“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” ― Warren Buffett
I believe everybody knows the quote. I am just curious does it apply to the current market for mobile home communities? My mobile home park owner friends receive many postcards from investors. 2015 was one of the first years they received so many cards in the mail. Is it a time when the market gets overcrowded with investors? I just curious to hear different opinions.
I have a feeling things are a bit frothy myself. People are asking ridiculous caps for all classes of real estate. In my parts of the NW it seems like parks command as low a cap as everything else, if not lower. I’ve moved rents, filled some lots, and I’m installing meters and will start billing back in the Spring. I’m seriously considering selling and taking my gains while the market is hot and interest rates are still low.
The frothy part of the market currently only extends to California, Florida, and 5-star parks that are 250 lots and above. Those are selling at around 4 to 5 caps. If I owned one of those, I’d sell it. A small increase in interest rates and some of those recent buys will be upside down. Carlyle’s purchase of the park in Sunnyvale for over $100 million should be a wake up call to many that things might be out of control at that end of the spectrum. However, cap rates are still 8% to 12% in the rest of the U.S., and that’s the biggest spread over interest rates that the industry has ever seen. Don’t expect to see the “froth” wind its way down to the rest of America for a couple years, as all those private equity groups (including Carlyle) will slowly reduce their buying parameters when they can’t find anything to buy that meets those original lofty goals. The first change will be a drop from 250 lots to 100 lots. The second will be from 5-star to 3-star. How do I know this? That’s what happened with ARC when they went on a wild buying spree in the early 2000s. They blimped up to around 60,000 lots nearly overnight, through continually relaxing their criteria. There are just very few parks that are 5-star, 250 lots and above, and certainly not enough to allow any new entrant to get to any type of critical mass – and that’s if you include every state and not just CA and FL. It would be like announcing that you are going to build a giant car museum of nothing but Ferrari California 250 GT Spyders, when there are only 50 of them in the world and only about one that goes on the market each year. At some point you have to relax that down to some other brands or give up your dream of having a car museum.
Having been to Berkshire Hathaway’s annual meeting 4 times, love this saying and have lost my shirt when not following this myself.
At the same time, Buffett says “The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!”. This is something that most of the people who are taking money from others to invest in this class are doing. They have to swing at everything and so the returns in this space are going to be much lower than before.
Coming back to this niche, I do think the market is a lot frothy. There are too many offers floating around on each park.
The challenge has been two fold:
So, can you buy parks at decent 10 cap rate? Yes, but this will require you to be near full time managing these parks as these are called “turn around parks”. Less than 50% full and will require lot of effort and time to fill them.
So, I don’t think these lower cap rates are only specific to the 250+ lots only in CA/FL. It is just a matter of time the lower cap rates will spread throughout the country and will achieve the Apartment cap rate status.
So if you don’t find a good park, just wait it out and let the frothiness subside or be ready to put lot of effort to turn it around.
Remember, you don’t have to swing at every pitch.
Frank, I’ve listened to every weekly call in show going back to 2009. I don’t think a week goes by that something doesn’t happen in my park or other real estate investments to remind me of something totally spot on you’ve said/taught. That said, I think one of the very few blind-spots you have is that you are operating on different level than your average small-time park guy. I’d guess most on here have 1-3 parks. At your operational size and scale deals tend to seek you out. Plus you have a solid system to seek them out in place. But almost every average small investor I speak to looking for +/- 50-100 space parks is having an incredibly difficult time finding even half-way decent deals. Even people who are digging pretty hard.
You agree rates have to start going up. And while the spread is good that will eventually catch up to you on a typical commercial loan. Long term I think the fundamentals are good for parks and if you’re buying places with upside it can still make sense now. Short term though I don’t know, it’s murky for many.
While we have obviously a larger deal funnel than anybody else in the industry, I know that you can still find great deals for the simple fact that I do about two Quick Deal Reviews per day, and people are still finding good stuff out there. Here’s an email I received in the last few days, as an example:
"Good Evening Frank,
Today is a great day for me. And all it is because of your training and guidance. I bought 3 parks today total 204 space, 130 occupied, $325 lot rent and tenant pays utilities. I bought all 3 of them for $1,400,000 with 13% down payment. This will give me $20,000 per month positive cash flow and $1,500,000 equity.
When I found this deal (from a broker referral), I called you and I said Frank I found a fantastic deal and I need your expert opinion. You analyzed the deal and you said buy it 5 seconds. I put the deal under contract, but later on the seller realized that he is selling for too low. And on top of that seller was financing the deal with 25% down. So he killed the deal in June 2015. But after 6 months of relentless effort, the seller agreed for a ALL CASH offer. The lender who financed my previous park was very impressed with me ( because by using your techniques, I increased the occupancy from 65% to 75% within 2 months) and the lender financed the deal with only 13% down, 5.5% interest with 15 years amortization. As a result I had to pay $200,000 less down."
And that’s why I know good deals are still out there. That being said, you have to really dig for them. This person pursued this deal for almost a year (he first ran it by me in mid-2015).
[quote=“GeorgeNiko, post:5, topic:12227, full:true”]
Frank, I’ve listened to every weekly call in show going back to 2009. I don’t think a week goes by that something doesn’t happen in my park or other real estate investments to remind me of something totally spot on you’ve said/taught. That said, I think one of the very few blind-spots you have is that you are operating on different level than your average small-time park guy. I’d guess most on here have 1-3 parks. At your operational size and scale deals tend to seek you out. Plus you have a solid system to seek them out in place. But almost every average small investor I speak to looking for +/- 50-100 space parks is having an incredibly difficult time finding even half-way decent deals. Even people who are digging pretty hard.
You agree rates have to start going up. And while the spread is good that will eventually catch up to you on a typical commercial loan. Long term I think the fundamentals are good for parks and if you’re buying places with upside it can still make sense now. Short term though I don’t know, it’s murky for many.
[/quote]It seems more like “willful blindness” than a “blindspot.” Keep in mind his target market for this site - it’s certainly not people looking for luxury 250+ space parks along the coastline. So it’s much easier to shift attention onto those in particular because he’s not selling anything to people interested in those parks.
To be clear, that’s not meant to criticize him or call him out or anything. He contributes piles upon piles of incredibly useful information regarding this industry: both directly through his products, posts, various web events and so on; and indirectly by having this forum exist in the first place where other experienced folks can share their views. (And on that note, it would be remiss of me not to mention Brandon, who ensures all of the above is working for the users and is so quick to respond & help with issues).
All that said, good deals are obviously still out there. While it is technically true the 250+ space high end parks are the worst market for investors, my point is mostly just that it’s kinda naive to ignore the inherent bias regarding this subject.
This forum is like a gold mine – And you may have to dig a long time to find the gold nuggets. That doesn’t mean they’re not there. Sometimes you get lucky, sometimes you create your own luck.
Deals that have languished on the market for a year because Seller is not realistic about their pricing are good targets. But if the Seller isn’t really motivated, move on to a Seller who is. MOST OF YOUR MONEY will be made up front in the deal-making phase. MHP’s are a great business because the RISK is SMALL and the reward is ample. Only you can decide what return on investment (CAP rate) you require in exchange for your risk. There will always be shoppers who are not educated who will pay more for less. Do your homework. The motivated sellers are out there and you want to be the one to find them.
The parks that are at 10+% CAP rates are parks that have been mismanaged and they won’t be turnkey – that’s true. A well-managed (turn-key) park probably does command a lower cap rate – the Seller knows what they are doing and they don’t need to sell. Every deal has warts. But you as the landowner should know how to wrest control. It should not matter if the park is 50% full or not – you’re paying for CURRENT income. If you want a “turnkey” park you may have to pay a higher price. But there’s little you can’t fix if you know what you’re getting into and have the right budget and tactics. Look for and bargain for the deals that you can fix – that’s where you buy at a 10% cap and groom to a 20%. That’s where you can make a great return. That’s our model anyway.
I’m a little under the weather so today’s post was a little disjointed – I hope it was understandable.
Brandon@Sandell
According to broker friends in the north, west, Midwest and also Texas and Florida they have many more buyers than sellers. I wonder Frank the 6 six parks your group put under contract at Urbana, Ill were they all 10 cap or better or did you have accept some for a 8 cap or less to buy that many in one area??
That’s a good example. We spent three years negotiating the deal in Urbana, starting when we bought the park next door.
Remember that the going-in cap rate is only part of the story. I once bought a park at a 4% cap rate with $100 rents and raised the rent to $275 within 60 days, which made it a 12% cap rate. So at what cap rate did I actually buy the park? When you are buying parks that are full and at full market rent, the cap rate you buy is the cap rate you get. But when you are buying “broken” parks and then “fixing” them, the actual cap rate is much more complicated…
Ya, I know they’re out there but serious, serious digging is needed. I think geography is a factor too. Up here in the mountain west it’s just nuts. I’ll often hear you reference Colorado and that’s basically the same kind of situation up here in MT as well as ID, WY, UT, etc from what I see. People would blow through a mountain to get at an 8 cap here.
But to echo what the guy you quoted said… that was me a couple years ago talking to you (though his deal sounds better even) and your advice and strategies did great by me. I bought my park using your calculations in a region where it was seriously pushing it and it both kept me safe and helped me buy right. After finishing the value add in another year to 18 months I should be able to sell it to someone at an 8 cap up here which will mean I’ll have bought for 1.05M and sold for +/- 1.5M within 2 1/2 years. Basically I’m forever indebted. Problem is I’m having a hard time finding anywhere else to implement everything I’ve learned from you and put that equity to work! If I knew in 2009/2010 what I know now, man, I would have killed it.
Wow. There are many good responses. I am looking for deals every day and send mailers weekly to the park owners because I believe there are still good and great deals. However, I was wondering to hear your opinion on the current market .Thank you very much for sharing.
My question to Frank simply was what was the cap rate of the parks the investors bought in Urbana, Il. at time of contract. What the investors do to change the cap rate is not my point but I believe people NEW to investing in the park business need to understand the parks listed with a 8 cap or lower could be a major turnaround great investment and the quote experts beside Sun Communities are buying parks with less than an 8 cap.as per numbers at closing. Some need to reflect what happened in 08 and 09 that bought good parks with reasonable rents what happened when the economy went south and the residents COULD NOT pay their rents and owners reserves were to low and some banks starting calling the loans. Speaking yesterday to a very knowledge broker indicated they he has seen recent sales that the owners are in over their heads and you can finish the thought. We have spend considerable time looking and putting parks under contract but when we see tax returns, and the ability for repayment we are still looking. We have see blogged on this site people wanted just to own a park–just trying to enter the glory fields of becoming wealthy and the question being asking (there are no stupid question–ok) indicate they need to keep their day job or at least spent 1 year managing a park before entering the market!! The present market is oversold and an excellent time TO SELL–it you wait you selling price could be considerable lower.
Serious digging is always required in any market condition and any asset class. Looking at 100+ deals to find 1 winner is not a new concept. If you look at who is actually buying deals right now, you’ll see one thing that all of them have in common. They all market from multiple angles (brokers, banks, mailers, cold calling, etc.) to create a funnel. They follow up effectively and they remain positive. Frank is the only one in this thread who sounds positive and is coincidently the only one who is spamming my email weekly with a new deal he bought. (I’m on Elevation’s email list)
To more closely point this out, Elevation Capital bought a deal about a month ago in Iowa. Last year, we dismissed this same seller because he wanted a million dollars more than what Frank & Dave wound up paying for it. Had we followed up (instead of moving on), we may have purchased that park instead. The point is, blame yourselves and not the market. If you aren’t getting any deals, then you aren’t taking enough action. We’ve bought two parks in the last three months and we’re under contract for a few more right now. Increase your action, increase your deal flow and you’ll find something worth buying. By the way, we are having some good conversations with a few sellers in Florida, which is also contrary to what’s being said here.
Carl,
I don’t know where you get your statistics from, but 2008 and 2009 were great years for park owners, based on occupancy and rents, as SF owners lost their homes and had to move into MH or apartments, and apartment rents soared. However, those who bought parks at 4% cap rates during the “1031 Mania Period” (mostly from CA) leading up to 2007 were stunned to find that they could not renew their loans or find buyers who would pay those ridiculously low cap rates any longer. A park I sold for $3.5 million during that period later sold for $1.7 million when the buyer defaulted and it became REO. We are still buying parks in REO that have mortgages from that period (they were 10 year conduit mostly and have all come home to roost). So the best time to sell was back then. Spreads today are the highest in history, and it’s a great time to buy, not sell. Unless you have a park in CA and are on the radar screen of Carlyle, etc. If you are swayed by tax returns, you’ll never be able to buy a park, as most of the seller’s tax returns are completely erroneous. Due diligence on a park does not even include the seller’s numbers, but the ones built on reality and how it operates under professional management.
I respect that everyone has a different viewpoint, but just wanted to point out the actual statistics. At the end of the day, however, everyone votes with their pocketbook, and those that want to sell should sell and those that want to buy should buy.
to Charles and Frank since we are before YOUR time the deals were more apparent and from many more owner-operators that spent lots of sweat and tears developing properties that followed no organized road map that today is more organized than a Rand McNally road map. As you have mentioned generally you are not developing new parks just rearranging the disorganized furniture and bringing in some new furniture to increase the NOI. For the THIRD time please answer the simple question Frank on those six parks at Urbana, Il what was the cap rate the investors paid at closing time!!! Frank I believe most park owners do not defraud our government of taxes owed and we use tax returns as a bases to determine a base line of were they were in the past. When I gave actual statistic and named the source to a question asked by a reader 3 months ago you totally trashed the source–thanks for being so kind but your statistic are just great with sources!! Frank with investors money keep buying more parks that is a good game. I believe some new buyers are experiencing great difficulty in finding great parks without great effort. Our first parks 30 years ago were much easier to find and complete the transaction than today. For example closing parks today takes generally how many pages of paperwork and recently a home we closed on a home with a major title company in CR took 2 pages and the attorney read through all the paperwork in less than 10 minutes and his cost was $25. Times are a changing but look very carefully at our economy and WHY, WHY are interest rates so low, grains and metal so low and stocks with a average PE of 27 that is extremely high–we have a national debt that is un payable. Really appreciate this space and the reality their are different opinions and experiences that allow new park owners to see a different picture.
We are talking to people in Florida too and looking at making an offer!!!
I’m not sure why you’re so fixated on that Urbana deal, especially because it was an anomaly for F&D anyway (an ~800 space package is not exactly their average purchase). Regardless, it’s worth noting they can afford to be a bit more liberal with cap rates than you, me, and virtually everyone else because their scale is over an order of magnitude greater. It’s a whole different ballgame when you have 170+ or however many parks, can raise tens of millions relatively easily, and have a much grander exit strategy. Hypothetically, lets say the Urbana deal was an 8 cap. Does that mean it’s a ‘bad deal?’ Nope. Given it’s location and large number of lots, what if it can sell at a 6 cap in a few years? Alternatively, what if they can get a lower cap rate on some of their current parks by packaging them with the parks from Urbana? Is the lower cap worth it then?
It might not provide the ideal annual cash on cash return many investors are looking for, but when it comes time to sell the price they can get could easily compensate for the lower than average cash on cash each year. A company of their size can afford to play the long game, even if they have to sacrifice a lower caprate at purchase.
The Urbana deal was extremely complicated, and you can’t simply define it by a going-in cap rate (although it was fine). A cap rate is based on net income, and the net income on this deal has a huge swing from day one to day 365. The rents are massively under market and the number of vacant lots that we can fill is huge. At the same time, the market is extremely hot and the quality of these parks is outstanding. When you buy a stabilized park with the only upside being the annual rent raise, then the going-in cap rate defines the deal. But in a turnaround, the cap rate could be negative going in, and it doesn’t even begin to tell the story. Many of the deals we buy are like that. Do we recommend others buy these type of turnarounds? Absolutely. But you have to become very flexible going in to do so. That would be like somebody going to an auto auction and buying a classic Ferrari that has no engine. Sure, it’s not running good now. But it still might be a fantastic deal. But you have to go to the end of the movie and work backwards to define how good it really is.
Would we buy a stabilized park with upside at an 8% cap rate? Absolutely. That would give us a three-point spread over financing, and we can raise the rents to ultimately beat 10%. The whole point of buying parks is the spread, not the cap rate. When we wrote the book, prevailing loan interest rates were at about 7%, hence the 10% cap rate fixation. But nobody ever expected interest rates to plunge and to be doing 6 point + spreads on parks. On a sample $1 million deal purchased at a 8% cap rate and with 20% down and a 5% bank interest rate, the cash-on-cash return is 20%, which is the target of most every buyer.
If you find a deal that has great infrastructure and is in a great market, but is priced at an 8% cap rate, and you can put it on a 10 year note at 5%, then buy it. Assuming you raise the rents 5% per year, you’ll be at 50% higher rents by the end of the loan, which will give you a great cap rate to either sell or refinance. If you find a deal with those same dynamics but a ton of upside in rent increases and occupancy, then pounce all over it.
The Fed plans on raising interest rates by two points over the next two years. The head of the Fed in Chicago spoke on this exact topic at the NCC event recently. When that happens, 10% cap rates will be, once again, the target. Remember that interest rates have never been this low this long in U.S. history, Here’s an article and chart of interest rates over the past 5,000 years:
As you can see, we are the lowest in 5,000 years. What does this mean as a buyer? You need to be flexible but with the ability to adapt to the market going forward. That means you have to lock in your loan for a long time at a fixed rate, and then push, push, push rents and occupancy – as well as cost cutting – to make sure that you can raise net income to take into account where interest rates normally are and meet that challenge. And if rates do not go up 2 points because of world economic weakness, then you hit a home run.
One final note as an amateur economist. When you look at the chart of the past 5,000 years, you’ll note the rates under Reagan. Bear in mind that when Reagan raised the rates into the teens, the U.S. had $900 billion in debt. Today it has around $19 trillion in debt – about twenty times more. If rates were to go up more than a couple points, the U.S. would be driven into immediate insolvency. I think the range of interest rates that you need to focus on is around 5% now and around 7% in two years or so. I don’t see it going much over that. If it does, then we may go back to a hunter/gatherer society.