Investing In Mobile Home Parks With Charles DeHart

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Welcome to the Next level Income show where it's our goal to take your income, your investments and your life to the next level. I'm your host, Chris Larson. You can get a free copy of our book@nextlevelincome.com and just click on the book link. Today's show is sponsored by Money Insights and their investment optimizer strategy. In my book, I share how I've used this strategy to invest my money in two places at the same time. This strategy has also been used by the wealthy for generations for estate planning, minimizing taxes, preserving wealth, as well as increasing stability for investments. Money Insights can help you build an emergency fund, pay for college fund, a business plan for retirement, as well as optimize your investments. You can check them out@nextlevelincome.com banking on today's show, I'm excited to have Charles DeHart. Charles currently co manages a team of brokers at Marcus and Millichap alongside his partner Glenn Esterson. Coming to the end of their first full year together, the team is on track to close out close to $250 million of mobile home park transactions this year. And prior to transitioning to brokerage, he also co founded Sunrise Capital Partners alongside Kevin Bupp and Brian Spear and they grew to over 2000 units within three years of founding the company. Charles still buys communities and has partnered with Dylan Marmot to form the Requity Group, which focuses on buying high quality, underperforming commercial assets. And to date they have closed on 163Mobile Home park spaces and is prepared to launch a $20 million fund to pursue more assets. Charles currently lives in Tampa with his beautiful wife. Charles, welcome to the show today.

Hey, thanks a lot.

Absolutely glad to be here. How did I pronounce that? Did I do it right? Did I do it wrong?

I don't know how to pronounce it either. That's Dylan's. Dylan, sometimes I purposely mispronounce it just to bug him.

Yeah, it's requity. And I see re and I always say re. Yeah. So the requity group. R E, Q U I T Y. So Charles, we've talked several times here, but for the audience who doesn't know much about your background, talk about your journey to where you've gotten today.

Yeah, so it's been kind of a mess of a journey, I guess to get here. I started off in the military. I actually did my first, I guess you could say it was my first real estate investment while in the Marines, went overseas, did A deployment had some money and my grandfather suggested that we build a house. I took that money, used it for the land and funded some of the construction of the house. And him and I and my dad built a house which ended up getting used as a rental property at times when I was gone, and then as a personal residence. And so that was probably my personal residence. Really isn't an investment property. But that was kind of my start, I guess you could say. After the Marines, I did some private contracting and. And at that point I was getting paid good money, so had a friend, Atlanta, and he was telling me that he was doing some single family home investing. And I bought two or three single family homes. Probably not the wisest decision, but the market at that time kind of bailed me out. I actually made quite a bit of money on those three homes. But operating that from overseas was very challenging.

Talk about out of state, right?

Yeah, yeah, it was a little bit different than out of state. Closing. It was weird too, because you have to use specific that have the ability to do it internationally. So it was kind of, I don't know, it was just a learning experience, I guess. So I did that and realized pretty quickly that I was like multifamily is probably better than the single family. It was pretty obvious. And so I started looking for apartment buildings, like smaller apartment buildings. Put a seven unit in Charlotte under contract. It fell out. I really didn't know what I was looking at, so I just got spooked off of it. And then a broker eventually showed me a mobile home park and the owner of that park walked me through business model and to me it just seemed genius. You got tenants who own the thing and they own their own home, and you take care of the roads and the water and sewer line. Then you just charge them lot rent. And he was telling me about the profit margins versus apartments and things like that, and it just seemed like a deal. So ended up getting into some coaching there, bought some coaching, learned the biz, and then took about two years to buy a park. But that was ultimately what freed me up from that overseas job. So bought a park, had met Kevin along the way, quit my job, moved to Tampa, and then we bought 20 more is basically the short end of the story there.

So 20 more communities, right? 20 more mobile homes.

Yeah. We ended up owning, I think 21 or 22 communities. We've sold some since then. I think I own 16 now. But it's been a good business.

Yeah, that's awesome, man. And obviously we share some commonality when it comes to our penchant for multifamily mobile home. So where were you stationed, by the way, when you were overseas? Can you say?

Yeah, when I was in the Marines, I deployed four times in six years. Went to Fallujah in 2006, 2008, I was south of Samarra, Iraq, and then 2009, went to Al Asad Air Base. That was a pretty boring one.

Boring is good over there.

Yeah, I was kind of all over. The last one was Afghanistan. We were at Camp Leatherneck and then spent some time in Kajiki and a little bit of time in Sangin. It was a good mixture of I was all over the place when I was in the Marines. And then after that I went contracting and lived in Baghdad for about five and a half years.

Interesting. Yeah. One of my former business partners was a Marine. And yeah, I just appreciate everything you guys do. My family, my uncle's father, grandfather, they were all Navy. I grew up not too far from the Naval Academy. You talked about the scalability, going from single family to really mobile home parks. Got a lot of people on the show talking about multifamily. That's next level. Income is a big focus. That's our focus. What is the difference between owning a mobile home park and owning a multifamily building? You talked about lot rent versus that. If you can go a little bit deeper into that.

I've actually never owned a multifamily building, but so I have to imagine what it's like. There's two big differences. One is the tax advantage difference. Our entire investment is pretty much land improvements. And so for all the accelerated depreciation stuff, it was a tremendously better deal. On the tax side, multifamily's caught up with accelerated depreciation and all that stuff, but we were on a 15 year schedule for pretty much 75% of the investment. It's been that way forever in this industry. And so that seemed like a much better deal, which was one of the reasons that I picked it. That was one of the big reasons. And then just from a management standpoint, when the tenant owns their own home, there's a couple of different ways to look at it. As a landlord, the turnover rate is so much less frequent. However, it also does give you a lot of leverage as a landlord. And so there's a lot of ethics that play into. You manage those tenants because you do have a lot of leverage there. You could raise their rent however much you want to. And really it's very difficult for them to lease and so that's been a thing that's happened in our industry where I've crossed the ethical line occasionally and just trying to find what our company's ethics are on those kind of things. That's been part of the learning experience that I did not anticipate. But as far as turnover rate, I would say your typical tenant owned home person owns their own home there is probably going to be staying on average maybe 10 to 15 years.

Wow. So, yeah, I mean, you Compare that to 18, 24 months on the multifamily side, that's a big difference.

Right. Occasionally we'll own some of the homes inside of the park too. And we'd see turnover rates that are very close to apartments. Like average lease length, depending on the type of community, might run from 20 to as high as 30 months. Home side, I mean, there's people that live in some of these parks for like 50 years. They bought a home when they were 30 or whatever and they ended up living there their entire life.

Yeah. That's incredible. So the communities that we're buying, Charles, we're looking at rents somewhere. Today's acquisitions, 1000, maybe to 1,200 or maybe upwards of $1,400 a month. Affordability is becoming a huge thing. I'd like to talk about that, but before we do, what are you seeing for average? And we're talking about lot rents, Right? So we're talking about what you're paying for a lot. What do you see as an average lot rent on a monthly basis in the mobile home space?

I'd probably say, and it's gone up a lot since I began, a lot faster than apartments have. And I think it's because of the constricted supply that we've got. But I'd say nowadays it's probably somewhere between 350 and 400 if you're looking.

At somebody that's living there. I was having this conversation with my uncle. He lives out in Colorado in between Aspen and Glenwood Springs. It's one of these tourism towns. They're facing a lot of issues where people can't afford to live in these cities. But there's all this space on the plains in between the mountains. And I was looking at these really great mobile home parks. I was like, this is a terrific option. It looks like in areas that there's an abundance of land and you're looking for affordability and there's some really nice, I don't know if you call it manufactured housing or even tiny homes today that you could put on here. So if you say, okay, what's the total cost? Obviously there's lot rent, but if I'm going to go live in, call it a mid tier, maybe upper end park. What's the total cost for a resident living there?

Say for a. I don't have a lot of experience in that part of Colorado, but I'd say lot rents and wider communities. Yeah, total cost for a tenant might be. I mean, in a park like in that part of Colorado, you might see the lot rents being 1000 or more and then the mobile home would actually be over 100,000. In some cases, depending on where it is, it might be a half a million for that home.

Wow.

I was out in Colorado re too, and my wife had to bear with me while I swung through one of those parks and asked some people some questions.

I love it.

In our parks, I'd say we usually hold our rents probably about 10 to 20% below market. That's kind of where we're at. We're slowly creeping those up to market. So we bought a lot of our communities well below market. So I don't have any of our communities that are at market rent right now, but we're probably sitting around 10, 20% below market on most of our parks. And then we typically try to pass through the utility costs and then if it makes sense to pass through trash and stuff. I don't like nickel and diamond people. I'd rather just do it through rent. But if it does make sense, they're getting individual can service at their unit, they're probably going to get that pass through. If they're taking their stuff to stir, we probably won't pass that through.

That makes sense. In the multifamily space, there's a lot of different ways that you can improve the income on these properties. These mobile home park, multifamily community, they're both valued on net operating income. Correct. So we raise rents typically through improvements. Then we have operational efficiencies. So in a mobile home park, if you don't own the home, what are the improvements that you can make? You were talking about land improvements. What do you actually do to increase the revenue on that park?

The biggest one is you see with people who, when a community turns over, is repaving the roads. And so a lot of people will repave the roads, new signage, and then maybe do some improvements to the office or a lot of the amenities in some of these parks have gotten old and tired. So they'll just refresh them and then they'll go in for a significant rent increase out of the gate and then slowly creep it up to market after that. That's kind of like the bread and butter strategy most people do with them. I think one of the unique things about parks, Dylan was kind of explaining this to me that in apartments, it's just odd to me that apartments transact every five years. It doesn't make a whole lot of sense. Five to 10 years. Why would you take the risk of bailing out of one community and going into one? But he filled me in that that's kind of the timeline where the capex needs to be done. Again, you're just refreshing. And so you send it back out to mark. New guy comes in, they do their improvements. They basically just do the same blueprint. But in mobile home parks, your roads, you know, how often do you replace a road? It's not that often. So you see a lot of these communities get held for 20 or 30 years. It's just not uncommon.

Yeah. So, I mean, Dylan's spot on. And we just bought a community, we closed on it last month and it was a 2018 build. We're still being able to go in and make some improvements. Just because the market has changed in that particular area to the point where some small changes with respect to the finishes is going to allow us to increase that. Then you have other. We'd sell to groups that they want something that's stabilized. That doesn't take a lot of capital investment. So even three years may not be an unreasonable timeline to go in and do that and flip and redo the strategy. So I think that's one of the areas that I've looked into. It seems like mobile home parks tend to have higher cash on cash returns than multifamily where the overall returns they can be similar, maybe a little bit higher depending on where you go. Can you speak to that? The cash returns and you don't have to talk specific numbers, but it seems like these can be real cash cows if you get them stabilized.

What creates that is there's two types of valuations that go into these things. So the lot rents, all the revenue and expenses. You have to imagine the park is two different views. Let's imagine because you'll get a park and however it comes. But the optimal business model is to have everyone own their own home. Those expenses and those revenues that are still present after the homes are all sold off, net operating income is capitalized, Whereas everything that spins off of the mobile homes, none of that income or that expense is capitalized is done instead is you value the home based on what it's worth. So it's kind of like a car. If I was buying a taxi company, I wouldn't probably. I don't know how to buy a taxi company, but I probably wouldn't buy the cars based on their noi. That's the way that mobile homes are done. And that typically creates. If you look at the revenue and expenses on your typical mobile home and look at what the prices that investors are paying for that mobile home, it probably works out maybe a 12 cap if you were to capitalize it, 4.

To 7 caps in the multifamily space. So a big difference. So cap rate is for those that don't know. You can check it out. In my book, I talk about it, but it's basically if you buy something for a million dollars, a 10 cap would be you're getting $100,000 of net operating income on the back of that.

The difference is, though, you can't push values because it's not valued on the cap rate. You're getting a high cash flow, but on those homes, you can't push its value.

Right. That makes total sense. So it's a blended strategy when it comes to that. So what changes have you seen? So you started. Was it 2014, you started in the mobile home spark space?

Yeah, right at the tail end of 2013. 2014.

Terrific. So what changes have you seen, Charles, over the past six years?

It's been a lot. I think being on the broker side, I get to see a lot of what's happening, all the relevant things. Seen a lot of people coming from apartments. Just tons of people coming from apartments. When I first started in the business, people did value the upside, I don't think ever existed. Where people say all the time they don't pay for upside. I don't think that ever existed in any market cycle. But there was still a little bit of that going on. Now it's super, super aggressive. It's to the point where you used to be able to buy a park even at a market price and have a margin of safety to give your investors the rate of return they're expecting. Nowadays, you have to be very. I look at it as the market has priced itself to a point where operators who aren't very good aren't going to make it. And so the very good operators, they can still function now, but the ones that aren't very good, they're going to have a hard time.

Yeah, absolutely. Who's operating your parks? Who's running that side of the business we are.

Yeah, we tried third party management. It's a problem of geography where it makes it really hard for a company to get third party management. And so one of the companies we went with had a very big management portfolio, about 40,000 lots. But they were in 30 different.

Oh wow.

And so they did a fairly good job. As good as you could expect. Being stretched so thin. There's just not that good options for that kind of thing.

Yeah. And I mean even us, we have different management companies in different geographies also depending on where that property is in the stack. Is it B, is it A, where's it going to be? So it's so important and that's what I talk about. And you know this, that's where the rubber meets the road. Right. You can have the best property in the best market and have crappy management and it's not a good deal. So that's terrific. So let's talk about the equity group. Let's talk about the fund you guys are raising. What you're targeting. $20 million fund, that's a good size. What are your targets and what are your goals with that?

I don't know. Dylan and I, we've spent some time, I've walked him how markets price in these things. It's a little bit different with two different types of evaluations that go into it. Or some of these mobile homes are sold on. So you're then basically doing some note buying as well. So we spent some time doing that and really our targets are the Southeast. We like Southeast. And since he's now in Florida, we're basically our investment thesis is still together, but we're building the Alpha and Tennessee and North Carolina, Georgia and hoping that that allows us to.

Terrific.

And so that's kind of what we're moving forward.

So Charles, one question we ask for every guest that's on the show is if you go back to your 25 year old self and give yourself one piece of advice, what would it be?

Okay. I probably wouldn't have listened, but I guess, I don't know. I actually really sometimes think it'd have been really nice to have gotten into real estate a lot sooner. But on the other hand, I got to do a lot of things that there's very few people that got to do the things that I got to do. So I probably would suggest that I'd get into real estate a little bit sooner though.

Yeah, I love that.

Just a little bit sooner.

It's never too early to invest. So if you're listening. And the best time to invest is yesterday. The best time to invest that second best time is today. So if people want to learn more about you, what you do at your brokerage, Charles, if they have any questions or maybe they're looking to transact or buy something and they want to learn more about the equity group, what's the best way to find out more information and connect with you guys?

Yeah, the requitygroup.com is the site for Dylan and I on our capital raise and what we're doing on mobile home park buying side. And then my brokerage partner, it's the MHP expert, Dom, if you're looking for mobile home parks to buy, you can go there and we've got five agents that are all country. We do them all over the place. We got them all the way from we got one deal in Silicon Valley, California and then pick out the most random tertiary market. We've done them. There's.

That's awesome, man. Now I'd love to hear more about that. And if you want to learn more about what we do at Next Level Income, you can check us out@nextlevelincome.com again. You can get a free copy of our book by clicking the book link. Again, we're going to have the links for Charles and Dylan's information. It's the recreatygroup.com it'll be in the show notes. Charles, thank you so much for being on the show today.

Thanks a lot, Chris.

Absolutely, man. Great to see you. Thanks.