Economies of Scale


#1

This post is intended for those familiar with operating smaller parks.

I am aware that every deal needs to be looked at by the numbers. In general it would be seen that more units = more economies of scale.

If you were to plot graphs of return on effort vs. size of park and return on $$ vs. size of park, are there places on the line where the curve improves sharply?

For example, as a park gets larger and larger, at some point, part-time, then full-time management will be required causing a variation in the line at that point.

So, for smaller parks, is there a point where the hassle factor, driving to location, dealing with tenants, etc. is NOT really worth the income. Is there a point at which a small sewer plant would be cheaper to operate than a lot of septics, thus changing the curve?

Naturally, this depends on a lot of factors, eg. type of tenants, closeness of homes to each other, etc. Perhaps, I’m looking for more of a feeling from owners as to what size park they would not do again, assuming they still like parks and own parks.

Thanks

Steve


#2

Great question Steve.

I will chime in with my expriences with the small parks and hope that others with larger parks will do the same so you will have a good cross section to compare.

Economies of scale do hold true with commuting to one location instead of many. Having the material on site (usually a shed or older home no longer used to live in) saves a great deal of time. Typically there is some blue collar tenant in the park who can handle most small repairs and emergency calls (water leak etc) so that I don’t have to rush out in the middle of the night to turn water off or defrost frozen pipes.

I find that with the small parks and land/home units, there is NO real emergency for us. In nearly every case I can get someone to shut off the water if a leak occurs and I will come out in the morning. The same holds true for frozen pipes. It is still nicer if the handyman on site can do this but if not, I can do it the next day (when it warms up).

For small parks or any property on septic, you need to be sure you have land that you can use for a repair area if a system should fail. Quite often these parks are built with as many homes as possible and they are often set up with 2 homes on one septic. With little land left for a repair field, problems can lead to you losing a home in the park in order to fix the septic issue. Not a good business exprience.

The learning curve is accelerated by having multiple units together, buying repair supplies in bulk saves both time and money, having a blue collar tenant base can save effort and cold nights defrosting pipes.

There are days when I dred the repairs in these small parks because they somehow seem to organize and come at me one wave at a time. I find that my land/home properties have required very, very little of my time. But when I do get a wave of calls from those properties, I am wishing they were closer together.

Tony


#3

Steve, my thoughts on your last question:I think back to when I was in my 20’s working a job and trying to get started in the rental biz, and I would buy some units that wouldn’t make much profit after all of the things you named were considered, but every little bit meant a LOT at that time. I think back to that time often, and I recall how I looked forward to the day when I wouldn’t be dealing with houses that really weren’t worth fixing. I surely would not buy those type houses today. But, I did make a start with them, and that allowed me to do other deals.

I think that the last question you ask probably is best answered after you consider what are the alternative uses are for your time, energy, and $$. And then, what specialized skills do I have? and how can i best utilize those skills.

As for the economies of scale: being the “right size” is a constant challenge. Basically, my view is the larger an operation, the more employees, the more apt it is to be inefficient. So, in my opinion the most efficient point is when the owner/operator is working at their maximum capability, just before they add staff.


#4

I like the question Steve. i don’t have the answer. I’ve owned a 22 space Park in TX and a 11 space Park in FL and anothe 26 space in FL and…I loved 'em all.

I now just own the one 26 spacer and…I wish it was bigger.

The older I get the more I feel, the bigger the better. The economy of scale, is kind of subjective. To me the perfect park is a 500 spacer with high lot rent, all undergound direct billed utilities, full time manager, assist. manger, lawn crew, maintenace. I go in once a week and ride my golf cart around and collect excess cash from account once a month.

Then I wake up and call the A/c guy for unit 14, send handyman to unit 2 to unplug toilet (diaper) sigh. I really just made those calls LOL

Greg


#5

Steve -

My sense after being in this business 15 months with an 88-space park is that the leverage is in doing good due diligence and buying the park right - not in targeting an ‘ideally sized’ park for efficiencies. Management costs will probably be 7% - 10% no matter the size of the park. Property taxes will be 1%+, etc., etc. Be sure you understand issues of deferred maintenance and what your property taxes will be after you own the property at a (presumably) higher price than what the previous owner owned it at. Finally, try and find a park with a decent amount of vacancy so you can do Lonnie Deals and fill it.

If you hold out for the parks that meet these criteria, then you’ll be handsomely rewarded. You’ll do better with a small ‘inefficient’ park bought right, than with a large park with ‘efficiencies’ for which you overpaid. Get the financial and physical due diligence right, the rest will take care of itself.

My 2 cents worth,

-jl-


#6

I agree with Jefferson, it’s in the purchase numbers. Buying “right” is easier with small parks b/c there is less competition for them. With that said, once you have 50-100 lots within the same rough geographical area, it’s easier to afford a fulltime IN HOUSE manager-handyman on a W-2. And yes, I did say on a W-2. I like the control and ease of insurance with employee, I dislike dealing with contractors for both of the stated reasons. I’d of course pay less than I would with a contractor to help even out payroll taxes, workers comp and the like - but most contractors would take the trade-off for the guaranteed pay on the W-2 side.

John Hyre