Buck: Welcome back to the show everyone today my guest on Wealth Formula Podcast is Jefferson Lillie. He is a mobile home park investor and entrepreneur and the founder of Park Street Partners which has been in business since 2013. He’s got an MBA from Wharton Business School, they’re a little school of a few people probably know, and started his career in Silicon Valley. Now he is focused on mobile home parks and even has his own podcast focusing on the topic. Jefferson welcome to the podcast today.
Jefferson: Buck, great to be here.
Buck: Now, I have to tell you, first thing it strikes me and just as an aside is that, so I have a friend, I don’t have that many friends in this mobile home park space, but the one friend I have who’s really good in the space and who knows his stuff and is a great operator, actually grew up on a mobile home park, hey Mike how are you. And so tell me how does a guy who goes to Wharton lives in San Francisco end up in mobile home parks?
Jefferson: Well Buck as I say when I woke up from the concussion, it just seemed like a good idea to go into mobile home parks. But more seriously, you know prior to getting into this business I had worked in high tech out in Silicon Valley. I’d kind of done the whole crazy doc-com up down and sideways thing. Came out of that basically looking for value, figured I was not going to do this sort of you know crazy high tech investing and again really wanted value and I’d always been a big fan of Warren Buffett and a very small Berkshire Hathaway shareholder. So I initially I just thought I would diversify out of the stock market buy an apartment building and obviously generate some passive income. So in just researching apartment building investing obviously that’s multifamily, I kept seeing these mobile home parks pop up and my search results you know and it was maybe one in a hundred multifamily properties were mobile home parks, they’re few and far between but if they tended to trade at a higher cap rate which is to say a lower price and so I kind of you know I found them part by part by plan and part by dumb luck and if you’ll get into this on your show but in researching I basically discovered why they’re so much better than apartments or other classes of real estate.
Buck: Yeah so let’s talk about that because I mean I am a die-hard apartment guy so I’m gonna obviously challenge you on this. Mobile home parks are the best real estate you can invest in basically better than single-family homes which probably is that in my view that’s not hard and apartment buildings so tell me why I’m wrong about apartment buildings and that mobile home parks are better.
Jefferson: Yeah so I’ll start off with two words leaky toilets and leaky roofs, undoubtedly an apartment owner obviously owned all your improvements and all that repair and maintenance those proverbial leaky toilets and leaky roofs are on you and I would guess, you tell me, yeah I would guess your repair and maintenance budget is probably fifteen to eighteen percent of your gross rents is that fair?
Buck: I don’t know I’d have to look but it may not be that high but I mean the other thing is of course we’re doing things in larger scale, not generally you know buying like 10 units or you know we’re syndicating 250 300 units at a time and have a portfolio of several thousand units so it’s a little bit different I think than necessarily owning one at a time but no I see your point, your point is that this is more with mobile home parks I think your argument is this is sort of more your Triple Net type model almost?
Jefferson: It’s not quite that good, but you know we of course do have repair and maintenance just on the land, so that’s plumbing it’s mowing for our parks up in the north it’s snow removal, but our repair and maintenance budget typically comes in at five or six percent of rents so anyway so our repair and maintenance budget is much lower because again our tenants own those improvements so this is something more like a parking lot business, not quite perfectly but but certainly much closer to that business model than traditional apartments. And then I’ll also just throw out that unlike apartments or most any other real estate niche, it’s actually illegal to build any more mobile home parks. Pretty much every city and county over the last I don’t know thirty or forty years has changed for instance the zoning laws, density laws so you just can’t build mobile home parks anymore. Best guess is that something like ten mobile home parks were built last year and then probably about 500 that would be about one percent of the total supply of say roughly 50,000 mobile home parks but about 1% of those are five hundred got plowed under and gotten redeveloped into some higher and better use, could be could be an apartment, I’ve seen them developed into this super Walmart’s, student housing, other assets. So you know in the apartment world and single-family houses in retail in hotel there’s always at least the risk of over-building, certainly when times are good pretty much every other class of real estate is experiencing new competition, only this niche really has shrinking competition about 1% of parks go away every year and then of course those folks have to move their homes into the remaining mobile home parks so that’s about 1% demand right there, demand also probably grows about another 1% just right along with the population growth, so that’s about 2% demand growth per year and then again supply is going away at about 1% a year so you have about a 3% supply and demand imbalance which again makes it a pretty unique niche within all of all of the world of real estate.
Buck: One of the things that you alluded to earlier is something I want to kind of touch on as well because one of the things that I initially was kind of interested a little bit more in mobile home parks was this idea of potentially higher yield. You mentioned higher cap rates etc and so I mean obviously they got me interested as a guy who likes cash flow as a general rule but you know the world as I’ve discovered in mobile home parks in 2013 when you started is a very very different cap rate profile from 2019, is that accurate?
Jefferson: Certainly. Cap rates have been coming down. I would say still deals can be had at least in the Midwest at say roughly 1/8 cap which I think is better than apartment buildings generally and we look really to of course not only acquire at a fair cap rate but to actually operate the parks better than they have been so that’ll be things like bumping rents buying a new mobile homes and bringing those into any vacant pads or buying used mobile homes or renovating used mobile homes that might be on site but just abandoned. So we actually improve the properties. So if we can buy them at about an eight cap and still have some upside there from rents and from infill, we’ll still do quite well for ourselves and for our investors.
Buck: So with an eighth cap, obviously one of the issues that you know you have an advantage an apartment certainly and you know at least B class and and decent markets is that we can get non-recourse debt, we can get debt as you know pretty significant loan-to-value can you talk about some of the issues that you deal with and effectively in low-income housing and in areas that may not necessarily be where the big lenders want to be?
Jefferson: Us very generally larger deals and we can qualify for CMBS or agency debt but indeed smaller deals let’s just say that’s deals under two or two-and-a-half million in acquisition price that’s almost certainly debt financing so far we haven’t had to great difficulty getting debt financing, we tend to stay away from parks that might have a very high percentage of park owned homes as opposed to resident owned and lenders are generally savvy that way they tend not to like to take mobile homes which is chattel right it’s wheel estate as I say it’s not real estate, they tend to not like to take that as collateral, but most of the parks we buy would probably be 80 percent resident owned homes, some of them have been a hundred and then again the quote unquote all we’re buying is the land. So we’ve been able to get that financed.
Buck: Typically what loan to value can you get?
Jefferson: Anywhere between 65 and 75 we might and one deal that went as high as 78% loan to value but the normal range would be 65 to 75. Obviously banks and the agencies in the CMBS world are all comfortable lending more on generally larger properties that are more full and specifically more full with homes owned by the residents not by the the park owner. They tend again not to like to finance the mobile homes themselves.
Buck: Right. Talk about if you would, you know obviously again just to compare and contrast and I don’t know the statistics for mobile home parks but certainly historically if you look at larger quality apartment buildings etc I mean you can get decent cash-on-cash but but you know improving the property and getting the appreciation on the back end is really a significant part of the IRR and those kinds of opportunities, can you talk about historically the appreciation of mobile home parks?
Jefferson: I can’t. I don’t have any industry, this is a quirky niche and there just aren’t those sorts of facts and figures readily available.
Buck: Right so overall you but you wouldn’t know if overall if it’s sort of relatively flat or if it tends to have a higher trajectory just in general I mean even without the you know necessarily with the statistics?
Jefferson: Things are good this is a business is probably not unlike apartments where they trade based on a cap rate so if you can demonstrate that hey over the last five years you bobbed up your NOI fifty percent then almost certainly your property is worth fifty percent more. So that’s basically what our goal is it is to get that kind of improvement believe that kind of timeframe.
Buck: If you have arguably, is this alt the ultimate low-income housing right? I mean is that fair to say or not?
Jefferson: So we have very few section 8 tenants. That said yes our average tenant probably has household income of between 30 and 35 thousand a year so I guess that’s certainly towards a low-income housing rate.
Buck: So it does that limit a little bit sort of on your on your up side as you create value I mean certainly one of the one of the things we focus on apartments and again I’m just mostly as an educational thing is you know we will frequently take you know a b-minus asset that’s poorly managed and you know maybe it’s sub institutional and then we will go and force equity and turn it into an institutional quality asset and get the additional premium on that. For mobile home parks do you have a little bit of an upside cap because you’re ultimately dealing with people listen if you’re gonna get to a certain point you’re not gonna be able to afford it anyway.
Jefferson: Generally not. Keep in mind we might be starting with a part that might have lot rents of two hundred and fifty dollars and over say a five year period we might bump those rents to three hundred and fifty maybe 400. So percentage-wise that’s a good increase but in absolute dollar turns to expect someone who’s low income to pay an extra $100 a month really isn’t gonna break the bank and certainly not if that’s say $20 increments spread out over five years.
Buck: Got it okay you as we mentioned before I mean you’re in the Bay Area and I think I’m and most of your mobile home parks are in the Midwest. Talk a little bit about what the processes in terms of what goes into managing those things and are they just the same kind of management companies that you would have for apartments or there’s a more intensive less intensive are they easy to find in terms of management companies etc, can you talk a little bit about that from an independent operators perspective someone who might be interested in doing something in a place where they don’t live?
Jefferson: Yeah so this is kind of one of the very few bad things about the mobile home park business there really aren’t good nationwide management companies that do this niche well. This is not like say trying to find somebody to come in and manage a four hundred unit apartment building, we’re talking about at least in our portfolio the average mobile home park is right around a hundred paths and the lot rent let’s say is $300 so that’s thirty thousand a month in gross receipts and it’s that’s just not interested in generally to large professional management companies. So to be in this business right you really need to keep operations in-house so we’ll actually almost always hire a manager directly from the park where we look for folks that own their own mobile home, and again, we’ll make them the manager, they will deposit all the rents, call the plumber, the lawn mower all those sorts of things and we then have an asset manager we actually have a couple in our in my previous funds and they’re overseeing the managers and they in turn at that level of the asset manager level they’re doing things like determining you know how much we’re gonna invest into renovating a mobile home that again what might be abandoned they make decisions like how many potholes are we going to repair or are we going to perhaps repay the park, but we keep that in-house because again that’s one of the quirky things about this niche, the assets tend to be much smaller than apartments and you really need to build up your own internal employees and systems and do it yourself to do it right.
Buck: And there we’re talking about people who are living on site so I mean for each individual Park that you have presumably you’re gonna have a different set of on-the-ground management is that it’s sort of like a caretaker model with an apartment building is that sort?
Jefferson: I guess you you can consider it that way yeah there are, again responsible for collecting the rents filing evictions calling for simple maintenance jobs like plumbing and mowing and then again more major things like a repaving or those sorts of things typically are handled by our asset managers.
Buck: So obviously you’ve got the asset managers now and you’ve got a fund. Tell me how when you first started how did you do all this stuff because now certainly have have thought about it myself at various times and I said I was interested in the idea of potentially getting into this space a little bit but if you are looking to go out and well how did you do it when when you first started I mean obviously you still weren’t living out the Midwest or maybe you were no you were in Silicon Valley or somewhere like that. How were you doing this back then were you just flying out there and and and buying something and then hiring somebody and basically keeping in touch with them on the phone? I mean just in practical terms how did that work?
Jefferson: Yeah so I’ve evolved from doing not quite all of it myself to now obviously hiring other folks to do the management, the asset management and the accounting. But yeah when I got started with my first part that was back in early 2007 I took many of the inbound phone calls myself from prospective residents I just used grasshopper which I still use to set up like a virtual PBX and people can route calls just by pressing one two three so I took many not all of the phone calls myself that first property did have a manager who collected the rents for me but I was doing for instance my own asset management. I was flying out and sleeping in an empty trailer about one out of every three weeks I lived on-site at that first part about one third time just bringing in at that point I was bringing in homes setting them up on vacant lots, I was overseeing the crews that were doing the painting and the roofing and the electric and whatnot. And then when I was back in San Francisco for the other two weeks yeah I was working the phones buying more houses, dealing with emergencies, dealing with the crews and then again going back out about one out of every three weeks to live on-site and see it all happen for me. So now I’ve hired people to do they and I did all my own books on QuickBooks but now I’ve got a staff of three people doing accounting two people doing asset management so I’ve outsourced that but having been the guy again answering the phones doing my own books and being my own general contractor that certainly helped me now and write job descriptions and help now my employees do those things that I myself was doing a dozen years ago when I first got into business.
Buck: Sounds like fun.
Jefferson: Now I work a little more smarter than working hard.
Buck: So right now and again just going back to the apartment comparison because that’s what I know best yeah so we have this interesting thing that I wonder if you’re aware of but you know there’s this new tax code that with the new Trump tax code there’s bonus depreciation and so what it effectively allows us to do is take your typical cost segregation and an analysis that we do on an apartment building and normally that would normally that would segregate chattel as you called it and most of your your buildings or your properties are chattel. They just aggregate that from rural property and the cost aggregation analysis would allow you to in the past depreciate that over five years but with the new Trump tax code you can depreciate that over the first year. So typically that’s about thirty percent of an asset in terms of an apartment building so in other words if I am investing a hundred thousand dollars in an apartment building or syndication and at 70 percent loan to value I’m getting like a one-to-one right off against other passive income sources. Can you talk I mean with especially if there’s so much chattel can you talk about some of the tax benefits of mobile home parks?
Jefferson: Sure so they’re numerous. We tend to depreciate about 75 percent of our purchase price I believe is pretty favorably to apartment buildings so indeed about 25 percent of our purchase price is the non depreciable land, but we will then do some cost segregation on any individual mobile homes that we own and break out things like appliances and carpets and things like that but keep in mind then the assets that we’re buying and putting on our books are things like roads which are depreciable I believe over 20 years, the pipes in the ground are indeed 27 and a half, we typically got fencing and signage that is I believe seven-year property some of that may be it may qualify for that sort of bonus depreciation, and then ultimately if we overpay that’s amortization of goodwill and that’ll come down over 15 years so on average again we’re able to depreciate 75% or amortize it but we do it over about 18 years rather than have to be spread out over 27 and a half which I think is more typical for it for more typical real estate where you buy the bricks and mortar.
Buck: Yeah nuance there of course is if we’re taking 30% of the asset in and depreciating that over the first year that basically that’s the 101 dollar loss on every dollar you invest so that’s inappreciable benefit there but if you have that much and if you can have bonus depreciation on top of that, what does your typical k1 look like to your investor do they have a hundred percent loss in the first year?
Jefferson: I’m not gonna be able to give you a real clear answer on that because to be candid the last acquisition I made was about a year ago so I’m just launching my new fund so I don’t believe any of what we’ve done so far maybe was done in time for the new bonus depreciation.So I don’t know what my K ones will look like for folks in my parents. I know my accountants are very sharp if they can take on this appreciation and generate that sort of one-to-one they certainly will.
Buck: Sounds good. So tell me about the podcast. Why’d you start a podcast, what is it called tell us all about that.
Jefferson: Yeah so I started the industry’s first mobile home park podcast, it’s simply called Mobile Home Park Investors. Folks can find it by going to MOBILEHOMEPARKINVESTORS.COM and I started it really to raise money and some deal flow but I get now about sixteen thousand downloads a month and I get folks I don’t know seems like somebody almost every week says like hey I’ve heard about your podcast and you know might want to invest. And then I haven’t gotten some deal flow it’s probably more like ten to one investors to deal flow but I did for instance buy a property in the raleigh-durham metro area from some folks that had listened to the podcast and knew about an off-market mobile home park.
Buck: What is the podcast focus, are you teaching people about how to manage these things and how to buy them or are you is it more just talking about your fund or what exactly is is the sort of avatar?
Jefferson: Yeah so the content is really much more about how to find and operate mobile home parks. We’ve covered some about legal structure and land Trust’s and other ways to own them we’ve had a range of guests on for instance we had Jim Clayton on. Jim started Clayton Homes which was and is the largest manufacturer of mobile homes, he owned a couple of parks but he was mostly a manufacturer of the homes he sold that business to Warren Buffett I believe he’s now a billionaire so we just got Jim Clayton on the podcast to talk about his life, lessons learned, we’ve had other guys on that do for instance specialize in any although it’s very minimal but any new development of mobile home parks or renovation and improvement of existing parks, we’ve had a number of folks on from Wall Street that cover the three publicly traded REITs equity lifestyle some communities in UMH are the three public REITs that specialize in owning mobile home parks, so we’ve had some Wall Street animalists on, we’ve had some mortgage brokers on just talking about why you might want to get bank debt on a mobile home park versus CMBS versus agency, we’ve had people on from the agency’s Fannie and Freddie so basically I you know I’m now actually just this Thursday releasing my 120th episode so everybody is directly involved in the mobile home park business in some way. We’re doing online marketing of partners providing insurance to park owners. Anyway so there’s just no no shortage of guests to have on and then other some other people that have bought parts and I’ll just ask them how and why they got into the business how they found their first mobile home park how they were on it so there have been a number of sort of case studies of other people that have gotten in the business and of course I’ve talked about the parks that I own as well myself and then with my partner and my previous two funds.
Buck: Sounds good. How can we learn more about you?
Jefferson: So the website is PARKAVENUEPARTNERS.COM and there’s an intake form right on the home page PARKAVENUEPARTNERS.COM you can just put your name and information in there I’ll get in touch with either phone them for right there on the home page. They’ll also find some links there that simply say invest and that will take folks to a page that has some information about my current fund. My track record has been returning between eight and twelve percent a year cash to investors and we haven’t yet sold anything or recognized any equity appreciation so that’s been the kinds of returns we’ve been able to generate just from actually operating the properties. We certainly do think it’ll be some backend and weighted capital gains as well but nice to be able to generate high single digits low double-digit cash returns just from operations for our limits. So again PARKAVENUEPARTNERS.COM
Buck: Well listen Jefferson it was really great to have you on the show appreciate it and hope to have you back again sometime.
Jefferson: Alright good luck to you Buck, thank you.
Buck: We’ll be right back.