Bad Economy AND MHP'S

mobile home university
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I’ve been on the sidelines trying to decide if now is a good time to enter this market. On one hand,the possible long recession we might face would create more need for affordable housing.there appears to be negatives also.

One might be that even with all the money the Gov. is pumping into the economy,things hardly look inflationary. Gold and all other commodities are plummeting. Look at oil…it has dropped almost 50% . This is not due to new discoveries but to a slowdown with less demand. The stock market has crashed and lending as frozen up. Home prices have also crashed and it’s hard to see the scenario that stops the slide in home equity. Savings are nill and everyone has tremendouys debt. This is not what inflation looks like. Where are you going to find "more money chasing fewer goods ? " This is pretty much the scenario that put Japan into a 10 year deflationary cycle. The only difference is that they had savings and we don’t.

So I guess I have a question as to what the next year or so will bring. I think it will be a deflationary period then followed by inflation as the economy recovers. If this is true,you certainly don’t want to buy real estate before a deflationary period.

One more factor bothers me a whole lot. It appears that we are going to have just a tremendous amount of jobs lost if this downturn is as serious as it looks. While we might have an easier time filling the parks, I think we could see a serious increase in tenants not being able to pay their rent. So I guess I would really stay away from tenant friendly states if this were the case. It would also make me want to get a bigger down payment on POMH’S . If you have quicker and more frequent defaults because of a horrfible economy,this would presnt a serious problem with the contracts we would be writting. Obviuosly,people don’t have the money for these big down payments.

Everything considered , I think maybe it’s wise to stay on the sidelines ? Could a few of you with more knowledge give me their opinion ?

Thanks…

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Art Laffer (Laffer Curve) has just written a book that applies somewhat to our current economic situation in the U.S. Could help you to read it.

Quote, “Just two weeks ago, a book on economic policy was released that will be a classic for the ages. Entitled The End of Prosperity, by Art Laffer, Steve Moore, and Peter J. Tanous, the book explains in full detail the economic disaster that will befall America if it takes a sharp left turn to neo-socialism under the leadership of the far left President Barack Obama, the ultraleft Speaker of the House Nancy Pelosi, Senate Majority Leader Harry Reid with 60 liberal Democrat Senators, and their pal the ultraliberal Howard Dean heading the Democrat party.”

I’ve been reading it and I’m thinking of moving out of California.

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Steve great topic.

I share your concerns regarding the uncertainty we all face, it is a difficult time to be sure. At the end of the day I believe it comes down to perhaps the most important factor related to real estate investing. Timing, this component has proven to be more critical than location, price etc. Getting in, and or out, at the right moment is the difference between great successes and failures throughout real estate history. Trying to time perfectly can be nearly impossible, though we all try. So here’s my opinion on your question; what will the next year or so bring?

The next couple of years or so, will bring tremendous acquisition opportunities for those with resources who choose to employ them in these times of uncertainty. Those with capital on the sidelines will likely see the purchasing power of that capital diminished when things appear to have"cleared up". To be clear, I believe many challenges will be encountered when trying to make such acquisitions in this climate. Speaking from my personal experiences, I’m in the process of my largest acquisition to date, it has definently not been easy.

You mention great points of concern in moving ahead with acquisitions; unemployment, the differencial between stick built housing and our products as home values decline. Higher potential default rates on our home contracts, the possibility of deflation. I know many are pointing to the Japanese lost decade as a likely blueprint for our future. Again to me real issues, but even bigger opportunities.

I address each as follows; locate opportunities in markets with less than average unemployment. Many changes unforseen can affect the success of this challenge, however there are also many known that can help. Government and private sector consolidation, large investments into regions for infastructure or energy projects etc. Look at historical migration patterns, if given the choice (i.e. no substantial housing price differences would people rather live in the market you are considering, or someplace else). Find markets where the housing differencial is substantial enough to withstand price declines and still leave enough spread to have a competitive advantage. Bottom line, in these times of great challenges and opportunities we must not look at generalities or averages. Rather we must be specific with the information we use to conclude that we are making the right move at the right time.

Lastly, regarding deflation vs inflation. It appears clear to me the government has decided to spend it’s way out of this, rather than let us all take our medicine. That said, it must come up with the money to do so. In the recent past we have had many willing lenders to choose from, this will not be true going forward. Some groups have learned from their mistakes and have either stopped lending all together or are requiring new defalut swap arrangements which will utimately be found as less than good security. The government will then simply print the money rather than try to borrow it. In short, I think the most likely outcome will be substantial inflation. To me this makes solid acquistions even more attractive when using leverage. Buy with today’s leveraged dollars at a fixed price and reap the benefit of increased cash flow future dollars relative to fixed debt.

I would rather act on opportunities in times of uncertainty, knowing I must work harder to understand my investment than compete in times of “general clarity” against those who buy in spite of sound investment principles.

Sorry, took longer to get that out than I imagined. Hope it helps provide another way to look at things.

Ben

Post Edited (10-20-08 18:00)

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Ben

I love your qoute-I would rather act on opportunities in times of uncertanty, knowing I must work harder to understand my investment than compete in times of “general clarity” against those who buy in spite of sound investment principles. Have you ever lived in CA? Many people claimed to be real estate investors here that had no clue what they were doing. Oh well thats the past and they are suffering.

I probably simplify investing in mobile home parks more than most, but here is my guideline in this environment. I am a cash flow investor not a real estate investor. If the demographics dont work to maintain the cash flow I dont buy. I have never been one to go into analysis paralysis though. There are always opportunities and I look for the simplist way to grab one.

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Thank you Ben , your post was very insightful , and gives what I think is a very good perspective on what is happening and what might be a good approach on how,when and why to enter this market.

I agree pertty much on everything you say other than your view on inflation. I think that this government intervention will in the long run end up inflationary,but unless they hand out money to individuals,how can we have "more money chasing fewer goods ? " What we had was a consumer oriented economy that was purchasing all these goods with borrowed money. First they stipped all the home equity and now they have run the credit cards into the ground. In fact many are predicting something similar to the motgage melt down soon hitting the crdit card industry.

So my question is where is the average American going to get the money to drive the cost of goods up ? It appears like it will be a vicious cycle…as people have no money to buy goods …more and more companies will lay workers off as demand for product lessons along with ever decreasing profit margins. So more people are laid off and less goods are needed and thus even more workers are laid off. I just can’t see what secor or sectors will provide for the jobs lost through such things as a wall street meltdown,crashing auto industrys,home building industries and how about all the jobs that were related to doing those horrible motgages ?

I guess what I feel is that only after there is somewhat of a “recovery” in the ecomony can there be inflation. I wish I understood M-1 and M-2 better,but I have read that this Gov. bail out really doesn’t increase the actual M-1 in the system. IMO opinion I think evrything has to work as you outlined in your post inorder for it to make sense to buy now. But it is also a possibility that for at least a short period (1-2 years) cash will be king and those that have it will be able to buy some pretty beat up and deflated assests.

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Steve,

You raise some great points and I applaud your taking a cautious stance. I am leaning more and more toward your stance but I’m not ready to say stay out of the game. There are some great opportunities out there to be had but you must be extremely careful. Unlike some of the more “rah rah” people in this business claiming big profits at no risk, you can lose your shirt in this business just as easily as in others. Having said that, I would still look hard for opportunities. Learn, look, analyze and then act.

The one bit of concrete advice I would give you from my own experience is buy a park that is both smaller and in better condition than what you think you can handle. The learning curve in this business is brutal and don’t take on more than you can handle. There are good deals in small, clean parks and while the upside is limited, so is the downside. This is advice from someone who went for the brass ring and is struggling now to just stay on the horse. I’d do it again but in a much different way.

Rolf

Wheat Hill MHC

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I smell opportunity, which always carries certain challenges. Couple of thoughts:

  1. Historically, betting against America has been a bad move. Everyone always thinks that “this one” is different. I do not not think that this one is different. There will be cheap assets for those who can aquire & operate them.

  2. The next 4 years will involve a hard left turn…but compared to what? And for how long? When you look at the degree of letward change in 1932 (or even before that under Hoover), it was greater than what we are about to face because we are already more to the left than was conceivable in 1932 or 1929. Carter gave us Reagan, let’s see if the Republicans cannot get it togther and take the gift Obama will hand them. In any event, there ARE people who use the system against itself and who prospered in the 1930’s and the 1970’s - what did they do?

  3. My answer to inflation: leverage up and raise rents. If you are selling on notes…I hope your investment is low, buying cheap may not keep profits from shrinking, but it sure helps keep from actually losing. For the most part, we buy MH to fill parks. The ones we Lonnie tend to have very little net investment involved (in other words, there is less than $1,000 in each one).

  4. This is classic fear-greed cycle. As a Rothschild said, buy when there is blood in the streets (Revolutuion in Paris) and sell when the trumpets sound (Britain stops Napoleon at Waterloo). Just as property was overvalued in the greed years, it is going to be undervalued in the fear years. Thinking people control their own greed and fear and buy based on real values. Buffet is going hard into stocks from a cash position…he may be all wet on politics, but he knows a thing or two about when to buy.

  5. Given the fear out there, serious bargains abound. Given the risks involved, buyers need to acquire at excellent, low prices. Drive a hard bargain - you must to protect yourself and you can given the mass fear.

  6. I do not do business in socialist jurisdictions (e.g., Cleveland, Toledo, Baltimore, etc.). They have made clear that investors & landlords are bad people, and I would not want to inflect my bad self on them or the fools who vote for them.

  7. People have to live somewhere. Even during the Great Depression (and Roosevelt’s policies are what made a depression the Great Depression), people had to live somewhere. Homeownership rates were much lower then and foreclosure rates much higher, meaning there were lots of tenants. Landlords who bought right and/or had equity did just fine - and became very wealthy once the boom returned in 1940.

Yes, times are tough-ish (using 1932 & 1982 as definitions of “really tough” and “tough”). Perhaps that puppy B. Hussein Obama will make things worse (he has limits that FDR did not)…but good times will return, the boom-bust cycle is as old as Man. Those who take advantage of over-fear become wealthy in the boom (or before) if they bought assets at bust prices.

Post Edited (10-21-08 03:35)

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I agree with the posts that say there will be opportunities ahead. Most of you probably know that the chinese symbol for danger and opportunity are the same. There will be deals that are off the radar of most investors…only to be found by those diligent in their search. ( I once found a 73 space park being marketed by residential agents on a residential MLS…no wonder the park was on the market over a year). There will be parks for sale that are well positioned to resist the economic storm…e.g. a park next to a prison that has a lot of prison employees living there…sadly prisons are a growth industry and unlikely to get too beat up in the upcoming storm. Caution…Due Diligence…Agressive Negotiation…No Fear.

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During the Hoover/Roosevelt nightmare, cash was king as fortunes were made. Cash is king today, at least until the effects of creating dollars out of nothing and irrational spending without restraint, appear as they must. However, it takes some time for the socialization of debt, credit, and risk to work through the system. I believe that it is precisely this time interval when the greatest opportunities present themselves, especially to those who are in control with cash. Therefore, the time to

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This is close to my sentiment if you are saying that MHP’s are going to be cheaper as this economy worsens. The only difference between this and the Great Depression is that our Gov. is pumping huge amounts of dollars into the economy. If we don’t go into a full blown depression ,what we could see is a short term deflation followed by some pretty hefty inflation resulting from Gov. trying to print us out of this. I know it’s hard to time anything and if a MHP is a great buy now,I agree that one should go for it. What I’m thinking is that if we are entering a deflationary period,the only thing to own is cash. The tricky part is timing when to step in and start buying assets. I guess the right time is to buy is when it looks the worst.

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I do believe that my timing is about as close to a reasonable guess as the early warning signs of the lack of available cash seem to indicate. We have heard a lot about the deflationary consequences of residential real estate, but little about the ubiquitous defaults of the commercial real estate markets. When the woes of the commercials occupy the headlines, then we can assume with more of a degree of certainty that hunting season, or harvest time, is upon us. During the next few weeks, we can expect that the Fed will do the opposite of what they should do and will lower the interest rate, again. America will have a new president-elect, a socialist, but still a marionette. After the $700 billion plus bailout down payment, the next hundreds of billions dollars as first installment payment for whatever will be introduced, deemed absolutely necessary, and endorsed. All this will have little or no immediate effect on our personal lives (unless somebody has a job) if we have or are preparing to weather whatever may be in store for us .

However, if as an investor, I am offered a productive asset that is flaunted at 50% or less of its intrinsic value, then my unadulterated greed will entice me to steal with haste. Also, in two weeks we will be meeting in Athens at the MOM event, which could be the most valuable gathering of the year for each of us. I truly regret that some of our friends such as John Hyre, will not be able to attend. His contribution are always most realistic and beneficial.