SHOW NOTES

Welcome back to the Passive Mobile Home Park Investing Podcast with your host, Andrew Keel! In this episode, Andrew Keel kicks off a new mini-series on some of the top risks associated with owning a mobile home park.

In this first installment, Andrew Keel dives deep into the critical process of converting park-owned mobile homes (POH) to tenant-owned mobile homes (TOH)—a pivotal strategy for many mobile home park investors.

As a seasoned mobile home park operator, Andrew Keel discusses some of the risks associated with transitioning a mobile home park from POH to TOH, providing a step-by-step guide for investors looking to maximize returns while reducing management headaches. He also shares essential insights that every passive investor should know before embarking on this trailer park conversion process.

While mobile home park investing could potentially offer tremendous cash flow opportunities, success largely depends on understanding and executing the park-owned mobile homes (POH) to tenant-owned mobile homes (TOH) conversions effectively.

Whether you’re a first-time investor or seeking to improve your current mobile home park portfolio, this episode is jam packed with actionable advice to help you potentially boost profitability and mitigate risk.

Key Topics Covered:

• The pros and cons of owning park-owned mobile homes (POH) vs. tenant-owned mobile homes (TOH).
• A step-by-step guide to converting POH to TOH.
• Common pitfalls to avoid during the park-owned mobile home conversion process.
• How converting to tenant-owned mobile homes could possibly lead to increased net cash flow and reduced management effort.

Tune in now to discover how you can make informed and profitable decisions as a passive investor in mobile home parks!

***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 50 Owner of Manufactured Housing Communities with over 3,000 lots under management. His team currently manages over 40 manufactured housing communities across more than 10 states. 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. Check out KeelTeam.com to learn more.

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 mobile home park deal review (get live feedback on your own deal!)
• Mobile home park due diligence questions
• How to raise capital from investors for mobile home parks
• Mistakes to avoid in mobile home park investing, and more!

Click Here to book the 1 on 1 consultation: https://intro.co/AndrewKeel

Are you getting value out of this show? If so, please head over to iTunes and leave the show a quick review. I have a goal of hitting over 500 total 5-star reviews, and it would mean the absolute world to me if you could help contribute to that. Thanks ahead of time for making my day with your review of the show.

Would you like to see value-add 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:

00:30 – Introduction to the new series on some of the top mobile home park investment risks and challenges.

01:00 – The ins and outs of converting park-owned mobile homes to tenant-owned mobile homes.

04:48 – Rules regarding how many mobile homes you can sell without needing a mobile home park dealer’s license.

06:50 – Handling tenant turnover and rehabilitating mobile home park properties.

10:05 – The concept of “handyman specials” and how they can impact a mobile home park’s profitability.

12:21 – Tips for marketing your mobile home park effectively to attract long-term tenants.

13:26 – Finding, vetting, negotiating, and financing for “sticky” mobile home park tenants who are likely to stay long-term.

19:07 – Conclusion and final takeaways on managing risks in mobile home park investments.

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

Links & Mentions from This Episode:

Ryan Narus’ LinkedIn: https://www.linkedin.com/in/ryan-narus-87293417/

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/PassiveMHPinvestingPodcast

Andrew Keel Instagram page: https://www.instagram.com/passivemhpinvesting/

Twitter: @MHPinvestors

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TRANSCRIPT

Andrew:  Welcome to the Passive Mobile Home Park Investing podcast. This is your host, Andrew Keel. I’m going to do something a little different. We’re going to do a new series talking about potential risks. As you’re a passive investor, you may not identify or realize some of the risks you’re taking. Just from my time in this space, I think one of the risks that oftentimes overlooked is why converting park-owned homes to tenant-owned homes is so hard and all of the factors that go into that.

I want to try to educate passive investors out there on this risk and why some operators don’t even buy parks that have park-owned homes because of this additional risk that it brings. I’m going to talk about that. We may do a couple other episodes on other types of risk, like the risks of operational issues with infill issues, utility infrastructure issues, and due diligence issues. I hope you guys find value out of this.

Today we’re going to be talking about why park-owned home to tenant-owned home, value add mobile home parks are so hard, and all the components that go into that conversion. It’s not as simple as just, okay, here, we’re going to give you the title after we close on the park. There’s a lot of dynamics that go into this. My inspiration from this came from a post from my buddy, Ryan Norris, who post on LinkedIn he has a lot of just really valuable content. So Ryan Norris on LinkedIn, follow him if you’re not following him yet.

Here we go. Turnover and capex costs can literally eat you alive. I think you need to start there. Yeah, your expense ratio is 35%, but if your capex, which is below NOI, is eating up all of your cash flow, then what’s your true cash flow? You have nothing, or you might even be negative.

One minute you may think that a hundred thousand miscellaneous budget is super healthy, and another minute you may feel like you didn’t raise enough money. This is really one of those things where you need to raise a little bit more than you need to build into, just build some extra funds there. Because if you have some turnover, a tenant owned home goes vacant. This happens all the time where they just abandon the home and they walk away. You have to go get the title, file for abandonment, and that costs money. Then you have to rehab the home when you get it back, and that costs money. It doesn’t just get better overnight.

I think the biggest thing is understanding that once you sign the mobile home title over to someone, nothing prevents them from removing the home from the community. The right of first refusal and your lot lease agreement can help slightly, but it’s not a guarantee. We have this clause in our lot lease agreement, yet three tenants have sold their homes without offering us this privilege. When the homes have already been moved out, it’s cost prohibitive to bring them back in and hire an attorney to try to enforce this.

The cost to replace a mobile home can and will likely cost tens of thousands of dollars. I think we are budgeting $25,000 to bring in a used home on our new parks that we’re acquiring. It’s not a cheap issue. It’s not a cheap thing to just overlook. It can take you years to recoup that initial investment when you sell via an RTL. You have a home move out, you got to spend $25,000 to bring a new one in. You’re going to sell it for $1500 down and $500 a month, and your lot rents $300 of the $500. It’s really important to understand the full dynamic.

When you’re buying park-owned homes and you own all of those homes, there’s extra costs. You have to insure those homes. If there’s loans on them, you have to. The lender will require you to do that. Also, you have to pay the taxes on them. You have to make sure you have titles so you can transfer them properly. There’s just additional expenses involved with maintaining them.

Let’s look through this. Dealer licensing is a big one that I think new mobile home park operators overlook. If you buy a park, every state’s a little bit different, but I think it was in the state of Ohio, I believe. If you sell more than six homes in a year, you have to become a dealer. To become a dealer, you have to have an office, and you have to have certain requirements that cost money as well. You have to go through all the paperwork and acquire a dealer license.

Every state has rules related to how many homes you can sell without a dealer license. When when selling or transferring park-owned homes to tenant-owned homes, you need to do it right, again, to ward off liability risks, because if you sell too many of those and you’re not licensed, then you’re giving the person that you sold the home to the power to come back at you later on and say, hey, this person didn’t do it right, they took advantage of me, or so forth. That’s really important.

The one third rule. When we buy parks that have a lot of park-owned homes, we’re expecting a third of them to convert to RTOs and eventually become owners. A third of them will stay renting. They’ll want to rent just with a rent increase, and then a third will eventually move out. That may take three months. It may take a year. It may take a year and a half, but that one third will eventually move out.

When you’re planning on converting a full park-owned home community to a tenant-owned home community, it’s not going to just happen overnight. I’ve heard stories where people come in. They acquire a fully park-owned home park. They say, okay, here, your lot rent is now going to be half of whatever you were paying prior. If you’re paying $1200 a month rent, here, you’re going to be just paying $600 a month or $800 a month as your lot rent. You can use the difference to maintain your home, and here’s the title. There’s so much risk with that.

I’ve heard mixed reviews because some people will get the home, and then they’ll end up moving it out of the community. Again, you’re taking two steps back instead of one step forward. It’s really important.

There are things just as a park owner you need to be good at right. Replacing tenants when you do have tenant turnover. It’s really expensive when you have to churn through a third of your park. We bought a 136-lot park in Columbia, Tennessee. Luckily the market is really good. This is outside of Nashville, but it was fully park-owned. Every home was a park-owned home, and they were paying by the week. It was weekly rentals.

We had to convert all of these. Our model was to go slow. We wanted to see, hey, which residents are our problem residents that we’re inheriting and the bad eggs that aren’t going to follow the rules and pay late? Let’s convert those and non-renew their leases first, and then let’s go into the next tier of people to just try to churn through the bad eggs and get more reliable tenant base in there that has been screened by us, we confirm their income, and so forth. 

It’s expensive to go through a third or a half of your current tenant base to refill those vacancies with new paying residents. If you’re going to get those homes back, you got to make sure that you’re providing a good home to the new resident moving in. Otherwise, they’ll turn over again, and then you’re just dumping more and more money into this thing. If you do the cheap rehab for four grand, then six months later they move out, and you got to do another $4000, you’re just wasting your time. There’s turnover time that you’re not collecting rent and so forth, so it’d be better just to spend $8000 or $10,000 up front and do it right the first time, and then get a tenant that stays in there for 10 years plus.

The tenant screening is really important, making sure you’re confirming their income and background. Our current approval rate across our whole portfolio of over 3000 lots is only  25%. That’s one in four applicants are getting approved. That’s because we’re screening, we’re talking to previous landlords, we’re looking at income, we’re getting pay stubs, and we’re looking at background checks and credit. It’s a very in-depth process, even more so than some of the apartments that people are applying at.

Anyway, the screening by the previous owner is likely not as good as yours. Retiring mom and pop owners are known for getting lazy with their tenant screening, not doing background checks, and just following their gut when they’re approving new residents to move into their park. On several of our recent new acquisitions, there’s been sex offenders living in the park. Some of the owners knew about them and put them in there, and then some of the owners didn’t even know they said. It was unbeknownst to them that there was sex offenders in there because they just followed their gut, said the person was nice, and let them move in. That’s important.

Property rehabilitation, better curb appeal is going to attract a better type of tenant. That’s common knowledge, but you got to know what type of amenities and improvements really get the most bang for your buck. We found new signage and fencing is really key. Landscaping around the front sign is really helpful. Off-street parking is something that people really love. Those can go long ways.

Another big piece here is handyman specials. These can be tough and can be very costly if your model is to come in, just give away the homes, and sell them to a handyman that’s going to come in and do all the work. In great markets, we’ve had good success with this, finding people that are actually going to spend the money and put the money into it, markets with high median home price and high population counts, because then the Lonnie dealers that are going to come in and get these homes and fix them up, they can actually make money. If they’re making money and they’re flipping these homes, then it makes sense. But if they’re coming in, they’re investing $10,000, and they can only sell the home for $10,000, that’s just a loss because they’re going to have so much time tied up in that thing.

Those handyman specials can fizzle out, and then you have to step in as the park owner and finish the job yourself, and hope that the previous fixer, upper Lonnie dealer, didn’t demo the home, beyond repair, and now you have to just get rid of the home. You have to tear it down. That can cause bigger issues than you started with.

Rehabbing mobile homes takes a long time, it’s expensive, and it’s hard to find good contractors that just work on mobile home trailers. Some contractors you call them, and the handyman, carpenters, don’t want to work on mobile homes. You have to probably call five handymen to get one that’s willing to work on a mobile home. Their quotes are going to be higher, typically, and you have to work with them to say, hey, I can’t afford to spend $35,000 on this 12×60 mobile home rehab, this is not going to work.

You and I know that it’s probably only going to cost you $8000 to actually do this, and that’s what you normally would quote. But since it’s on a mobile home, they’re going to charge you more. It’s just like plumbers. When you don’t have a clean out and the drain is clogged, if they have to crawl under the home and it’s mid January, they’re going to charge you $600-$700 to go in there and clean that out if the clean out’s right in the middle of the home, have to climb underneath of there, and the sewer line’s been backing up. If you have a clean out now outside the skirting or right there on the inside of the skirting and it makes it easier for them, that may be a $120 fix. The more work it is for them, the more you’re going to have to pay.

Marketing homes for sale. This is tough. Facebook marketplace postings is where we get most of our leads. We also post them on Zillow. The whole marketing funnel is super important. If you’re going to be selling these park owned homes because you need to make sure people are showing up for the showings and making sure that there’s someone that has salesmanship to push to get an application. We have to have systems built around the whole marketing of the homes, spot checking the listings to make sure that they’re being renewed.

If we’re boosting the posts on facebook marketplace to make sure that the contact numbers are correct and so forth, we recently hired a full time salesperson in-house that all of our leads are going to funnel to that person, and then she has a CRM to follow up with people that are interested in the homes, making sure they show up for their showings, confirm the showings, ask for feedback after the showings, and then text them a link to the application so that we’re putting it out there trying to get applications, and then also try to vet people up front. Hey, if you want to get this home, you need to make at least $2800 a month so I don’t want to waste your $40 application fee if this is not going to be a fit for you, so that we’re not clogging our management system with applicants that are not going to get approved. That’s another whole process to this.

There’s just a lot to it. There’s financing the sale of a park on home to a tenant. The RTO arrangement and then keeping control if you can, but following the state rules is going to be most important there. If you can keep the title and have some sort of rent to own agreement, where when they pay it off, you can give them the title. Or if you keep the title and place a lien on it with a contract saying that they can’t move it out for at least five years after the title transfer, those type of arrangements are common in mobile home park ownership.

I think at the end of the day, if you’re not taking advantage of the tenant, charging 25% interest or something like that like a used car salesman, and you’re really trying to just get the money out of it that you have in it, that’s what we try to do. A lot of the times, it’s, hey, we invested $8000 into this home to get it ready. We’ll sell the home for $8000 or $9000 to cover our actual hard costs plus the commission for our team for selling that home and their time involved.

We’re just trying to get that back within a couple of years and getting that home to be a tenant-owned home. Once it’s a tenant owned home, I think at the end of this whole picture, what we’re trying to do is we’re trying to get sticky tenants. We’re trying to get residents that enjoy the community. They’re going to stay there a long time because they’re only paying lot rent. The affordability factor is so big for them that if they left and they wanted to go rent a three bedroom apartment, it may be $1800 a month, but they’re only paying $400 a month in lot rent at this community because they now own that home.

That is the gem behind mobile home parks and mobile home park investing is the stickiness of the tenant base once they own their own homes. But getting there and getting through selling off these park-owned homes has risk associated with it, and these are all the factors I’m explaining to you.

Another piece is negotiation, making sure you have someone that is closing the deal when it comes down to it. Really, what we focus on is less on the purchase price, but more on the monthly payment, because that’s what matters most to a lot of the mobile home buyers that are trying to buy homes in our communities, and then also trying to get as big of a down payment as we possibly can, because we find that once they have a substantial amount into the home of equity, they’re less likely to turn over. They’re more sticky. That matters more than the sale price.

Also the monthly housing costs, we really make sure that the income that the resident is bringing in per month is at least three times what their monthly housing costs would be. In our housing costs, we include the full payment, lot rent, any park-owned home additional payment along with some minimal estimates of what utility costs would be, or any other additional fees, so that we’re really giving this person a leg up right that they’re going to have money to live off of and they can afford to live off of. We don’t want to take one step forward and three steps back because they move in and then they can’t afford the home six months from now. That’s really important.

From a mobile home park investor standpoint, when you’re financing the mobile home park, the top lenders in the space, which are the agency lenders, Fannie Mae and Freddie Mac, they typically require 20% or less park-owned homes. That’s ideal for what they want. The proceeds that they’re willing to give you or the loan amount that those agency lenders are willing to give you as a park owner are higher, the lower your number of park-owned homes are. A 20-lot mobile home park can have 20 straight rentals in it and still qualify for agency financing, but the agency lenders are not going to count that additional income from those straight rentals. They’re only going to count what the lot rent is off of those units.

It’s important to understand what your long term goals are with these investments. Is it to refinance into a long term permanent solution, or is it to fix it up, get it full, get it fully tenant-owned home, and then sell it to somebody? But even the person that’s going to be buying that park, if you want top dollar, the park needs to be able to qualify for financing at one of the bigger lenders. The better financing terms they can qualify for based on the park’s conditions and specifics, the higher the price you’re going to be able to get.

If you’re selling 136-lot park, and they’re all park-owned homes, the buyer for that is going to have a harder time getting financing because it’s all park-owned homes. But if you’re selling it and you converted all those park-owned homes to tenant-owned homes, they all own the homes and they’ve seasoned, which is another big thing that a lot of these lenders want. They want to see the income consistency. They don’t want to see it’s high one month, down the next, there’s turnover, and things like that. They want to see consistency in the rent roll and in the financials. If you can do that, then your next buyer is going to be able to get top tier financing, which will allow them to pay more on a purchase price basis.

Just really important things, high level to understand about park-owned homes and tenant-owned homes. I wanted to share this with you. I hope you got value out of it. If you did, let me know. Feel free to rate the podcast. If you got value out of this, I really appreciate that. Thank you all so much for tuning in.