look at government workers, you look at Home Depots, you look at Walmarts. Yes.

Another issue with parks is the utilities. Sometimes water and sewer are public utilities. Sometimes there's private wells and septic systems. Do you even make offers on those, on septic systems and private wells, because they come with all kinds of headaches?

Yeah, they actually can come with headaches, but I actually had parks that actually did extremely well because— and it goes back to actually what you were saying. At times you want to look left when other people are looking right. So when people say, I don't want private utilities, yes, they can actually be a headache at times, but sometimes they can actually be just fine. One where it actually cash flowed a lot, but if we actually wanted to bring in homes, I think we actually had to hook up the homes and change some transformers or upgrade. But it was like $280,000 or so, which is actually expensive. But we got the, the, the park— I think we got the park for, I think, like $900,000 below, below the, below the market. Below the appraised value from a large bank. So, you know, spending $280,000, are we still ahead? I would say so.

Well, you had mentioned early on in the conversation that your foray into this was actually just through a direct mail campaign. Is that still how you primarily are sourcing properties?

Absolutely, yes. Yeah.

Can you give us some tips on what you're saying in those direct mail?

It changes up a lot. I don't know. I actually had one that I'm sending out right now. Now, it's not actually a direct— it's a direct mail piece, but it's actually a particular park that I want. It's pretty big, but I'm actually going to FedEx him an actual letter just because it's big, etc. So sometimes we actually do that if it's big enough. You know, a lot of people are getting direct mail, just send out, spend the $30 and send out a direct mail piece.

Okay.

Or yeah, directly to them. So it could be FedEx or USPS.

Yeah, okay. Do you have a size of a park? Mobile home parks vary tremendously from 5, 6 units to several hundred units.

Yeah, so we— so I, and I, I toy with that. I've seen some actually ones that are, you know, 50 spaces and some that are 600 spaces. So I would say right in between there. And we're actually looking at buying portfolios as well.

Okay.

So you can— so for a smaller investor, I would say you can actually make a park work for 50 spaces. That is true. My parks were— I think my first one was I think it was, well, it was 82, but one had the manager's office, so it was really 81, you know, paying tenants. And then we had some that are 100 spaces, 140, 103, 155. So that's where we're at.

Well, you just mentioned management, and so the next question is in regards to To management. I'm sure you're not managing your own properties. And you mentioned that one was an office for the manager. Oftentimes, particularly the smaller parks, 50 spaces and so on and so forth like that, they have an onsite manager that lives there and they offer them a unit for compensation for that. Is that a good idea? Have you had experience with that, or do you just stay away from that kind of arrangement?

No, that's actually a great idea.

Is it?

Uh, it's, uh, it's the reverse of, uh, I would say out of sight, out of mind. If they're actually on site, they have it in mind, right? You just manage the managers and you put things in place to actually make sure the manager's set up for success. So yes, that's actually an ideal situation.

And when it gets much larger than those, you, uh, up to the 200 to 600 or so spaces, does that equation change, or?

It changes a little bit, yes. It changes. You can actually have one on-site, or you can actually have one that actually drives to the manager's office the Monday through Friday or Monday through Saturday, and they get Sunday and Monday off. Like that. Yeah, so those work as well.

Well, is it challenging to find, um, competent and, uh, and good managers, or—

Uh, it used to be easier besides the quiet quitting phenomenon, but I think that's coming back. Not the quiet quitting is coming back, but I think finding good, clean, quality employees that actually want to work and want to help out and contribute, I think I think that's actually coming back. Yes, I think the COVID and the stimulus money is actually running out, so I think people are actually looking for, you know, for jobs. Yes.

Well, in making money, most of us think that's a good thing. There's been a lot of studies in conjunction with that and whether or not making more money does make people happy. What, uh, how do you feel about that?

Well, yeah, that's, that's I mean, I don't think money's not— I don't think money was invented to make you happy. That's not what the whole premise of money was, right? But at the same time, I've never seen someone mad on a jet ski. So it's one of those things to where I think it's up to the individual. But I would rather have money and be miserable than not have money and be miserable. That is true.

Yeah.

Well, I certainly have found that to be true as well. And I mean, there's an oft-cited study that was done actually about 12 years ago that indicated that there was really kind of a threshold once you got up to about, in today's dollars, about $108,000. There really wasn't any increase in happiness or subjective Well-being, but some later studies that have looked at various different factors indicate that yes, that as your income increases even beyond that point, that you have more options. With more options, you have more autonomy. With more autonomy, yeah, you do have more positive emotions and overall life satisfaction. So Making money is not a bad thing, but also those those same studies also indicate that happiness is kind of an outcome of wealth. That actually centering your life around striving for more money is a way to be very very unhappy. So if you have it, it's good. But if that's your overall goal in life, it's probably not going to do much.

No, no, absolutely. I think money's like a true serum. It lets people know, or it exposes people who they really are. At the same time, I think as many good people should make as much money as possible, because when you give good people money, they're going to do good things with it. When you give bad people money, they're going to do bad things with it. So I do think money's actually just a real true serum.

Yeah, that's for sure.

Yeah.

Well, what are your favorite books?

I actually just read the new Arnold Schwarzenegger book. That was actually a pretty good book. I enjoyed that. It's pretty similar to his show on Netflix, but he went a little bit deeper. But I, you know, Arnold Schwarzenegger was a childhood hero, and actually to read his books was actually, you know, very inspiring. However, his first book, Total Recall, I think, was actually better than his, his latest book. So right now I would say read Total Recall. That's a fantastic book.

Well, I didn't know he had a show, so— Yeah, yeah, obviously.

I think it's just called Arnold.

Okay, well, so we have been talking with Walter Johnson, and he is with Sonus Capital, and you can find at Sonus Capital and, uh, forward slash investing call. And, uh, so Walter, thank you so much for being with us today. It has been a pleasure getting to know you and to find out more about mobile home park investing. Thanks so much for being with us today.

Thank you. Absolutely.

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