AIPIS 89 - Jefferson Lilly, Mobile Home Park Profits

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Welcome to the AIPIS show for accredited income property investment specialists and those who desire to be. This is your host, Jason Hartman where we talk about increasing your income, your productivity and just generally having a better life while serving your clients better with America's most historically proven asset class income property. We have a great interview for you today and we will be back with that in less than 60 seconds. Hey, it's my pleasure to welcome Jefferson Lilly. He is an expert on buying mobile home parks. He's been doing it for nine years. He started a fund, he's raising money from investors to go into his deals and it's interesting. He's based in San Francisco, but buying properties in all the smart states where you can get reasonable deals, you certainly don't get those in the Socialist Republic of California. Jefferson, welcome.

How are you, Jason? I'm great. I see our views, our political views on California are in alignment.

And you live in the Socialist Republic of San Francisco?

I do. I'm diversity for San Francisco.

There's like three of you.

That's right, that's right.

Yeah. Yeah. That's funny. Do you live right in the city?

I do. I live with my wife and 17 month old son Alistair right in the marina. It's kind of the north central part of the city, right near the water.

I know the marina district. My uncle used to own the Balboa Cafe.

Oh, you were kidding. Yeah, that's a couple blocks away. And one of my local haunts. I darken their doorways a little less frequently now that I'm married, however, much to my wife's relief.

Well, there you go. There you go. Well, hey, what got you interested in mobile home parking? Investing. I mean, were you investing in other types of real estate?

I was not. You know, I've just always been interested in investing. I purchased my first stock when I was 17 and needed to have my dad co sign the trade ticket. I won't tell you how old I am, but suffice it to say that was long before Internet trading. So I've Just always been invested. I've migrated really towards a value style investing. I really consider myself a value investor or who now invests primarily in mobile home parks.

That's the one area where I'd say I do agree with, you know, recently, in the last several years, very hypocritical Warren Buffett is the value investing concept. Although he's become a bit of a hypocrite in a lot of ways, I think, and I've lost my adoration for him a bit. But yeah, that philosophy I do definitely agree with. You know, that you just buy value stuff. It's just so. It's so conservative. It's just not risky, you know, it's solid.

Yeah. And so mobile home parks. Yeah. Are every bit value. We don't, for instance, take a raw piece of land and try and redevelop it into a mobile home park. There's no development risk with what we do. We're simply buying these real estate businesses that frankly, many have been around and doing quite well longer than I've been alive. And we put a little more marketing muscle behind them. Websites, Craigslist, and we'll go into this in the podcast, put a little more muscle behind them. We might infill them with some homes that we buy that perhaps are sitting vacant somewhere that a bank has foreclosed. We'll bring those into our communities. We'll provide more affordable housing for folks. We're just kind of stepping on the gas pedal a little harder on a property that's already generally going in the right direction. We're buying into that property at a fair value and then again and stepping on the gas, just taking it forward a little faster and making some very good returns.

Okay, so first of all, tell us how you find a deal. There's certainly the word has gotten out in the mobile home park investing world. I mean, everybody and their brother is doing these deals nowadays. Right.

There has been some more interest. I would still say on the whole, it's a fairly undiscovered niche, certainly relative to friends of mine that are doing fix and flip on single family houses in California or apartment buildings, trying to take a C quality apartment building and reposition it into a B quality apartment building in A market. Mobile home parks are still, well, maybe totally undiscovered is too strong of a term, but they're just nowhere near as pursued perhaps by the smart money, if you will, not as pursued as several other real estate niches that are more overheated. Just to throw out some numbers. We're typically acquiring properties at a 10 cap. Certainly for the coasts, that's unheard of. But in the Midwest we own. And again, Wyoming, Kansas, Oklahoma, Ohio, places like this, we can acquire properties at a 10 cap. We don't think that we're competing in auctions or overpaying. And then we can pretty much always improve the profitability just from controlling some expenses. Water, insurance, telephone, what have you. Control some expenses, bump the rents to market and pretty much improve every property by at least 25%. So that means really, quote, unquote for free. We're not having to do heavy investment in capex. We can take a property from a 10 cap to about a 12 and a half cap within a matter of months. We're borrowing money generally around 5. So that 5% that gets us to something like a 700 or greater basis point spread over our cost of capital.

Did we really get the answer there though, to the question of how do you find a deal? I'm sorry, I'm not sure we got that. So I just wanted to make sure.

Yeah, so there's no single way brokers are probably the best, but we've also done some mass mailings, postcards. We've also walked in off the street and just stuck my hand out and shook the manager's hand. Or perhaps I've found the owner in a park. And then actually we've also even bought off ebay and Craigslist, believe it or not. So those are a bunch of different ways. Websites also like LoopNet, that would typically be a lot of brokers putting properties there. But anyway, online and brokers are probably the primary way to find reasonable deals.

And so in terms of brokers, I mean, then it begs the question, how do you find a broker? Are you working with brokers who really specialize in the mobile home park world?

Yeah, it varies. So Marcus and Millichap is the largest brokerage firm that specializes in mobile home parks. So we know most all those folks. We have bought properties from them. They obviously shop deals pretty widely because they specialize in the business. But we still do business with those guys and some other large brokerage firms. But we just bought our last property in Ohio from a gentleman who does not specialize in mobile home parks. He's now become very interested in helping us find deals. So we've given him our acquisition criteria. Just had breakfast with him yesterday and he actually has dug up seven deals on his own that are not marketed anywhere. And, you know, actually a couple of them look interesting. I won't say that all seven look interesting. But there are about three of those seven that we're definitely interested in looking at. So I'd say for your listeners, you never know where you're going to find that deal. Certainly look at some of the larger, more shopped deals, but you will find mobile home park sold by brokers that don't specialize in the space. And if you can get them interested in being a bird dog for you, I think that can be a very powerful source of deal flow.

Yeah, right, okay, interesting. What is the model of that type of property that you look for? I mean, you alluded to this already. I know, but you know, do you have a cookie cutter that you go after a cookie cutter model?

So we've got some acquisition criteria. So yeah, a real bread and butter. Typical park furniture us would probably be 75 to 100 pads. So that is to say, when you get up to two and 400 space parks, those tend to appeal to some of the larger REITs.

And you'd have institutionals in there.

Yeah, yeah, yeah. You'd have a lot. You'd be buying at a lower cap rate. So generally parks sort of under 150 spaces generally are below the radar screen. You won't have a lot of competing acquirers. So 75 to 100 space would be right in the middle. We're always looking for parks on city water and city sewer or if they're not, then we must have city water and city sewer run in the street right in front of the property. So that if, and frankly more likely when a private well or septic system would fail, we know we can tap into the city utilities right in front of the park. So that's pretty key. We do look generally, of course, we need to be in a strong economy. That's typically exhibited by being within five miles of a Super Walmart. So really small towns that may not even have a stoplight don't have a Super Walmart. Those are going to fail out right there. We need to be really almost always within 5 miles or 10 of a Super Walmart. And then we're looking to see average household incomes of 40,000 and up. I think 53,000 right now is the national average. So we can come in a bit below, but not too low. When we see towns down at 30,000 household income, there just aren't jobs in those towns, there isn't economic activity. So household income 40 grand or better. And then we obviously compete to an extent with the site built houses in any given market. So we like to see site built houses at 100,000 and up. Again where we see markets that the average house is 60,000, then we know at the low end there will be site built houses for 30,000. And it's hard to compete with that. That gets into the price range that we're trying to sell mobile homes for. And folks would generally rather live in a site built house for the same price, but again provided average house price is 100,000 and up, then really the likely least expensive house in a market like that would be 70. And that of course would require about 14,000 cash down 20%. And most folks living in mobile home parks aren't going to be able to come up with that kind of cash to get into a site built house. So we're their affordable housing option, getting them into a house for maybe two.

Yeah. And what are you doing? Like do you like owning park owned homes or do you not like that? Do you look for deals with or without park owned homes specifically? And you know, depending on what your answer to that is, what's your model with that?

Yeah, so our goal in the long run is to run a parking lot. We just want to own the land. We want to encourage folks to become homeowners. The park for instance we just purchased in Ohio is a 90 space park. 81 resident owned homes. That's great. Obviously about eight or nine vacant pads. So we will get into the home business temporarily. We'll be bringing in. That's a particularly nice community. Lot rents are about 325. So that's a nice enough community that we can bring in brand new mobile homes and be selling those for roughly 40,000. Or we may bring in some say up to 10 year old used homes, but still in very good condition and vinyl siding, shimmering. They'll look new, but we'll bring in some used homes and perhaps sell those around $30,000 in that community and then most of the folks will end up owning those homes over on average, I'd say six years. There's nothing like a 30 year mortgage in our business. We want folks to see the light at the end of the tunnel. We want it to be a single digit number of years before they're a homeowner again. For some of those new homes it would be about six years. And if we take back an occasional house or two in that community or any of our communities, sometimes those will be older homes and we'll be able to get those sold back out maybe for $1,000 down. And folks will become homeowners in two or three years at the most.

And you're seller financing them, are you doing lease options or rent own or anything like that or just straight seller financing?

Yeah, we typically do a rent credit program which is very similar to rent to own, but it's good for any house in the community. Jason so if folks end up paying us, say over a couple of years, they've paid us ten grand and they then have another child and they want to move up from say a three bedroom to a four bedroom house with our rent credit program, they can just take that 10,000 say in credits and move up into a larger house and just continue paying on that house. They don't lose any money. So it's really like it's even better than rent to own for our tenants. But that's how we do it. We're also working with a finance company called 21st Mortgage and they will bring in new homes and they will actually carry the paper on it.

So either way, tell us about the types of interest rates when you carry paper or when you bring in this other company. What rates do they charge?

Yeah, we're typically charging anywhere between 8 and 14%. It depends a little on of course, the occupants credit and how much down.

Got it and how much down. What's the LTV on those deals and what's the deal size? Like how much do you sell that park owned home for?

Yeah, so new homes that'll come in will really just get sold at about cost. So that would be 40 grand. We had one in one of our camps Kansas properties. I think it cost us 38 grand to bring it in. That one we sold for 40. Well, I'm sorry, that one was actually an all cash purchase. Believe it or not, the lady went to her local bank in Kansas and got us paid off. So she carries the mortgage with that bank. But anyway, so I guess it's been a range of ways.

What else do you want people to know about mobile home park investing?

You know, it's a quirky niche, but don't be afraid of it. It's a very good niche. It is the only real estate asset class that actually has shrinking supply. You know, I've got friends of mine that do self storage or apartments or small, you know, strip shopping centers or office and they're always building more of all of that.

No city planner wants to build a new mobile home park, huh? No, I can't imagine.

Yeah, so yeah, really, over the last 30 years, pretty much every city and county where you would actually want to build a park. So sure, there's some really small po dunk you know, 800 person towns in the Midwest where you could still do it. But from a practical standpoint, any place you would actually want to build one, any place with good 40,000 and up household incomes, 100,000 and up average site built house prices, you just can't build these anymore. Cities and counties have either literally changed the zoning so that anything that was multifamily is now basically multifamily apartment. And specifically, they don't allow mobile home parks. Or like my friendly little city in Oklahoma where I purchased my first property, they passed the master plan and the master plan for that town says that sure, it's still okay to build mobile home parks, but basically any new housing that gets built in that town, you have to surround each house with two acres of land. So most mobile home parks would be roughly 10 mobile homes per acre, or call it 20 houses spread out over 2 acres of land. So this town has passed zoning to make the density 1/20 what it was. So it's simply not economic to ever build a mobile home park in that.

Town again under current government. You know, I mean, that could always change. You know, when the government needs more money, they change their mind about things. But yeah, certainly, I understand. I just don't want to say that's like forever. It's not written in stone.

Well, it isn't. But honestly, Jason, when government wants to increase the supply of affordable housing, what do they do? They build their own. They put up projects. Government very rarely would loosen zoning, and at least so far, I've never seen it happen that they would allow people to build mobile homes.

Actually, that's an interesting point. I got a question for you about that. I have not thought oddly about government housing projects in years. I mean, I remember when I was a kid in Los Angeles, they had some government housing projects. Do they even have those anymore? Or they're really done by private, but they're done through tax credits, Is that what you mean? I mean, the government isn't building houses, are they? That may seem like a kind of an elementary question, but I certainly just for some odd reason haven't even thought about that. I mean, they've got section eight, they've got low income tax credits, and then they've got just government fiat where they just say, look, you build affordable housing or you can't build anything, Right?

Yeah. And I'm not going to be able to quote statistics on how many government houses or apartment buildings were put up, but let me just say this. I've been in this business about nine years now. I have never once heard of any city or county anywhere that said, hey, we've got an affordable housing crisis and the solution is going to be that we are going to loosen restrictions on mobile home parks and let one or two or three get built in this town and, you know, supply six or 800 new affordable housing units for folks and of course, encourage folks to become homeowners, whether it's tax credits or construction, directly owned and financed by government. Either way, government's answer always seems to be that structures, rental structures get built and then folks in need get trapped into paying rent and never become homeowners again. I've never seen a government really allow mobile home parks to get built. Not recently.

Yeah, no, I understand, and I agree with that. I just wanted to throw some interesting questions in there. Okay. What's the biggest mistake you've ever made on a deal?

Well, the biggest mistake I've ever made was really getting into this business with the wrong mindset. And by that I mean when I got into this business again, I was thinking of myself just as an investor. I bought that first park, I fixed it up. I bought and brought in some mobile homes and invested several hundred thousand in fixing up those homes for folks. But that was all my own capital. What I've evolved into now is a worldview that says, hey, I'm not specifically an investor. I'm really a money manager. As you mentioned briefly, I've now got a fund. I've raised money from outside investors. It's enabled me to buy more parks probably than I really ever would have been able to do on my own. So just coming into the business again with the mindset that I was going to do this all myself versus where I'm at now that I can tap outside capital and do this in partnership with others, that really held me back for like the first five or six years in this business.

Right, right. But of course, you know, we have to say that you're in a different business now. You have investor relations issues and things like that. How much did it cost to set up your fund? I mean, I get numbers all over the board from attorneys and from guests, guests on my shows. What did you spend on legal fees and all of that compliance stuff?

Yeah, My number is $7,500. We used an attorney out of Los Angeles who specializes in real estate funds. And so, again, we've set up a properly registered 506 reg D fund. It was $7,500. We honestly don't anticipate making very many changes to our offering materials. For our next fund that we'll be starting in 2016. So hopefully we can just sort of copy and paste that legal agreement and not have to spend another 7,500 each year. But that's our number.

Yeah. Okay, good. That's pretty inexpensive, really. I mean, I've heard of people spending 50 grand, you know, to set up.

Their fund, but you know, the attorneys are just sort of doing their own copy and paste other guy that they just did a similar fund for.

Oh, of course. It's such a scam. I mean, listen, don't get me started on the legal profession. What an epic scam that is. It's unbelievable. But yeah, very interesting. Is there anything else you'd like to tell the listeners? Anything I didn't ask you, maybe, Jefferson.

If you want to take just a. I'll take maybe just a couple minutes and kind of go into a real quick case study to give your listeners a sense of the kind of things that we do to turn around a mobile home park. So we purchased a property a little less than a year ago in Tulsa. It's called Tulsa Estates. The website is simply tulsaestatesmhp.com that was a property that had been very badly abused by the previous owners who were not investing in it and really had literally not set foot on site for about six years. So the things that we did to turn it around, we bought it at roughly a 9 cap. But we cleared out, for instance, four mobile homes that were burnouts, just trashed homes.

Meth labs.

Well, not quite, no. I don't think that was the reason they caught fire. But I guess, I don't know for certain that was before we owned it. But we made the park a little safer there. Right? Kids were playing in and around the houses. We got that community with seven additional vacant park owned homes. So we invested roughly between 1 and 5,000 in each of those houses to make them livable. And we've now sold those on our rent credit agreements. We resurfaced the roads, we fixed some bad water leaks and then since then we brought in five more mobile homes and we've had another move in. So it's a bit of work. But what all that has translated into, and we've increased the rents from 180 to 210. And fair market, that's still below market, our nearest competitors at 240. But what all that has meant is that we've improved the NOI about 48% in less than a year and there's still going to be decent upside. We're going to take this park I believe to every bit of a doubling in Noi by the end of the second year from doing a bit more infill and taking the rents probably up to 240 where that market is. So if you're willing to work in this business and take care of some deferred maintenance issues from other owners that frankly aren't that interested in the property again, there's still tremendous upside that'll basically take this property, if you will, from a 9 cap to an 18 cap rate inside of two years.

Yeah, yeah, good stuff. Give out your website.

Yeah, it's parkstreetpartners.net and you can just click right there in the upper right hand corner it'll say Invest with us. ParkStreetPartners.net, click Invest with us and you'll get some information on our fund. We take accredited investors and the minimum investment is $50,000.

Good stuff. Jefferson. Thanks for joining us.

Hey Jason, thank you so much for having me.

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