Have you heard of a 92% collection rate on rent with investors getting 10% type cash on cash returns? If you want a good asset class to invest in, don’t miss this episode! The Principal and Founder of Wealthward Capital, Christopher Nelson, tells us all about mobile home parks. He goes through important items you need to check off when investing in the space and shares how Mobile Home Parks sets itself apart from all the other asset classes. So tune in, be guided as you create your business plan, and get closer to achieving financial independence.
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Passive Income Through Mobile Home Parks With Christopher Nelson
In this episode, I have Christopher Nelson. He is an experienced technology executive, two-time IPO, real estate investor, author, and the Principal and Founder of Wealthward Capital. Wealthward Capital is a real estate investment firm with a diverse portfolio of over 3,000 multifamily units, mobile home parks, and ATMs. Christopher’s mission is to help technology employees achieve financial independence through financial education, and creating passive income portfolios. He is finishing his upcoming book, From No Dough to IPO. We will have him back on to talk about that book once it is ready. This episode is going to be on mobile home parks. I’m excited to have you on. Welcome to the show, Chris.
Thank you so much, Lisa. I appreciate you going through all those details. I’m happy to be here. I’m excited to come on for the book. I know we’re talking a little bit in the green room about this. That’s going to be a powerful episode too. We’ll let people know. It’s coming up.
Anybody who is out there thinking about working for equity and startups, when that episode drops, it’s going to be monumental and provide you with lots of nuggets. In this episode, if you’ve been thinking about investing in mobile home parks and you’re like, “I don’t know where to start. I don’t know what to do,” you’re paralyzed and you’re not trying to move, but you know you need to move, this episode is going to help you to get started. Chris, to kick things off, why mobile home parks? When I introduced you, I said 3,000 multifamily units. You’ve now pivoted into mobile home park investing. Why mobile home parks? Why now?
I need to update that stat because we’ve traded out of some of those multifamily, and we’ve started moving those dollars into mobile home parks. I’ll tell you why. It starts with financial independence. Financial independence needs passive income. It needs dollars coming in. Real passive income in my definition is 8%, 9% and 10% cash-on-cash return that’s being paid out monthly or quarterly. We need those kinds of checks to be financially independent.
In 2019, we saw in multifamily, especially here in Central Texas where we’ve been investing, that they started doing two classes of shares. You can have an equity share, maybe it has 4% or 5% cash-on-cash, or you can do the cashflow share, no equity, 10% cash-on-cash, and you still get the depreciation. That to me was the first indicator. As prices go up, this asset class is going to start getting impacts on what it can provide.
As they went into single-class shares because the yield started getting compressed more and more, it came to a point where multifamily in my mind and my definition was then a growth vehicle where people would put in their dollars. They wouldn’t get a lot of cashflow, and two years later, they would get their money back 2X. That became a problem, especially for myself. I’m a passive investor first and foremost before a general partner.
What I saw was I wasn’t going to be able to live off of that. I couldn’t graduate from my W-2 if I wasn’t getting significant checks. I had to start looking for other asset classes. That’s where I found ATMs. It’s a phenomenal asset class, with high cashflow, great depreciation, and no appreciation. It just depreciates. I kept looking. In 2020, I did this bake-off between self-storage and mobile home parks. Both of them have much higher cashflow right now than multifamily. What I saw was the supply factor. You can stand up and build self-storage easily. It’s popping up all over. Mobile home parks, no. It’s a scarce asset class. Scarce meaning in the economic sense, high demand and low supply.Financial independence needs passive income. Click To Tweet
They’re making a few mobile home parks every year. In fact, many are getting plowed under because people don’t want it in their backyard. A lot of municipalities don’t want to stand up mobile home parks even though they know affordable housing needs to be addressed. The reason being is that they’re not going to get the same taxable income as they are of multifamily, but it’s going to probably require the same more services like ambulance, police, etc. It was those factors that made me see mobile home parks are where I want to be.
Diving deeper, what are the big-ticket items for an investor that they should be looking at when looking at a mobile home park investment versus looking at a multifamily investment?
In mobile home parks, like all real estate, you want to understand what your location is. Where is the property physically going to be in the town? You also want to understand what type of asset is it. In multifamily, it’s A, B and C. Arguably, there’s D out there that nobody talks about. In mobile home parks, you have 5-star, 4-star, 3-star and 2-star, which is interesting because it doesn’t have the same amount of requirements because it hasn’t been institutionalized. It’s just getting institutionalized now in these last few years, but it was a guy in the ‘50s who ran around and gave this star rating system and created it.
At a high level, a 5-star is going to be a golf resort where there are manufactured homes and beautiful places. The homes can cost hundreds of thousands of dollars. People are paying $1,500 in lot rent. That’s a 5-star. In 1-star, you and I wouldn’t feel safe going in. It is probably a bit of a war zone. It’s for people to understand what asset class they’re purchasing, and then the operator and their experience with those particular asset classes.
It’s the same thing with multifamily. You’re going to want to look at that. You’re also going to want to understand what’s the age of the park. Make sure that you’re talking with your operator and understanding the due diligence. I would say from a high level, the location, the grade of the park, and then the operator’s experience with that particular grade are going to be the top three things you want to look at, similar to multifamily.
Let’s dive into the business plan. In the multifamily space, business plans typically are like, “We’re trying to push rent right now where we have compressed cap rates and interest rates that are approximating each other.” As people go into purchasing multifamily, they’re trying to achieve one of two things in order to get to where they need to go in terms of providing returns to investors. They’re either going to push rents or they’re going to find a way in which they can decrease expenses, better manage the property or add additional income streams in order to drive that NOI growth.
I’m not deep on mobile home parks, but I believe that NOI is also important. How you get to that NOI now is where we’re going. I don’t believe pushing rent is as strong in that area, but I might be wrong. What is the typical business plan you would say that investors can anticipate seeing in the mobile home park space?
You have to look at the classes or the way that you would in multifamily look like core plus. If you are purchasing a 5-star park that is near the beach, the first thing people are going to look at is what the market rent is. Do we have market lot rent? They’re going to look to push rents. That is going to be a plan. They will look at the trash valet. They will look at other services. It’s the same thing that you would in a class A multifamily core plus. How are you going to go in there and manage that? That is very similar, but you’re also dealing with a clientele similar to a class A apartment or class B apartment, where they’re seeing prices trending up. That’s normal.
When you get more into where we operate, which is class C and class B, where we’re doing value add operations, it’s a much different business plan because of what you have still in the marketplace. The interesting thing about mobile homes that create the opportunity is in that mid-tier, there are still a lot of mom-and-pop operators that run it as a cash business. Running it as a cash business means two things. Number one, it means that they collect their rent in cash. That means that they can collect $15,000 and they can deposit $12,000. It’s beneficial to the owner, but also the bank is going to see the $12,000. That’s going to then dictate what’s going to be the asking price. That’s number one.
The other thing is what we see a lot in mobile home parks. They can get that $12,000 or these single mom-and-pop owners, and this isn’t all of them but this is a subset. If they can do that and the park is at 60% occupancy, they’ll do that. Many of these mom-and-pop owners have built these parks from the ground up. They have owned them for 30 or 40 years. They have little to no debt on them. Generally speaking, they’re retired dealing with the clientele. What that allows us to do is when you think from a business plan, then there’s a number of things that you can do easily to shore up the business and increase value in the park and push lot rents.
A lot of these mom-and-pop owners are way below the market rent that we’re finding in some of the areas where we operate. Generally speaking, if you want to do the rule of thumb for market rent, you want to look at class B, two-bedroom apartments and cut that rent in half. That should be your market lot rent for a mobile home. You’re going to be selling a 2 or 3-bedroom, single-wide. It could be a 3-bedroom, double-wide. That’s going to have rooms, a little yard, and those types of things. It’s going to be half. It is going to be the lot rent.
Pushing lot rents is one of them, and moving to a cashless system. There are different technologies. PayNearMe is one of them, where you give the tenants a QR code and they can go into 7/11, Walmart or Dollar General, and they can go pay the rent and comes cash. You’re eliminating then some expense lines. The other thing that you can do is a lot of these owners don’t have centralized water. Now you can go and do water meters and do bill backs. You can remove the expense line.
What we’re finding in a lot of these parks is cleaning up the vacant homes and getting them occupied can increase your NOI by a significant amount. A lot of these owners have been running the parks relatively inefficiently. In a value-add play, you can do that. The other thing is that we have a park for example, where it’s 140 lots, but it only has 75 homes. What we’re finding in this housing crunch is that in some of the areas where we have parks that are in good school districts, people are saying, “Let’s get a manufactured home. We’ll move it to your lot. We’ll start paying rent.” That’s increasing the NOI immediately with no overhead to us.
Those are strategies and techniques. The interesting thing about mobile home parks is that as investors, they need to understand the operator, what is their business plan, and what are the types of parks they buy. It’s still arguably a more niche business, and there is some variance in there.Self-storage and mobile home parks have much higher cash flow than multi-family. Click To Tweet
Similar to investing in multifamily or even other asset classes in real estate, the people running the deal are important. In my opinion, they’re the first people you want when a deal is presented. It’s like, “Let’s go find out about the sponsors. What is their track record in doing this kind of deal, executing these types of business plans and the works?” To touch a little bit on your investing, you have Thrive Fund, but you have a fund before that, that has invested in a good chunk of mobile home parks. I’m sure you have the number and all of that.
ThriveCommunity.Fund is our fund. The first one we did was called the Founder’s Fund. Our strategy was we saw that a lot of the larger parks, 100 pads or more, are getting sought after by these larger investors. The observation was anything that’s 95 pads and below, nobody is knocking on their door, but there are a number of great parks with great cashflow and tired owners who want to get out. What we put together was let’s go look at geographies that have high density. High density, meaning Fayetteville, North Carolina. It is a metro of 500,000 people, growing around 6% to 7% a year. It’s anchored by two large military bases, three universities and hospitals. It’s a secondary market to Raleigh Durham. It has 400 mobile home parks, and 50 of those are 100 pads and above.
There are then 350 with not a lot of competition. Our strategy was let’s go in and aggregate these smaller parks, buy them up, and operate them as a large one. The Founder’s Fund was 300 pads, 250 homes, and 11 smaller parks that we’re running. Now in our follow-up, which again is a Thrive Community Fund. We’re calling it the evergreen income because we want to be long-term hold and have high cashflow. The focus there was to execute the same strategy but do that in more geographies.
Touching on returns, as we started this conversation, you mentioned that one of the things that attracted you to the mobile home park space is these 8% and 10% type cash-on-cash returns. Is that what you’re seeing across that 400 mobile home park portfolio?
That’s what we’re delivering. In our first fund, we’re delivering right now since our first payment, 10.5% cash-on-cash annualized. We’re seeing that out of our second fund too. We see that even while we’re still in stabilization and we’re at 70% occupancy, we’re able to deliver that because, in these value-add types of parks that we’re purchasing, we’re able to purchase for such a price and start adjusting this NOI by infilling the parks and by getting tenants in some of these vacant homes. That doesn’t even include the opportunity to do the infill that comes in year three of our business plan.
One key thing that is probably in the mind of a person reading this is, “These guys are in 10% cash-on-cash.” I’m not seeing that in the multifamily space. Why is it that mobile home parks are able to generate this? You touched on this earlier, but it’s important to touch back on that again because I’m sure it’s in their mind.
I didn’t drill into that specifically, but mobile home parks are made to cashflow more than multifamily because of the fact that the tax structure is different. When you think of multifamily and even here in Texas, you know that tax and paying property tax is a huge portion of that. Mobile home parks are not taxed like buildings. It’s taxed like a park. You don’t have permanent structures on it. It’s taxed closer to owning property and owning a parking lot than it is to own that. That’s a big expense line removed.
The other thing is there’s an opportunity when you’re running the parks and you’re doing the billing back of utilities. When you convert parks, you purchase parks as park-owned homes. That’s generally how a lot of the traditional owners do it. You then rehab the homes. You get the tenants on rent-to-own programs. You’re then taking off the expense of repairing the homes. As you’re helping people become homeowners, they’re owning that responsibility. They’re taking care of their homes. You get lowering the expense line which adds to more free cashflow.
If you’re in a scenario where you are buying these parks where they are 40% or 50% occupied, it’s a cash-owned business. When you negotiate for the buying price, you’re going to buy a cashflowing asset that’s 50% occupied, then you start filling it up. The cashflow gets higher and higher. You’re buying low. This is something that in multifamily right now, you’re not able to buy low. When I tell people that we’re buying at a 10% or 11% cap rate, their heads will explode. They’re like, “How is that?” It’s that the asset class that we’re going for, this is what they’re operating at right now.
We’ve now touched on the returns. We have a good sense of what the returns look like in the mobile home park space. We also touched a bit on the operator and looking for people who have that experience. We dived a little bit about the differences between mobile home parks and multifamily. One of the other key things that are good to discuss is financing. That is a key thing that plays in all of the real estates. The biggest partner in the room is the bank. Can you talk a little bit about the financing and what specifically investors need to be looking at when they’re looking at these mobile home park deals about the financing?
The same rules that apply to multifamily apply here when you’re looking at bank-owned financing. Are you at a fixed or floating interest rate? How long is the term for? What is the relationship with the bank? Is it a bank that’s comfortable with this asset class or is new to this asset class? Those are things that are essential to understand. In mobile home parks, the interesting thing that we’re finding goes back to this cash-run business. Imagine that you’re a mobile home park operator. You have been in the business for 30 or 40 years. You’ve been running it as a cash business. Maybe your books aren’t as clean as they need to be because you have been collecting $12,000 and depositing $10,000, or collecting $12,000 and depositing $8,000.
You don’t want to get cashed out for a couple of reasons. Number 1) You don’t believe in the market. 2) You’ve been a real estate person your whole life. You just want easier passive income. Because of some of these drivers, 30% to 40% of the parks or portfolios we take over are seller-owned financing, which is phenomenal for us because we can write these flexible terms. We’re not paying a lot of overhead to banks for fees. The owners get a chance to get their books in order. They also get income. They’re great to negotiate interest-only terms as well. They’re also still partners in the business. As far as we can go and ask them questions and because we’re operating their park that they’re getting the income from, then they become a phenomenal partner there.
One of the interesting things when it comes to financing is we’re finding a lot of flexibility with this seller-owned financing. Our two plays are we have established some deep relationships with some regional banks. We’re consistently going to them and our goal is to provide them with a clean track record. A great thing for other passive investors to look at is, are your operators creating good relationships with banks and building trust so that’s where they’re going.
Banks want to continue to lend money. Even in this environment where things are slowing down, they need to deploy capital as well. Knowing operators, seeing clean books, and seeing efficient operations, they’re going to continue to do business with them. That’s what we’re doing. The dynamic of seller-owned financing and as an investor, making sure that you’re clear on what the terms are. What’s the initial term? Can we extend it for another term? Can we refinance at any time? Understanding and getting clear and transparent on those things is important.Find people who allow you to be in your zone of genius and let you do your strengths, and everybody wins. Click To Tweet
A couple more metrics are important, looking at the expenses. What are some of the big-ticket items that investors are looking for? For instance, in the multifamily space, usually, it could be around 40% to 50% expense ratios in comparison to the NOI and the income that the property is bringing in. In the mobile home park space, what are some of the big-ticket expense items? What does that expense ratio look like for typical properties as well?
This is again why mobile home parks were made to cashflows. The expense ratio is usually around 35%. The biggest ticket item is going to be the park-owned homes repairs. That’s why being able to have an operator who has a team that says, “If you’re buying a mobile home park that has older mobile homes, it’s being able to rehab them and give them in great quality to tenants.” Being able to get them on rent-to-own programs is great because you’re getting homeowners that will see the home payment drop off at some point, and they’re paying a lot rent. They’re going to be able to reduce their payments permanently at some point, but then taking that off the expense line is critical.
You’ll find that other than that, normal expenses like taxes tend to be up there. Taxes are a little bit higher. It’s mostly ground maintenance and a lot of maintenance stuff, depending on where you are. Is it going to be trees or other things, but clearing and managing the grounds, and then any type of utility work that pops up because there is going to be some type of plumbing work. This is where investors need to look. Is this on public utilities, public sewer or public water? Is there a blend and maybe it’s septic tanks, public water or public utilities? Understanding that is also going to understand what the onus of some of those repairs is going to be on the owners.
For parks that are not on city water, there could be potentially more costs connected to like plumbing, etc.
If they’re not on city water, they’re going to be on a well. Especially here in Texas, when you go through a drought season, all of a sudden, the water can dry up, so then you need to go bring in water trucks. You’re going to then need to go dig wells deeper to try and tap into the aquifer that has gone further down. Those are the types of expenses that you can expect. That’s not going to be steady. It’s going to be more of a burst. The same thing with septic. Planning in and making sure there are good and healthy reserves in case something goes wrong in the septic system. If you think about it, a well-run mobile home park is you are trying to be a huge HOA that’s providing all of the infrastructure and all of the park management to your tenants.
Park-owned homes and tenant-owned homes, from this conversation, it seems to me that you lean towards having tenants own their homes and getting them on plans to do so.
That’s the result of the business plan. We prefer to purchase parks with park-owned homes because one of the big focuses for us too, and this is also important, is thinking about how the operators are going to run the parks. Our main focus is we want to have nice respectable places to live that are safe. Safety is huge. When you take over a park and maybe they hadn’t vetted their tenants and done any type of background check or other things, you may have some people in the park that are choosing not to follow the laws or not to follow the rules of the park.
If it’s a park-owned home, then you can put them on a do not renew. They’re usually on 30-day terms. You can then start creating this environment that you want of safe people that want to work together that want to be a part of a growing community. That’s why a park-owned home is good. Converting it to a tenant-owned home is then this long tail of this is our value-add plan of how do we turn it into with the vision of the 4 or 5-star park, where it’s all these homeowners that are truly paying for the services.
I heard you on another podcast. You were talking about how you were planning on buying mobile home parks on your own initially. You started doing research about it and realized some people were losing their shirts and all of the money that they put in as a result of this. I know a couple of other people who have done similar things where they have bought parks on their own, and it hasn’t ended well. Can you talk a little bit about why you’ve chosen to partner with the partners you’ve partnered with, and the benefit of investing in the fund that you guys have created?
It’s interesting. I was talking with an investor. In our conversation, we were talking about active versus passive. I started realizing, my strength is more on the financial side and the financial analysis. I love doing a lot of legal work. I like operating the funds. I like talking with investors, but I’m not strong on the operations side. That is not my strong suit as far as being there in the day-to-day operations. While we do have a small portfolio of single-family homes here in Texas, my wife and I thought, “Let’s add to our cashflow by getting a mobile home park. They cashflow well. This was part of my exploration in 2020. Let’s go do that.”
We were looking at a nice eleven-pad park. It was kicking off $3,000 or $4,000 a month. We’re like, “This looks amazing. It’s amazing.” I started pulsing friends. I asked people who were doing it, “What’s your experience? What have you found?” I knew somebody who had been doing multifamily for a number of years. They were small owner-operators in different parts of the United States. They purchased a mobile home park in Memphis, Tennessee. They live in Danville, California. I was like, “How’s the whole thing going?” He’s like, “Let me send you an email.” He sent us an email and he is like, “This is one of the biggest mistakes I’ve ever made.” He walks through how he let somebody else move in and burned one of these things down. The property manager that they have on site is stealing money from them.
I read it like a horror list. I was like, “I don’t want to do this.” What I realized is it’s having experienced operators who understand the business, who understand the clientele, and who are engaged. They feel passionate about going to work. It’s interesting, we need affordable housing here, and affordable housing for a workforce, for people that are working in construction and industrial jobs, for people that are maybe supporting our armed services, and maybe they aren’t making a ton of money. We also need it for retirees that hadn’t saved money. Maybe they have money in their house and they’re on a fixed income. They need something that’s low cost so they can then sell that home, and they can use the money to travel and do other things.
There are people who feel passionate about that clientele and understand how to manage it. It can also move out the riffraff. What I realized is I needed good partners to help me on that side of the execution. That’s when I found people and I said, “Let me do my zone a genius. Let me go into my strengths and do this. You do your strengths, and then everybody wins.”
Why do a fund? Why not just do individual investments and raise capital for each deal?When times are good, you’d want to be in affordable housing. When times are bad, you also want to be in affordable housing. Click To Tweet
We are buying the smaller mobile home parks. If we were syndicating all of them or even doing JVs, it would be incredibly inefficient. Doing the funds for the types of parks that we purchase is a much more efficient way to manage the investments and the flow of capital.
This was so good. I learned a lot about mobile home parks. Is there anything else I didn’t touch on that you think would be good to share with my audience on mobile home parks before I have you tell them where to learn more about you?
There are a couple of things that I would share with them. Number one is mobile home parks, for having the word mobile, they’re not really mobile. When they get put on a location, that’s usually the last location that they’re on. The other thing is that there is a high collection rate in mobile home parks. Many people ask, “A lot of people there are defaulting. Do you have to do a lot of evictions?” No. People come to understand that it is affordable housing. Usually, beyond this, there’s homelessness.
People do work with you and we work with them to make sure that they’re able to make the payments and get the dollars in. We found that in 2020 the mobile home parks that my partners had owned had a 92% collection rate throughout. In Dallas, Texas, we had some multifamily buildings that were at 80%. It’s much worse than that. I thought those were a couple of interesting things to point out, the misconceptions.
One last thing is the market environment. Is this a good time to be in mobile home parks when you have rising interest rates, a potential market downturn, and a potential recession? Is this a good time to be investing in mobile home parks?
I’ll repeat this quote that my partner said which is, “When times are good, you want to be in affordable housing. When times are bad, you really want to be in affordable housing.” When there’s downward pressure in the market, and I have this chart that shows that since the year 2000 when this chart was created, the NOI of mobile home parks has consistently gone up to the right more than anything, more than apartments and self-storage.
It has gone up because when there’s downward pressure in the market, A is going to move to B. B is going to move to C. The C is going to move to mobile home parks. A unit that we’ve rehabbed, we’ll take it online. If we advertise too much, we will be inundated with phone calls. We’ve gotten over 200 in 24 hours before. The housing crisis is real. It’s not going away. If there’s downward pressure in the market, we’re going to have more people that want to be tenants because this asset class is scarce.
With that, if people want to learn more about you, your fund, and investing in mobile home parks, where’s the best place they can go to learn more?
The best place they can go is ThriveCommunity.Fund. They can get access to a free webinar where we’ll help educate them more on what we’re doing with mobile home parks. They can get a chance to meet me, Bo, and the team.
Thank you so much, Chris, for coming on. We learned so much about mobile home parks. We appreciate it.
Thank you so much, Lisa. It’s always a pleasure.
About Christopher Nelson
Christopher Nelson is an experienced technology executive (2 x IPOs), real estate investor, author, and the principal and co-founder of Wealthward Capital. Wealthward Capital is a real estate investment firm with a diverse portfolio of over 3,000 multi-family units, mobile home parks, and ATMs. Christopher helps technology employees achieve financial independence through financial education and creating passive income portfolios. He is also finishing his book, From No Dough to IPO.
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