Listen on Apple Podcast here: https://podcasts.apple.com/us/podcast/interview-with-mobile-home-park-sales-broker-kris/id1520681893?i=1000633997205

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 the extremely accomplished and knowledgeable Mobile Home Park Sales Broker Kris Wessel, Senior VP at NAI Martens.

Kris Wessel has over twenty years of commercial real estate experience, with a particular emphasis in manufactured housing communities. He has been associated with Mobile Home Park community transactions dating back as far as 2008 and has cultivated a client list of more than 1,500 active buyers for the mobile home park real estate asset class throughout the midwest and southeastern United States.

In today’s episode, Kris and Andrew discuss the history of the Mobile Home Park sales market and what has changed in the current 2023 market as of this recording. Kris shares with us the importance of due diligence, his take on the mobile home park investment market in the midwest, and why mobile home park operations can be the most difficult part of the industry.

***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 2,500 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 deal review
• Due diligence questions
• How to raise capital from investors
• Mistakes to avoid, and more!

Click Here: 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 five-star 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 five-star review of the show.

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

01:39 – How Kris Wessel got into mobile home park investment sales

05:26 – Transaction volumes and the current trailer park sales market

13:09 – Cap rate changes in the Midwest

15:24 – Commercial bank debt terms

18:45 – The hair on the deal

20:32 – Big institutional buyers versus smaller MHP investors

22:03 – Planning ahead for the future

26:04 – Why mobile home park operations are so difficult

27:44 – Vetting potential mobile home park investment partners

31:26 – Evaluating the assumptions: raising LOT rent, infill, and sales models

35:20 – Good demand for affordable housing

38:52 – Underestimating the mobile home park industry

40:50 – Reaching out to Kris Wessel

41:30 – Due diligence on mobile home parks

41:53 – Conclusion

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Links & Mentions from This Episode:

NAI Martens – Manufactured Housing Communities: https://naimartens.com/mhc-3/

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. Today, we have an amazing guest in a mobile home park broker, Kris Wessel, Senior Vice President at NAI Martins.

Before we dive in, I want to ask you a real quick favor. Would you mind please taking 30 seconds to head over to iTunes and rate this podcast with 5 stars? This helps us get more listeners, and it means the absolute world to me. Thanks for making my day with that five-star review of the show. All right, let’s dive in.

Kris has 20 years of commercial real estate experience with a particular emphasis in manufactured housing communities. Kris has been associated with mobile home park transactions dating back to 2008 and has cultivated a focused list of more than 1500 active buyers for the mobile home park property type throughout the Midwest and Southeast where he focuses.

In today’s episode, we will discuss where the mobile home park sales market is and what’s changed in 2023. Kris, welcome to the show.

Kris: Thank you, Andrew, for having me on. Really good to get together for a little bit.

Andrew: Kris, would you mind starting out by telling us a little bit about your story and how in the world you got into the manufactured housing community brokerage business?

Kris: I always joke that everybody gets into business either by accident or by being born into it. I got here by accident, it was a prospecting accident. I was doing general brokerage right out of college. One of our early assignments was to find a mobile home community to purchase for a gentleman who had a bunch of single family rentals. That was going to be his next step. That project ultimately was not successful, but born out of that was a good career.

I ended up putting together a database at that time of about 60 mobile home communities. I called every single one of them and asked them if they wanted to sell. I think we got three that said maybe, and one of those was too large for him to purchase. We turned that into a listing, and that closed in January of 2008. It was by far the largest deal I had sold at the time.

What I noticed was that when we started advertising the property that the phone really rang. There was an audience for these things. I think it took a couple of years to do the second one. Fortunately, after that, the tap turned on, and we’ve been able to really run with this now.

Andrew: That’s fantastic. Wow. Would you mind sharing a little bit about 2008 and what that looked like? I know you were newer into this side of the business. Obviously, we think about the Great Recession and the housing crisis. What did 2008 look like from a mobile home park standpoint?

Kris: I was still pretty new into the business at that time. We had done that transaction, we were searching for our second one. At that time, I still had feet on both sides of the fence. I was doing some general brokerage work.

Across commercial real estate at that time, it was a pretty hard stop. I don’t think it looked the same as any other downturn before that or since then. Really, even some of the headwinds we have in the economy currently, it’s nothing like it was then. We have a really, really big decrease in transaction volume and a lot of paralysis in the economy. Things certainly feel different than then, and we’re probably all thankful for that.

Andrew: Totally. What did 2008–2011 look like? Were transactions plentiful? Were they really all 10 caps, there were distressed deals everywhere, or was it hit and miss?

Kris: The demand for mobile home communities since that very first one has really been unabated and really has grown. I would say, other than we had some financing what was back then, it’s been a crescendo in terms of demand for communities and pricing almost ever since then.

I started to hit my stride on the community business probably about 2013. At that time, it was an excellent time to be a purchaser. I think anybody that was lucky enough to get in that early, it’s what they did. At that time, the formula was we were listing communities almost always with a mom and pop owner. Occupancy between 2/3 and 80%. We would list them on a 10-cap, and they would sell on an 11-cap.

On those deals, if we got 10,000 of space, we got a pat on the back, and everyone’s very happy. We compare that to modern times, and you could see why the ones that started earlier were glad they did it.

Andrew: I bet. Yeah, that would be fantastic if we could just get a couple of those deals. Where are we today in 2023? We’re recording this in October. How are the transaction volumes compared to the last few years?

Kris: In 2023, in terms of transaction volume, almost half certainly has to be a step down from where we were. I think that’s mainly because I think particularly in the first half of this year, there was a lot of reprogramming going on. There were deals that fell out of contract. There were deals that got put together on the wrong assumptions and ultimately did not close. Just a really a lot of recalibration is what I’ve heard from other market participants and really our own experience too.

Our pipeline now, I think, is about as strong as I ever remember it being. We’ve got stuff that’s in line for clothing, things in LOI stage, and a lot and listing stage. I think if your only measurement is transaction volume, the news is good.

This job is never boring. You look at how things have changed in different directions since the start of Covid. We’ve ping-ponged all over the place since then on what’s been going on. The interest rate increases have stressed pricing probably most so for what I call the main street assets.

If you’ve got 50 spaces, and maybe it’s a smaller metro, and a little bit of hair on that deal, your buyer audience for that probably are smaller investors that rely on commercial bank debt. For a lot of those deals to trade, they’re going to be a function of the available financing. That cap rate can be nine-something right now.

On the other end of the spectrum, I think the primo stuff, the high percentage of tenant-owned, large properties, institutional quality, strong market, those deals have marched along at pricing that’s maybe much stronger than any of us anticipated. We’ve seen cash purchases. We’ve seen low leverage or 1031 buyers that are still making some of those deals trade cap rates below what the debt would be.

How much longer does that go on? I don’t know where we go from here. It probably depends on whether rates linger, move up, or move down. If you ask three different people, I think you get three different answers right now.

Andrew: Wow. You’re still seeing things trade at below interest rate debt. Those types of assets are probably getting six-and-a-quarter at this point. Those institutional quality mobile home communities are trading it four- to five-caps.

Kris: So far, that can still happen. Our priciest examples have been maybe agreed to for a little while and still working through the deal process. I think on the low side, we’ve got a couple in three- and four-cap transactions that could potentially come together right now, but we’ve got stuff clear to the nines and again, across the spectrum of quality and location.

Andrew: Yup, quality and location are key. Is it a good time to sell?

Kris: Certainly, the better time was 12 or 18 months ago. I think there are some sellers that come to market and they have a reason. I think now, there is more time where we’re going to see the transactions that occur with sellers that have a reason. It’s a pure profit motivation, and there are no time constraints. I think some of those folks might sit this out for a little while longer.

We’ve had folks come to market for other reasons that might be just wanting to change in lifestyle or retirement. We’ve seen some listings that have come about because of, I call it pruning the trees. If they have a property that’s a geographic outlier, or one of them that really doesn’t fit their core competencies of how they operate communities and where they like them to be located. Like I said, geographically, do they just not have much scale in that area? We’re seeing those kinds of sellers.

I think for sellers that do want to maximize pricing, if they’re in a position to seller finance and wait a little while on the rest of that money to come in, I think that’s an attractive way to get things done right now and maybe make it work for both parties.

Andrew: How common is that with the seller financing component? What does that look like in real time? What are you seeing that look like in transactions you’re working on?

Kris: I think it has been conspicuously absent in some of our transactions. But talking to other market participants, I think that’s becoming more common than it was. I just think that’s a function of the set of sellers that we have on the market at this current juncture in what makes sense for them, what they can and can’t do.

In the market that we were in, seller financing was a tough conversation because the lenders will lend the money. The money was so inexpensive that if our opening call to a buyer was asking about seller financing, then there’s a pretty good chance they weren’t qualified to buy. Now it’s completely different.

I think there’s a reason to do it. The buyers, I think, are still giving, I think they’re still aggressive. But most of them have the same problem, and that’s debt pricing. If you as a seller can solve that problem, then I think they’re happy to adjust the purchase price as long as they can get the debt they’re looking for.

Andrew: That makes sense. We have a couple of communities we’re selling right now. We’ve received offers on them asking for a seller-held second note. Have you seen any of those types of offers or any deals get done with a seller holding the second note?

Kris: Yeah. Mezzanine seller financing has always been a favorite trick of mine. We actually utilize that even in the prior market conditions. Sometimes that was the way to bridge a buyer and a seller together that we’re maybe just a little ways apart on price. From the seller’s mindset, maybe they got that last little percentage of money that we wouldn’t have seen otherwise. I went to them and said, hey, I can get you that last 150, you just have to wait on it. Sometimes the answer was, yes, we’ll do that.

One nice thing about this property type is you usually have more than one type of collateral. You’ve got the land that gets collateralized by the lender, the commercial bank, agency, or whoever’s financing it, and then you’ve got the homes that may not be encumbered by that process that can be secured. It may be a security for a different loan.

Andrew: That’s an important differential there, because a lot of first mortgage holders won’t allow a second mortgage on the real estate. But if you split them up, the bank will have the real estate loan—they’ll have the first position there—and the seller can use the homes as collateral. Either keep the titles or have liens on them and do it that way, which we’ve done a deal that way. Here’s some collateral.

Kris: Yes, we have also.

Andrew: How have cap rates changed on just a typical Midwest, three-star park, say it’s 70 lots in Wichita, 75% occupied on public utilities. What does that trade for?

Kris: The community you’re describing, that’s probably somewhere in the 8% right now depending on the inputs.

Andrew: Eight percent on actuals?

Kris: Yeah, I think so. Eight-something. I’m not saying it’s eight-even. If you’re below a 9% cap rate on something like that, it’s probably because there is some rate growth. There is some infill potential on the vacant sites.

If you’re dealing with something that’s very much maxed out, market grid, and high occupancy, then you’re going to be debt-constrained. If the interest rate is 7%, or I guess it’d be higher than that right now, the interest rate is 7½%, then maybe that cap rate has to be 9.

Andrew: Sure. Where are typical operators like your buyers underwriting these today? Is it that 8%–8½% cap rate on that type of a community? Or is it the price per lot? Or what’s the typical gauge of what a deal pencils out to, underwriting-wise?

Kris: I think you’ll have a lot of things, the cap in the mid-eights to nine right now if it’s a property that’s (like I said) fairly debt constrained. As you know, there are so many varieties of quality, location, and other things. People ask me, what are cap rates on mobile home communities? I say, what does a car cost? There are so many variables.

I think there are a lot that probably settle in that range today at that 8½%–9%. It can be more, it can be a lot less for the right quality. There are going to be a lot of things that probably could trade in that range.

Andrew: Yeah, that three-star park, over 50 lots but not over 100. Not institutional quality, but somewhere in the middle. Okay, that’s good insight. What type of debt have you seen operators get on that type of a property as well, currently?

Kris: Commercial bank debt, at this moment, I’m guessing you’re probably 7½–7¾, is about as good as anybody’s going to see right now. You can certainly get quotes well into the eights or even nine, depending on which lender you’re talking to and how aggressive or conservative they are. If you can find the 30-year amortization, or 25, that certainly helps get deals together. I think that’s how it’s going to price at least for commercial bank debt.

Andrew: That’s what we’re seeing. I would say 7½% interest rate. We’re trying to pencil deals out where they stabilize at the end of year two around a nine-cap or more. That’s how we’re able to do deals. How that has changed. The days of 4% interest rates and being able to pay for 7-cap, things changed pretty quick there, didn’t they?

Kris: They really have. Like I said, it hasn’t been boring over the last four years, that’s for sure.

Andrew: Yeah. What are your mobile home park buyers afraid of right now? What type of properties are not trading or are harder to get to sale? And why?

Kris: I think it’s probably nothing that would surprise you. I think anytime the more of these measurements of desirability that are in the right place, the easier it is to trade the property. If you have more strikes against it, then it does get more difficult. I think now is a difficult juncture, but we’re finding buyers, and we’re working through those challenges and making it happen.

I think you’re always looking at some of the same attributes. What’s the size of the deal? What’s the quality of the market? What’s the park-owned home burden? The more of those that land towards the desirable end, the easier it is to get done.

For the most part, we’re still finding a home for most properties. I think the only things I can think of that we’re in danger of missing out on are just maybe where we have a seller that can’t come all the way to today’s market value on that particular asset and certainly understand those decisions. It’s their property, and they have to live with these outcomes a lot longer than we do.

We’ve mostly done at closing plus a little bit of post closing follow-up cleanup, and making sure everybody lands in a good place. But I get it. If it doesn’t work, it’s another business decision, then don’t do it. I’ve been pleasantly surprised with the amount of product that we have had come into market, and maybe just the right place, right time in the way we’ve taken care of business throughout different cycles. Hopefully that’s helping us a little bit.

Andrew: That’s great. Would you mind summarizing like the hair? There’s always like, this deal is nice, but it has this hair on this deal. Some ideas that come to mind are private utilities, like a lagoon or a wastewater treatment plan. I know for a lot of buyers, it’s less desirable. Under what size would you say?

For us, we don’t look at anything under 50 lots. But I’d wonder what size cut-off you’re seeing market size, park-owned homes, older homes. Obviously all add hair to deals, gravel roads, no off street parking. What other hair makes a park less desirable on the deals you’re seeing?

Kris: I think you hit on some of the common themes. The private utility systems, there are some buyers that just don’t have that. It worked into their risk profile, and that’s just not something they want to take on. If they’ve had a bad experience previously with private systems, then it is very hard to get them to revisit that again.

I think if you’ve got a tough market, maybe the pricing and the rents are just a little too affordable in that area, or the economy is just a little bit too soft, that’s certainly something that can be challenging to overcome. How much deferred maintenance does the property have? What condition are the utility systems in? You hit on it.

We’ve had some deals we looked at where maybe the income was in pretty good order today, but as you look at the condition of those homes, there are some big question marks on how many of those are still going to be serviceable in 5 or 10 years that can really prove a challenge if the buyers worried about having to repopulate the community with homes.

Andrew: Totally. How many of your buyers would you say are big institutional buyers, funds, and private equity groups? And how many are the smaller investors?

Kris: Ours really run pretty much the circuit, and it depends on what kind of community we’re selling. We’ve been involved in some smaller projects and smaller markets, and try to take good care of that business when it comes in. Some of that’s repeat clients that need help with maybe property they purchased earlier in their career before they scaled. We marketed some very high quality portfolios.

We cultivate those top 100 operators, try to keep them close to us, and know who to contact to get deals done. We have a lot of folks that are in those small- to medium-sized funds, and we’ve now some individual investors that might be their money as a side project, or it’s family money that they invest in.

It runs the circuit. We’re pretty equal opportunity. We’ll work on about anything if it’s manufactured housing. I always say, we’ll go wherever we’re invited. There’s a buyer for each deal, and that’s part of really being able to make that match. You don’t have to do anything disingenuous to get somebody to buy something. TYou just have to know how to find the person that wants it.

Andrew: The right person, 100%. Have you seen any mobile home park buyers using variable rate debt the last few years? Do you think there are any distressed mobile home park owners out there with restricting debt similar to the multifamily space?

Kris: I think there’s certainly a risk of that coming about. I don’t think we’re seeing many of those waves hit the beach so far. I think that accumulated property in the last few years is probably looking when their loans come up, for adjustment or renewal, and checking where they are on financials on those properties. I think some of that planning ahead could be driving some of the sale decisions we’ve seen.

If there’s a property they have a lot of equity in, even after a little bit of coming off the top of market conditions, if they can sell that, that money produces great returns that may average out, the payment adjusts, and maybe the return is below expectations. I don’t think we’re seeing a lot of distress or anything bloody from that currently.

Depending on where rates go from here and if they linger in this zone or higher, we can see some of that happen, but I think it’s still a little bit early. If you’ve got somebody that’s got a portfolio, and maybe one or two of those properties are coming up this year and the others are further out, then things probably balanced themselves out.

Andrew: What do you think is coming in the next 12–24 months? I was just at a real estate conference with a bunch of commercial real estate guys, and everybody is talking about this generational buying opportunity. Is that so in the mobile home community space? Do you think that there are operators that took weird mezz debt, or other debt facilities that could get them in trouble, and create distressed sellers?

Kris: I think if your eyes are open and you’re participating in the market, there are buy opportunities in almost every part of the market. I think one thing you can say for right now is if it works today, and we do get any break in interest rates coming up, you’re going to win twice, if a deal makes sense today when your interest rate is 7½% or higher. If we get into a period of lower interest rates during that whole period and you can refinance or sell, that project is going to probably exceed what returns you could promise today sitting here modeling it, not being able to promise a six capex. It may not happen for certain assets.

I think there’s a case to be out shopping. Even if it’s just a double, or it’s trading at par today, there could be a time in the near future where you’re very glad you made that purchase. I think anybody that’s on the buy side like you guys, I think you’ve got to keep your ears open for that. Where there is some distress, if you start seeing anything come back, that’s lender owned.

I’ll make no prediction on where interest rates go from here because who knows? We’ve come through a period of several months where all indicators were pointed up only. I think what’s interesting right now is I’m hearing mixed predictions.

I have some that tells me, oh, it’s going higher, it’s going to get worse, it’s going to be the 70s all over again. And others that say no, they’re about ready to take a break, it’s election year. We put a pretty good dent in inflation and slowed the economy a little bit; it’s going to be fine. I guess the good news is that if we’re getting mixed signals, then hopefully it isn’t climbing way higher.

Andrew: Yeah, who knows? I don’t have a crystal ball. It’d be nice to. Let me ask you this, Kris. What would you say is the toughest hurdle for most operators in the mobile home park ownership business? What’s the hardest part?

Kris: Operations, not even a question. It is a business that is really won or lost on operations. That can be the difference. You can take a community in a certain location and a certain quality. The outcomes differ greatly, depending on how attentive, how successful that operator is, and what’s their marketing program for getting homes moved to new residents.

It’s not an easy business. I think people maybe sometimes underestimate that. I think that’s one reason we’ve seen so much success with folks like you that have figured out the operation side. You’ve got LP investors that don’t have the time commitment it takes to be an operator themselves, maybe don’t want that risk, or don’t want those headaches.

I still haven’t met that person that says, you know what? I really love operating mobile home communities. But I think there are a lot of people that have said, you know what? I got good at this, I like the return profile, and I like the resilience of this type of business.

Andrew: As a passive investor, a limited partner, how could you tell if a general partner was a good operator or not? Do you have ideas or tips? How would you tell if you’re looking at a passive investment?

Kris: If I were going to look, I think I would visit some of their existing projects and actually go see how they look, driving through them, and see how they’ve executed on those. I think you’re really looking at, what’s their track record? And what’s their experience? I think, who is more important and how much in this case, meaning that if it were me, I would not just pick the one that promises the best return. I think I would pick the one I was most comfortable with their trust as an operator.

If you buy 100 communities, there’s no way all those go perfect. But if you have a good operator, then they can make the best of the challenges that might come up on a particular deal.

Andrew: It’s so different. I have some friends that are apartment syndicators. There’s a lot of work on the front end lining the deal up and passing it off to the property manager, but really, a lot of the day-to-day operations fall on that property manager. There are asset management fees for overseeing the property manager that go to the general partners.

But mobile home communities are so different because there are so many intricacies. You can’t really just pass these off to a third party because there are some third-party managers that manage nationwide. From what I’ve heard and from my experience, because we bought some parks that were managed by them, it’s hard to keep your expense ratios low through a third-party property management. The little things. When a tenant-owned home goes up for sale, our team is all over it. We want to broker the sale of that tenant-owned home to a new person that’s going to buy the home and live in the park.

That little piece right there, if that gets missed, homes are going to start moving out of your communities, and your occupancy is going to drop, because there are wholesalers and dealers trying to buy these homes, then move them out, and sell them to somebody else, or the other park up the road that wants to infill. It’s little stuff like that that makes it so much more involved. That’s why I feel the best operators are self-managers. What are your thoughts?

Kris: I would agree. I think the majority of the folks that we work with do self-manage. They do try to develop those capabilities in-house. I think there’s a good case for doing that. It’s an operations-intense business.

If you can get good at the hardest part, I think that’s your best chance to create value. I know for certain situations, third-party management may be the way to go for them if they don’t have that team in-house. I would agree, a lot of operator teams seem intent on building that when they can.

Andrew: When you have scale, when you get over a thousand lots or so, it’s easier to manage, because now you can afford a team to siphon off different divisions of the business and manage it more effectively, instead of one person wearing five different hats. I think that that also plays a role here somewhere.

Kris, is there anything else for passive investors that they need to look out for when investing into mobile home parks? What are the top couple of things you would tell them? Like, hey, if I was going to invest passively in a mobile home park deal, this is what I would look for. What are those tips?

Kris: Like I said, I think the very first criteria we covered is the operator. From there, I think it’s looking through some of the financials. Do the assumptions make sense? Are they reasonable? Ultimately, once you start operating, you guys know that certain things go better than you thought they would, and certain things are worse.

If they’ve built a pretty 50-yard line model, and some things got better, something’s got worse, then the project as a whole hopefully goes off pretty close to what was projected. I think checking those assumptions and then looking at the location.

Andrew: I think three pretty important assumptions would be your rent growth. Are you going to raise rents a hundred dollars a month every year for five years? Probably not. That’s probably on the high end of expectations there, but more like $25–$35 per year after getting to market is maybe more realistic.

I think that’s a good metric to check. I would love your thoughts on infill. Infilling more than 10 homes a year is probably really tough to do for most operators. There are some that can do it at a high level and bring in a lot of new homes. What other top assumptions would you look at?

Kris: You mentioned the infill. If you’re utilizing the full sales model, it’s probably pretty tough to outrun 10 homes a year in multiple locations. There’s always somewhere that has an exceptional demand, but those deals are not every day. If you’re embracing more of a rental model, and then the operator is wired to do that and manage those turnovers, then we have seen some very strong velocities on infill with either rental or rent to own programs.

I would look at, like you said, what’s the assumption on infill? What’s the assumption on rents? How do you feel that the execution matches to that property in that market? It’s some of those things.

Andrew: Exit cap rate, which is guessing right now, because you don’t know where interest rates are, but likely will be higher than what you’re buying in at. I think something like that would be another important metric to look at their assumptions.

Kris: Absolutely. I think if you’re projecting a cap rate on exit reflective of today’s conditions, and like I said, we do get a break in rates, and the opportunity is there to refinance or sell at a cap rate below that projection, then again, you win twice.

Andrew: You win. Totally. I was talking to another operator at this conference. I said, we bought it five caps, and now these are seven, eight caps. This was an apartment syndicator. Just over the last year, that is a huge drop in value just for nothing out of your control. The interest rates going up and cap rates going with it. That’s a big assumption to keep track of.

Kris, what does the perfect mobile home park investment look like in your eyes? And why?

Kris: I think somewhat, we would all probably describe the same community. I don’t know if we’ve ever seen that one before. It’s hard to get all of those attributes in one place. I think for me, I would say somewhere in an area with good demand for housing. Probably one thing that’s interesting about me, I’m more agnostic on the size of market than probably anybody else you’ll meet.

The example I always give is, I grew up in a town of 2500 people. There’s one mobile home community in that town, and it was full when I was a child, it was full when I was in high school, it’s full today, and nobody’s going to build another one. Again, if there’s staying power in that area, then I’m not too worried about it.

It’s different if I came to you and said, there are a hundred vacancies in this and you need to fill those. But if you’ve got a community that’s already in stabilized occupancy, we’re not really asking you to dream big or have any vision here. The people already lived there.

Getting back to maybe more of the question, good demand for housing. Rents and home prices in the area, obviously the higher, the better. That just creates a bigger window of success for manufactured housing if the site build options are much more expensive. There’s a certain threshold where you can justify infill with new homes.

That’s obviously much quicker to do and much easier to do than needing to rely on purchasing used homes, having a rehab crew, and that kind of thing. There are some operators that have made a good business out of doing that, but not everybody’s got that team.

I think in terms of scale, certainly I like things that are 50 or more spaces. I think below 50, it’s a different buyer audience going outside in terms of how qualified they are and how they can perform on the deal. Probably from management and operating efficiencies, a 50–100 space zone is an area where you still get some attractive cap rates. But hopefully you get a decent economies of scale and certainly good marketability going out.

You can really take it to the level of perfection if you want to talk about a large market, high population growth, high percentage of tenant-owned homes. I’m taking my broker hat off and trying to put myself in your shoes. My favorite deal has always been that community that’s 75% or 80% occupied and maybe a little below market on rents, because you really have a couple of different places you win there on rent growth and infill.

Andrew: Totally. And then public utilities (I think) would be the other piece instead of private well or septic systems. If you can get city water, city sewer, that’s the trifecta.

Kris: It is. It makes your life easier from a regulatory perspective. Better risk profile than dealing with the private systems. We have operators that will buy those two. They’re finding a little bit different cap rate to account for the risk and the headaches.

Andrew: Definitely. Kris, what mistakes have you seen operators make?

Kris: We’ve seen people that got into the business and maybe underestimated the operation side. We have sold to folks that later came back to us and said, hey, I did this for a couple of years. Some of them did okay, but it was a lot more difficult than they thought and maybe more time-consuming. One mistake is just underestimating the operation side.

I always say, too, if you’re well capitalized, this is a great business. If you’re bootstrapping your way in, it is very, very tough. The perfect example, being the one you already bought, is when a tenant-owned home comes up for sale in your park. Some operators will choose to buy that home so it doesn’t leave, and then they can just resell it to a new resident.

Maybe that’s a used home, and you got to come out of pocket with 20,000 that month. If you’ve gone into the deal on the assumption that your whole retirement income is wrapped up in that, and now suddenly, you have no income that month because you bought a home, not a good situation.

Again, if your access to capital is strong, you may go resell that home for $25,000 or $29,000. You might get cash or you might carry paper. Ultimately, the return on investment is excellent, but you have to be able to live with it the month you buy it.

Andrew: Yeah, you got to weather the storm. That’s the hidden capex that definitely can sneak up on you, so I agree with you on that. Kris, thank you so much.

Kris: Actually, expanding on that point a little bit, new individual investors call us and they say, hey, I got $100,000 or $150,000, I want to buy a mobile home community. I told him, don’t. Do you want to be an LP investor? Just for the examples we’re getting there, it’s a capital-intensive business.

Andrew: It definitely is. Kris, thank you so much for coming on the show. If anyone would like to get a hold of you or learn more about you, what’s the best way for them to do so?

Kris: All of our contact information for myself and our other team members is on our website, mhclistings.com (manufactured home communities). We’re on there. Email is always good. I welcome the telephone calls too, but sometimes it’s easier to just schedule those and make sure we’re available when you call.

Andrew: Awesome. I’ll put that in the show notes. Kris, what’s one last tip before we sign off for passive investors interested in the mobile home park space? What do you think matters most in a successful mobile home park investment property?

Kris: Again, not to repeat, but I think do your due diligence on the operator and their track record. If that’s strong, I think you’re going to have the best possible outcomes on every other factor.

Andrew: Awesome. Kris, thank you so much for coming on the show.

Kris: Excellent. Thank you, Andrew. Appreciate it.

Andrew: That’s it for today, folks. Thanks for tuning in.