Listen on Apple Podcast here: https://podcasts.apple.com/us/podcast/interview-with-jefferson-lilly-of-park-avenue-partners/id1520681893?i=1000504364435

SHOW NOTES

Welcome back to the Passive Mobile Home Park Investing Podcast, hosted by Andrew Keel. On this episode of the Passive Mobile Home Park Investing Podcast, Andrew talks with one of his biggest mentors; Jefferson Lilly with Park Avenue Partners. Jefferson talks about his first mobile home park deal in 2007, the demographics information on what would be his perfect mobile home park, what makes Park Avenue Partners different, and his predictions of where the mobile home market will be in 2021 and after.

Jefferson is an expert and educator in the mobile home park asset class. As a founding member of Park Avenue Partners (and it’s predecessor, Park Street Partners), he is responsible for their strategic direction, property operations, and new acquisitions. In this episode, Jefferson shares his expertise on the manufactured housing industry and also shares resources like his podcast and his Mobile Home Park Investors LinkedIn group.

***Andrew Keel and Keel Team Real Estate Investments (Keel Team, LLC) do not endorse any interviewee. This interview is for informational purposes only and should not be depended upon for investment purposes. ***

Andrew Keel is the owner of Keel Team, LLC, a Top 100 Owner of Manufactured Housing Communities with over 1,400 lots under management. His team currently manages over 20 manufactured housing communities across ten states – AR, GA, IA, IL, IN, MN, NE, OH, PA and TN. His expertise is in turning around under-managed manufactured housing communities by utilizing proven systems to maximize the occupancy while reducing operating costs. He specializes in bringing in homes to fill vacant lots, implementing utility bill back programs, and improving overall management and operating efficiencies, all of which significantly boost the asset value and net operating income of the communities.

Andrew has been featured on some of the Top Podcasts in the manufactured housing space, click here to listen to his most recent interviews: https://www.keelteam.com/podcast-links. In order to successfully implement his management strategy Andrew’s team usually moves on location during the first several months of ownership. Find out more about Andrew’s story at AndrewKeel.com.

Book a 1 on 1 consultation with Andrew Keel to discuss:

• A deal review
• Due diligence questions
• How to raise capital from investors
• Mistakes to avoid, and more!

Click Here: https://intro.co/AndrewKeel

Would you like to see mobile home park projects in progress? If so, follow us on Instagram: @passivemhpinvesting for photos and awesome videos from our recent mobile home park acquisitions.

Talking Points:

00:21 – Welcome to the Passive Mobile Home Park Investing Podcast

02:14 – Jefferson’s background in the business

06:22 – Jefferson’s first park in 2007

09:37 – The most important thing passive investors (LPs) need to know or look for (risks)

14:35 – The toughest hurdle

17:19 – The current state and future of the mobile home park industry & manufactured

housing

21:55 – Value-add implements Jefferson uses in his new acquisitions

25:30 – Jefferson’s perfect mobile home park

27:56 – The value proposition at Park Avenue Partners and what makes them different

29:40 – Getting a hold of Jefferson Lilly

31:06 – Conclusion

SUBSCRIBE TO PASSIVE MOBILE HOME PARK INVESTING PODCAST YOUTUBE CHANNEL https://www.youtube.com/channel/UCy9uI3KGQmFgABsr9lUtRTQ

Links & Mentions from This Episode:

Mobile Home Parks 2.0 Presentation: https://www.mhvillage.com/pro/community-owner-presents-mhp-2-0/

Mobile Home Park Investors LinkedIn Group: https://www.linkedin.com/groups/131404/

Jefferson Lilly Podcast: https://podcasts.apple.com/us/podcast/mobile-home-park-investors-jefferson-lilly-brad-johnson/id1069263193

Jefferson Lilly Website: http://mobilehomeparkinvestors.com/

Park Avenue Partners Website: https://parkavenuepartners.com/

Keel Team’s Official Website: https://www.keelteam.com/

Andrew Keel’s Official Website: https://www.andrewkeel.com/

Andrew Keel LinkedIn: https://www.linkedin.com/in/andrewkeel

Andrew Keel Facebook Page: https://www.facebook.com/PassiveMHPin…

Andrew Keel Instagram page: https://www.instagram.com/passivemhpi…

Twitter: @MHPinvestors

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TRANSCRIPT

Andrew: Welcome to the Passive Mobile Home Park Investing Podcast. This is your host, Andrew Keel, and today we have an amazing guest and one of my idols in the space, Mr. Jefferson Lilly. Jefferson is a Mobile Home Park Investment expert and educator. He is responsible for Park Avenue Partner’s strategic direction, acquisitions, and property operations. Prior to founding Park Avenue Partners, he co-founded Park Street Partners, a similar partnership also focused on acquiring mobile home parks nationwide.

Both personally and through his partnerships, Jefferson has acquired 25 mobile home parks, this was as of when I read it off your website which may have increased since then, in 13 states since 2007 totaling over $56 million in value. He started the industry’s very first podcast and the largest group on LinkedIn dedicated to investing in mobile home parks which I will make sure to get you the link in the show notes to that. He holds a BA from the University of Pennsylvania and an MBA from the Wharton School of Business. Jefferson, welcome to the show.

Jefferson: Andrew, whatever I’m paying you, I’m doubling it. That was an astounding introduction and actually about a third of it was actually accurate.

Andrew: I’m so happy to have you man. Your podcast was very important to my education in the space. I’m really excited to dive in today and probably learn a couple of things I don’t know about you.

Jefferson: Fire away. Glad to be here.

Andrew: Awesome. Can you please tell us about your story and how you got into manufactured housing?

Jefferson: When I woke up from the concussion, it just seemed like a good idea to buy a mobile home park. But no, seriously, I got into the business, I got turned on into the space, it’s now been about 15 years ago, 2005, I was working in iTech. I have been through the dot-com boom and bust and semi resurgence.

I was looking for some passive income to even out stock options, income, and what the stock market was doing. I thought I always lived in a house and apartment, why don’t I buy an apartment? I don’t mind going to work, maybe I’ll fix it up, new roof on the building, new kitchens, make it better for the tenants, bump rents, make it better for me.

Then just being on websites like LoopNet, I would filter for multifamily properties. I live out here in San Francisco, I knew I was not going to find anything that cash flowed even then in San Francisco so I was already looking at Lubbock, Texas and Illinois on and on. I would see in these multifamily listings, again this is 2005 pricing, in 99 apartments at 8 cap. Then one trailer park at 10 or 12 cap. Probably that included some of the house income and we can talk about that. I didn’t know that at that time.

I saw these asset classes 1 in 100, they were yielding 200, 300 basis points more and of course I thought that’s absurd. I’m not going to buy a frigging trailer park. I deleted the search results and looked in Omaha, Nebraska and Madison, Wisconsin. I kept getting hit over the head. I’ll be embarrassed. It probably took five or ten of these little search results before I finally thought, I guess mobile home parks are multifamily. Why don’t I look into why these things seem to pay so much money? It’s just they’re a huge […], what isn’t?

I started looking around and found the Mobile Home University website back when its original founders, Corey Donaldson and Steve Case, were running MHU. I went into one of those and started buying every book and listened to tapes that I could find. I built up an unofficial advisory board of about 10 guys that all owned mobile home parks.

It took roughly another year and a half. I wasn’t really looking full time, I was still working my day job in tech, but I would run deals by these guys and they would say thumbs up or thumbs down, here’s why, or maybe you don’t know about this deal, Jefferson. Dig in on issue x and when you figure that out, then you’ll know if it’s a park you should buy.

I spent 17 months from the time I really got turned on to the space and figured out why it’s a great little niche in late 2005. It took me until about March of 2007 to close on my first park, about 17 months. Put in some other offers, got outbid along the way, I didn’t chase up the price on deals but I finally closed on my first deal in early of 2007.

Again, it’s taken on a life of its own from then. Doing some consulting to buy another park to then raise funds to now buying, I think I’m about 33 mobile home parks. Hopefully closing on three more this friday. We’ll see.

Andrew: Three in a day. Is it a portfolio?

Jefferson: Yes, exactly.

Andrew: Wow, that’s fantastic.

Jefferson: Closed on two in the portfolio a week before last, we got three more. We’ll see if we can get it done here by the end of the year. Fingers crossed.

Andrew: Fingers crossed, man. Congratulations, dude. That’s a fantastic story. Would you mind telling us a little bit about that park in 2007 and how it fared during 2008, 2009. I think a lot of investors have heard of the recession resistant characteristics the asset class has, but it’s not too often you get to speak to somebody that was an actual operator during that time. If you wouldn’t mind sharing some expertise, that would be great.

Jefferson: This is my perfect business timing now. Closing on my first investment with a very large chunk of my then net worth in March of 2007, and then towards the end of that year, certainly into 2008, the wheels came off the housing market as it were.

I enforced no pay, no stay. I kept expecting my manager one month to call and sort of say a third of the people haven’t paid, do you really want me to empty out your park by a third? Fortunately, that call never came. I got some other amusing calls, but that one never came. Folks generally continued to pay rent.

There’s always a single digit fraction of the folks that just can’t bring themselves to pay rent, but that didn’t increase that much. We might have had slightly more turnover. We continued to market the property. We pretty much always since day one had a website for that property and we’re advertising on Craigslist. Facebook wasn’t really big back then.

Long story short, we stayed 95%-100% full right through the great recession. We actually raised rents about 50%, I know that sounds extraordinary. This first park I bought had a going in rent of $110 a month, very modest, and that was 2007.

By 2010, I believe we were at $155 a month. It’s still quite affordable. But percentage wise, that was a 50% increase. Again, we remain 95%-100% full rate through it. That was in Oklahoma. Indeed, Oklahoma was not ground zero for the housing crisis. That was in places more like Miami, Vegas, Eastern I guess, inland part of LA.

What I hear, I know one park owner was active in Florida during that time. He had much higher turnover and therefore had higher expenses renovating some of his homes. I think he was more in the rental business, but he was closer to ground zero. He also remained over 90% occupied right through the housing recession. He lived near his park, he was renovating houses and got them as high turnover and some high expenses. But still, even though he’s close to ground zero for the housing debacle, he didn’t get wiped out. He worked a bit harder and he still got through it. I think cash flowing all the way.

Andrew: That’s fantastic. Thank you for sharing that. A lot of our listeners are passive investors. They’ve invested in other asset classes and they’re not really aware of all the risks involved in the mobile home park asset class. What are the most important things that passive investors, or LPs, if you want to call them, need to look out for prior to investing either into a mobile home park syndication or a fund. What are the shortlist top items that you would like to share with listeners?

Jefferson: Honestly, I’d say the most important thing is doing diligence on your deals sponsor on the GP. Making sure that person is ethical and a good operator. I’ve long felt that frankly it’s almost impossible to destroy the mobile home park business model.

We’ve seen the government come close and we’ll see how we’ll get through this eviction moratorium, but the dynamics around the actual asset class are so strong. There’s greater risk in your GP in the partnership. I guess my advice to LPs would be get to know your GP, understand their ethics, understand how they operate both how they source deals and how they operate them.

Those are really the only two things and you need to do both well, but finding good deals and operating them well are really the only two things you need to do to make money in this space. I would argue if you only do one of those well, you’re not going to do that well on the whole.

Some key questions to ask your GP would be how are you sourcing deals? Are you getting deals off market? Or are you just buying the widely shopped deals from brokers? I bought from brokers with my current fund, given pricing, I’ve actually so far shifted to being able to find deals 100% off market. We’ll see what the future holds. It’s not that the brokers have no good deals, but I’ll be a little reticent to invest with somebody that exclusively buys broker deals and makes no effort to invest in people in the system to be cold calling and get sourcing deals on your own. That’s the first thing.

The second deal is then how do you actually operate. There are some other operators. I don’t think it’s you and it’s not me, but there are some operators out there that just outsource their properties entirely to property management companies. I’ve never done that with a whole portfolio. I’ve done it with a couple of properties, I’ve bought one property that came with an outside management company and we are in the process of replacing them.

I would say that it’s really not a good long term strategy to just outsource your management, frankly this business just isn’t that easy, outside management companies can maintain a property, but in today’s market, today’s pricing, you’re probably still paying a pretty decent price. You really got to take the property to the next level. You cannot any longer in general just sit back and cash flow and do nothing but raise rents. You got to actually be fixing your houses, you got to be buying new and getting those transported in. You got to get the website setup, you got to advertise on Craigslist, on Facebook, and so on.

I would say, obviously I’m biased, but I would say the LPs should really be investing with partnerships that find almost entirely off market deals, those are likely to be priced better and you can actually close those deals usually quicker and then again invest in partnerships that actually keep the management in house.

Andrew: Those are two extremely good pieces of advice so thank you for sharing that. I agree with you on both of them. I think I read something where mobile home parks trade off market rather than on market which is quite interesting. The third party management, we had one community that was third party managed when we acquired it and it’s just a very tough cookie. It’s not your typical residential single family house portfolio. There’s a lot more moving pieces.

Jefferson: Moving parts. Some of those parts actually have wheels. Management companies don’t do well with wheel estate, they tend to do okay with real estate, but the wheel estate part of our business I have found has confounded most outside management companies.

Andrew: Totally. Jefferson, what has been the toughest hurdle in your business for you guys?

Jefferson: I think it’s all really, for me, revolves around people, hiring people, motivating them, and building a culture. This business is relatively easy to get into if you’re a sole practitioner and you want to buy a park at 50 pads or 100 pads, that’s how I got started. It’s easy to do everything. You’re answering the phone, you’re calling the plumber, posting the ads on Craigslist. But where you certainly get a couple of hundred pads, I would say generally, this is my experience, when you get to about 500 pads, you can no longer be superman. I probably have a bad superman complex. I think I can do it all.

In fact, given an infinite amount of time, I’m sure I could do it all. I could do all the accounting, answer the phone calls, I can do all the marketing, but there’s just not enough hours in the day. I call it Mobile Home Park 2.0 where I’ve done a podcast on it. All the Mobile Home University and all the books and everything out there help you get to Mobile Home Parks 1.0. Why this is a great business, where do you advertise a home for sale, that kind of stuff.

Nobody’s really teaching Mobile Home Park 2.0. How do you now build an organization so that you, as the founder, really almost step out of the mobile home park business and you get into more of being a headhunter, a recruiter, and a manager of people that in turn do all the accounting, marketing, rehab, and whatnot.

That’s quite a stretch. I haven’t found it easy to do. I think I’m getting better at it, but I still got a long way to go. Just getting to Mobile Home Park 2.0, getting beyond the 400, 500 pad mark and really having to hire and motivate the right people is I think always a challenge.

Andrew: I totally agree with you on that. That’s been one of the tougher things for us as well. In another life, I work a lot with Keller Williams real estate agents. Gary Keller wrote a book on how to grow your team. This is your first hire, this is your next hire. There’s nothing like that in the mobile home park business like you’re saying. I did enjoy your podcast, Mobile Home Park 2.0 and I think you gave a presentation either this year or last year on that as well.

Jefferson: Yup.

Andrew: I’ll put a link in the show notes to that so they can go over and check that out if they’re interested. Fantastic. What can you tell us about the current state of the mobile home park industry and manufactured housing in general and where do you see it going to the foreseeable future?

Jefferson: The business generally is consolidating. It’s still a fair number of popup operators, but I certainly see a much greater competition for deals than I did say 12, 13 years ago when I got into the business. As I alluded earlier, it’s becoming increasingly important to execute. We’re nowhere near doing deals as big as stuff that was done back in the 80s, with all the RJR takeover and the KKR and all these guys.

You saw an evolution from it being initially in the most of 80s, big buyouts just about financial engineering and all these people that were investment bankers who could raise money, slap debt on the company, take it private. Tinker with the finances a bit and sell it at a profit, but they weren’t really operating the business. Then you have firms more like paying capital come along than actually paid up a pretty penny, big price for deals, and then actually went in and operated those businesses.

We’re not doing deals anywhere near into the billions. Most of my deals at least are single digit millions, but at the end this business has evolved from just saying I just want to buy a park and do nothing as if it’s a passive investment.

If you’re buying at the prices circa 2010, probably you could just buy the passive and do nothing. But again, today you’re probably not getting great deals pricewise. Better still if you’re buying off market, but you’re rarely stealing a deal and again, you really need to operate it, get a good manager, get a good compensation plan for them, get them motivated to be bringing in and renovating houses and all these operational issues.

You got to be a much better operatore today than you did 10 and certainly even 5 years ago. I think what we’re seeing also as the business consolidates is it makes those exits a little more interesting. All of our numbers with our LPs are predicated on selling deals one at a time at the end of our 10 year fund. Selling deals one at a time at basically the same cap rate that we bought them at. Presumably that we’re making money, we’re going to get some operating leverage.

Anyway, it’s not baked in any of our numbers, but I suspect what we’ll see increasingly in certainly 5 or 10 years down the road when we might be exiting some of our funds is you’ll see some of these larger operators, even larger than we are, paying lower cap rates to buy a portfolio of properties. I think I’ve seen more of that happening than 5 or 10 years ago.

We don’t plan on it, but we think we’ll not only have the operating leverage of improving the properties, but we think we’ll actually be able to sell them at probably a lower cap rate and get some financial leverage. That’s been a change that there are portfolio buyers and their portfolios are generally traded at a higher price, lower cap rate than the individual properties.

Again, there’s value to building just a larger portfolio in general. For instance, we’ve been able to concentrate some, for instance with our current Park Avenue fund, we’ve now acquired five properties in Sioux City, Iowa. For a future operator, that’s great to have. Now we’re a little over 400 pads between those five properties and they’re all within about a four mile radius of one another. We’re looking at some other acquisitions in metro that we’re already in. It’s not a must but I think there’s some unique benefit today and at exit in the future as they continue to consolidate to having a portfolio of properties that you can sell off in a bundle.

Andrew: That’s fantastic. Would you mind touching on the value add that you guys implement in your new acquisitions? Some of our other guests have mentioned how infill is one of the tougher value add components. Would you mind sharing a little bit about what you guys implore on your properties?

Jefferson: The big three for all of us are basically bumping rents, that’s the easiest, obviously it doesn’t take hardly any effort. Just send out a letter and say the fair market is now $20 higher, your rent has gone up. Rent increases, that’s the easiest. Even someone not strong at operations can raise rents.

Secondly, kind of going down the list of low hanging fruit of what’s slightly less than a low hanging is to actually install water meters. We’ve found with our portfolios so far—it’s approximately half—that has upside from installing water meters. The other half is either the meters are already there or the beautiful thing is the local utilities are billing tenants directly for their utilities and then you have a pure parking lot. That’s a fair amount of our Sioux City portfolio, thankfully.

Anyway, we’ll actually install water meters. Those are remote read, wireless, so they feedback into our system, our rent accounting system. We happen to use Rent Manager, AppFolio is also good, ERD, there’s half a dozen of these. We happen to use Rent Manager, that’s a big plus just to get the wireless reads and not have to first of, of course bill for the water and again not to have to bother the manager with going around manually reading meters. We want our managers focused on selling houses and maintaining curb appeal, not on doing manual things like reading meters. Water meter is the second thing that we do.

The third thing you alluded to is infill, that is the heavy lifting in this business. Over the last couple of months, actually about the last year, we’ve ordered almost 20 brand new homes and we anticipate escalating that and buying far more over the next 12 months as we continue to acquire our properties.

Buying new is easier but still requires logistics around getting the home delivered, skirted, plumbbed, electrified, and on and on, and marketed. What we may do frankly over the next six months is hire somebody just to source mobile homes for us, new and used, and coordinate the moves. For used homes they will also be coordinating a rehab and just have somebody who just infills our parks. That’s again not something that an outside management can really do a good job of.

We had some of our managers find one or two homes to buy which is great, but I think we’re about at a scale where we can probably create a decent high five even six figure income for somebody just sourcing homes and getting them into our parks. Anyway, that’s the third thing. You got rents, water meters, and real heavy lifting of infill.

Andrew: That’s great. That’s wonderful. Jefferson, what does the perfect mobile home park look like in your eyes?

Jefferson: It’s free. It’s got a treasure chest of gold and diamonds buried in it and only I know where that is.

Andrew: Twenty cap.

Jefferson: Yes, it’s free. You just get one for free. I think realistically, we at least like to buy roughly stabilized upside. Something that’s around 80% occupied, probably very few parked owned homes at a reasonable price. We love things that are into the double digit cap rates. We’ve been able to find a couple of those, and again, with all the infrastructure is there, the extra 20% of the pads are fully constructed, all the utility headers are there. All we have to do is source and bring in homes. Of course it will be nice if all those additional vacant pads are also directly billed by the utility company.

The park itself, thinking outside the park, we would want that to be located in a decent metro. Decent for us means an average house price of $100,000 and up, average a site built house. We’re in some metros where it’s closer to $200,000. We’ve done one or two deals where the average house price is a quarter million, but anything well over $100,000 means you got a pretty healthy economy. We also like to be within five miles of the super Walmart. We think they did their demographic and economic research quite well and Super Walmarts are put in places that are reasonably healthy, economically.

One of our better deals was zero miles to the Super Walmart. Our northern border of our property was the southern border of the Super Walmart parking lot. That Super Walmart had been a Super Walmart for 20 years, 30 years and it actually was torn down and rebuilt larger about six years prior to us acquiring the park. Walmart’s investing that way in Super Walmart, we probably got a pretty decent economy there. That’s our perfect deal.

Andrew: That’s great. What is the value proposition at Park Avenue Partners and what makes your operation different?

Jefferson: Unlike most other partnerships, we take no fees. I get no salary. I get no acquisition fee. I get no backend investiture fee. We are truly aligned with our limited partners. We split the profits 50-50, that’s both cash flow quarterly as well as no guarantees but presumably some much larger cheques at the end of the fund, at the end of 10 years. Again, we focus on mobile home parks. We aren’t also dabbling in single family, or apartment, or self storage. We focus on mobile home parks.

Again, we’ve been also so far able to source deals exclusively off market and we operate those entirely in house. We think that will lead to the best long term results, both managing in house but also having the discipline to not be motivated by fees. I go do a $10 million deal. I’m not pocketing a $200,000 greater finders fee acquisition fee. The deals we do got to actually cash flow. I think we’ve got better alignment with our limited partners than most other funds because there are no fees, no salary. We’re just true partners of the deal.

Andrew: Wonderful. Jefferson, thank you so much for coming on the show. If any of our listeners would like to get a hold of you, what is the best way for them to do so?

Jefferson: Our fund website is simply parkavenuepartners.com and there’s actually at the bottom of our home page, there’s an intake form. Somebody can just fill out their information and ping me directly through the website. There’s also at the top of the website, just a little subscribe button and folks can join our mailing list. Honestly, I probably don’t do as much email as I should. It will be almost certainly less than one email a month. We don’t spam but that’s how folks can get appraised of our deals and upcoming fund which we hope to launch in about Q2 of 2021. We have another six months.

So parkavenuepartners.com and then you’ll get into the podcast and the LinkedIn group. We also got the calendar of events that people can download as well. All that is at mobilehomeparkinvestors.com. There they can find the links to LinkedIn, our podcast, and our calendar of events.

Andrew: Awesome. Please make sure to check out Jefferson’s LinkedIn group that’s titled Mobile Home Park Investors and it has over 5700 to date. There’s a lot of viable information in there. That does it for today’s show. Jefferson, thank you again for joining us and to all you listeners, thank you so much for tuning in.

Jefferson: Thank you, Andrew. You’re the best.