In today’s episode, we have the pleasure of featuring a well known & respected mobile home park guru, Kevin Bupp. He entered the real estate world at the young age of 19 where he started with single-family residential real estate. As time went on, he learned about commercial real estate and grew his portfolio- right before the crash of 2008. Like everything, you live and learn- and that’s what Kevin did. He did some soul searching and wanted to focus on his hobbies of health and fitness. He took some time off of real estate and built a company around custom cycling clothes and ran a social club ‘Running For Brews.’
However, Kevin still had that real estate fire in him and his vision changed after a lunch meeting. Kevin became intrigued in mobile home parks and he owns several of them throughout the US. In today’s episode, he discusses how and why he chose mobile home parks in this second round of his career, the factors of a good deal & how to find them, and the importance of being in a good headspace.
Episode Highlights:
- How Things Affected His Business In The Early 2000s
- 2012 Tragedy And Onwards
- The World of Mobile Home Parks
- Where To Learn About Investing In Mobile Home Parks
Connect with Kevin
Website: Kevinbupp.com
Company Website: sunrisecapitalinvestors.com
Podcast: Real Estate Investing for Cash Flow
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TRANSCRIPTION
Intro: Hey guys, today I’m very excited to discuss one of the most intriguing asset classes and one that is known to have caught my attention at least. And of course, I’m talking about mobile home parks. Mobile home parks are one of my primary targets as an investor because I truly believe that to create long term wealth, there is nothing better than buying a piece of land. And if that land also happens to be a cash cow, then I’m all in. I think mobile home parks are just that. So, in today’s episode, I’m going to host Kevin Bupp who has a truly remarkable story and is considered a guru when it comes to mobile home parks. So, let’s get going.
Lady: Welcome to the commercial real estate investing podcast with Don and Eden where we cover all aspects of real estate investing with special attention to off-market strategies.
Don: Alright, hey, Kevin. Welcome to the show.
Kevin: Hey, Don, thanks for having me. I’m looking forward to it.
Don: Of course I was looking forward to it as well because I know you’re one of the best mobile home park investors out there. So, I’m very happy to have you on the show because it’s not a secret that I’m very interested in mobile home parks. But first, I’m going to ask you a little bit about your career and how you got started so my audience could get to know you a little bit better.
Kevin: Sure. Mobile home parks have been our focus for the past seven years. However, it’s not really where I got started. Like a lot of folks, I got started in single-family residential real estate. It was introduced to me or I was introduced to it back when I was 19 years old. Ultimately took me about a year and a half to buy my first property and spent the next couple of years following that introduction to residential focusing on building a single-family rental portfolio. And that’s the direction of my mentor at that time. That’s exactly what his business model was. So, I just followed it to a tee.
We would only ever wholesale or flip a home when we needed to build up capital reserves. But the long term intent was to always build a portfolio for long term cash flow. At some point during the first couple of years, I was introduced to the world of commercial real estate more specifically multifamily property and so we started diving into the multifamily space as well. This is back pre-2008. This is back in 2002-2007, leading up to ’08. So, we had built quite a large portfolio of single-family properties and instead of acquiring apartment complexes as well, along with other miscellaneous commercial real estate.
Don: Sounds risky build up a big portfolio just before 2008. So, did it end well?
Kevin: Well, if I had a crystal ball, I surely would have planned slightly differently, right? No, it didn’t end well at all. We’re down in Southwest Florida pretty much ground zero, one of the ground zeroes for the real estate crash and crisis. It was a very challenging time. The single-family market down here suffered greatly, not just from a value perspective, all of our properties have a lot of equity. We had a very low leverage point we thought was a very conservative leverage point in our single-family properties. But what we found is within a year period of time slightly less, most, if not all of them were upside down in value.
Don: It’s like the worst nightmare for every investor. What happened to you? You were investing in single families in Florida before 2008. That’s the worst-case scenario.
Kevin: Yeah, and it wasn’t just the values it was a rental, the occupancy got affected, a lot of people are leaving Florida back then there weren’t jobs, a lot of the jobs, were heavily relying on real estate, the growth of real estate, you know, building and development practices. So we had to hit to our rental premiums that were charged, and we had to start offering concessions, and your rents don’t always continually go up, there are certain points in times where rents can be affected, and you might have a little more of a challenging time occupying your units will take longer than usual, you might have to give some concessions away, couple free months of rent or a discounted rent for the first couple of months. So, we had to do that, we had to do all the above.
It just was very, very hard to maintain the status quo when we had a portfolio that was underwater. In addition to that, it was negative cash flow, and it went from positive to a negative cash flow standpoint, you can’t sustain that for very long least we couldn’t. I didn’t have $20 million sitting in the bank that could just keep feeding this beast and so we hung on for as long as we could. But ultimately, we were forced to essentially give back a lot of our portfolio to the banks. At that point, the banks didn’t have the loss mitigation departments. This was very fresh. Most banks were forced to create those departments within their company to do workouts and loan modifications. However, that did not exist. The first year when things started going completely haywire, and so none of the banks were willing to work with us whatsoever. That’s the last thing they wanted to discuss was that loan workout. We really did what we had to do and we tried to hold on as long as we could and ultimately had to get back a lot of what we had built over the years.
Don: Okay, so when you say give back, I assume it was a deed in lieu? Foreclosure, right?
Kevin: We had hundreds of properties. So, deed in lieu, some of the banks were so in disorganization at that point that they just didn’t, there was a way we could speak with just ultimately went through the judicial process and went through foreclosure. We would short sell whatever we could just that we tried to work with the banks as much as possible. We were here, we were open, we’re open-minded and willing to work with them. And so, some of the banks worked with us through short sales, we did that.
Others again, there was no communication, there was no dialogue and so, those ultimately went through the judicial foreclosure process somewhere deed in lieu or willing to do whatever we could to ease the process on both sides. But again, there wasn’t much organization with a lot of banks in the first couple of years of the crash. Now every bank has a loss mitigation department. There are people, there’s a dedicated department to deal with loan modifications and doing reworks with borrowers. That didn’t exist. It just didn’t exist back then.
Don: Of course. Going a little bit forward, then it’s 2012. I know you made your first mobile home park deal, right?
Kevin: That’s correct. Yeah, took a couple of years off a real estate. Well, I shouldn’t have I kind of kicked myself in the butt now. But it was damage control for a number of years. It was very hard to see the light at the end of the tunnel. And it’s not a sob story. I’ve learned a lot from it. I lost my personal residence and got bank accounts got garnished. It was a very ugly personal time for me. I’m still young at heart today but I mean, I was in my 20s. And I’d never gone through something like this before. I’ve only ever experienced the positives of real estate. It was a lot to consume and to digest. I knew that I needed to focus on my health and fitness. And so, I started a few other businesses that were directly related to the health and fitness industry and that allowed me to number one, create some revenue and income for myself because I was broke. I mean, I’d have anything and my bank account got garnished.
Don: What kind of business?
Kevin: I started two different companies. One was a custom clothing company. I was a big runner, and I’m a cyclist, triathlete. And so, I was already ingrained in that community. And there was a huge need for custom cycling clothes and also running clothes for big events that we got into the sublimation business. I knew nothing about it before just watch some YouTube videos and did a bunch of my research and ultimately built a printing company. In addition to that, I love craft beer, and I love running as well. I thought there might be a great marriage. This is back again in like 2009 craft beer was kicking off. It wasn’t as big as what it is today, but it was on a roll.
So, I started a social running club that was called ‘Running For Brews’, and once a week and a set location, we meet for a social run. And afterward we have been at a local brewery and we ultimately ended up opening up 45 locations throughout the country. The bars we charge them for basically bringing people every week to the bar so we get paid based on the amount of attendance we had. It was a fun business. It was one allowed me to be in direct alignment with my interest and also stay healthy and fit as well. Because again, every week we were meeting and going for social runs, 5K’s, 10 K’s, what have you. And so, it didn’t kill the world. We weren’t making millions of dollars with it but it was a fun revenue-generating business for us. And then the printing company as well. So those two things allowed me to really tie together my hobbies, health, and fitness and also generate income while I was trying to work through the mess that I had been experiencing with the real estate downturn.
Don: Nice. Yeah, I think it’s very important to do things you love. I’ve had some rough times as well. And then I found out that my hobbies are the ones that really saved me and got me back to become a lucid person again. I like to skate, you would never know if you see me dressed up work, you’d never know. But if I need to clear my mind, I just go out and skate and do something. I’m sure you’ve done that and that helped you a lot with mood and willpower, right?
Kevin: That’s the one thing that I realized is that everything else was out of my control. My credit was shot, I was getting calls every day from creditors. There were a lot of things that were outside of my control. The one thing I could control was how I felt and how I dealt with these challenging times these days and months that were lying ahead. Being in peak shape, both mentally and physically surely helped me get through those times. I mean, if I had just sat around and ate a bunch of cupcakes and drank a bunch of beer and got overweight and lazy, I’m sure my mental fitness surely would not be in tip-top shape.
Don: Let’s talk about 2012, where you got back to real estate after the trauma that you’ve been through with establishing a very serious portfolio and then losing most of it in the crisis. Then you got back to real estate, which is I believe, you know, once you do real estate and you’re successful, it doesn’t matter what happened, you going to get back to it, right?
Kevin: Yeah, that fire was inside me. I tried to pull out or once in a while during those tough years, and I wish I would have looked at it differently. I think if it ever happened again, I would have a different perspective. And everyone knows the old saying of ‘buy when there’s blood in the street’, it’s just really hard to put that theory to work when its blood that’s out in the street, right? It’s really hard to think about it when you’re inside that bubble. But I think looking back I did the best I could. And I had that fire burning, things were looking better. I was in a better situation all around. I’ve gotten married to the love of my life, still married to her today, she dealt with me through those downtimes. We got married in 2010. So, she was with me during some really hard times. Life was looking great, didn’t have good credit yet. Still, we’re working through some financial challenges, everything else was just lining up perfectly.
I knew I would get back into real estate, I knew I wanted to get that fire just glowing again. I look back and reflect on what I would have done differently or what mistakes I might have made back during my earlier years prior to the crash. What would the second round look like? Was it going to look the same or am I going to change my business model a little bit? What I realized is that I put a lot of time and energy into buying 120 plus single-family properties for the rental portfolio. I wasn’t married, enjoyed what I did, but I put a lot of long hours and which is fine. I mean, you got to work your butt off.
However, I knew there was a more efficient way kind of reflected back and I compared to my apartment complexes that we owned to the single-family properties and realize that we didn’t put nearly as much effort into acquiring 500 doors, apartment doors as we did acquiring 120 single-family rentals and those apartments to seem to kind of chug along, whereas the rentals were scattered amongst three different counties. They were inefficient to operate. I just knew that moving forward, I didn’t want to have to rebuild a single-family home portfolio. It wasn’t a good fit. It wouldn’t allow me to scale fast. I wanted to regrow things or rebuild things much faster than I had done it before. I knew that multifamily is a way to do that. I understood residential real estate.
I knew that apartments were going to be a good fit for me and during that kind of journey of learning how the landscape has changed even the apartment space, I got introduced to a guy by the name of Randy. Randy owns mobile home parks here in Florida. He owned three of them had been a banker for his entire life, did a lot of lending on mobile home parks here in Florida and ultimately retired from the bank and went out and bought three fairly large mobile home communities and had lunch with Randy were introduced by a mutual friend. I had lunch with Randy one day just not interested in mobile home parks, but just really to meet someone new and I left that two-hour lunch meeting with Randy with a newfound interest in the mobile home park.
He piqued my interest in many different ways that I had never even thought about as it relates to investing in parks and I left that meeting confirming that I was going to give the next 12 months of my life to learning everything I could about mobile home parks, not just learning it, but going on actually putting the use of buying a park. So, I was going to buy a park and either prove or disprove all the great things that Randy had said about the niche. So that’s what I did. I went out and did that. So, this was like 2011 when I met Randy, and so in late 2012, bought our first Park up in Atlanta, Georgia still owns it today.
The smaller community, it’s the smallest thing that we own. However, we bought it at the right price, it’s a great location. And the thing kicks out money every month without fail, bought that one, really enjoyed how it went. Bought the second one, which up in North Carolina bought a third one bought the fourth one and the story evolves forward seven years later, got communities and 11 different states right now and this has been our core business for the last seven years. So really, it has been very lucrative for us, it has been a lot of fun. It’s a phenomenal niche. You’ve come into it, Don. I know you’re looking to buy your first park so there’s been a lot of things that have piqued your interest in this niche. Same things that probably peaked mine seven years ago. And we just took it and ran with it. So that’s where we’re at today.
Don: I could tell you what I’m thinking about mobile home parks and where I’m coming from, I’m coming from owning a single-family portfolio as well. I’m also developing 30 units here in Hollywood, Florida. I’m developing the entire thing from the ground, it’s going to be in A-class building, it’s going to be great, close to the beach. So, it’s a great area. But somebody had a discussion with me, which also piqued my interest in mobile home parks for a few reasons. I can tell you what I’m thinking, and I want to know what you’re thinking about this because I know you’re the expert of them. So, here’s what I’m thinking. I’m thinking that there are a few reasons why I’m interested in them. The first one is because they’re not zoning for them anymore. So, it’s just a fundamental of supply and demand. That’s like the most basic thing in the universe. Supply, demand. If you have something that has more demand than supply, then you should try to get that thing for a good deal. So, they don’t zone for them because they don’t make as well as an income for the cities, as much as the multifamily would as far as property taxes from what I understand, maybe there are other reasons. So that’s one reason.
The second reason is that it’s just not getting any cheaper and it’s not getting any easier to find affordable housing in America. Some so many people have section eight vouchers but can’t find homes and the population is growing. So, I don’t see any stop to that, I just see how you know, we keep growing as far as that number and the gap between the rich and poor, that’s not going anywhere as well. So, when rents are going to get compressed, how compressed are they going to get so that mobile home parks are going to go down in the price? That’s the reason. The last reason is that its land. So, it’s God’s money. When bitcoins replace dollars and when the currency changes in the next 10 years or 20 years, the land is always going to be worth a lot of money. I think buying a mobile home park, close to downtown is a long term investment. It’s the best investment you could make, because in cash flows and it’s going to appreciate in a tremendous way. If somebody who owns a car dealership is going to want to buy our lot because there is no other land to buy it and they could pay you $15 million in 20 years in today’s money. That’s what I’m thinking. Am I right?
Kevin: I think you hit all relevant points. And it’s a great covered land play. We’re not a speculative buyer. So, we don’t buy our mobile home parks with the intent that there’s going to be a higher and better use in 10 or 15, 20 years, we buy it for the income that’s being generated as a mobile home community. However, we look at the higher and better use as icing on the cake. If you’re within the path of progress or anywhere in its path, even if it takes 15, 20, 30 years to get to you, that land at some point in time should have a higher value than what it does today.
Having a mobile home or mobile homes on that site paying you lot rent. People need a roof over their heads. It’s a great way to cover the cost of owning that land and generate some income until that higher and better use comes along. So now, I wholeheartedly agree. I mean, it’s a parking lot. It’s kind of the same idea behind investing a parking lots like you see parking lots is urban core districts, downtown business districts. What a great covered land play. You’ve got basically a demand for parking, you got a prime piece of real estate at some point in time or another, those surface parking lots are going to have a much higher better using that could be high rise office building apartment complex, what have you, and I feel mobile home parks are very similar nature.
Don: Okay, so let’s talk about your criteria and your experience. So, what have you learned about investing in mobile home parks? What is it that you’re looking for? Like when you see a deal, how do you know it’s a good deal?
Kevin: A good deal has a different definition for everybody. A lot of it depends on Is it a long term strategy, is it a short term strategy. For us, we like to look at things as though we’re going to own them for 7 to 10 years if not longer than that, ideally longer than that, right? We have bought and sold things in the past. However, going into them, we pretty much decided that, that is that type of deal. Like we’re going to get in here turn around, and we’re not going to keep it for whatever reason that is we’re going to look to flip it here in the next year or two. But as far as long term strategy, we know number one, speaking about the demographics, we want to be an area that is economically sound, that doesn’t have a diminishing population to it, we want to be an area that has a strong median home price, strong median rental price as well, so that we know there’s a demand for affordable housing.
You know, we wouldn’t have been an area that’s got a diverse employment base as well. We want to know there are jobs available for our workers. Generally speaking, that’s the demographics that we’re seeking. As far as the deal itself, there are certain targets we have investors that we have to meet the demands of and so for us, we look at what kind of cash on cash return in this park generate, not just from day one, but look at year one, year three, year five, you know, what does the long term projection look like in this community? Where can we get it to go, where’s the value add components and what’s realistic of what we truly achieve in that given time, and our target then between year one and year two, is to be somewhere in the 12% to 13% cash on cash range, so that number is kind of changed over time.
I could tell you that things have gotten a lot tighter, cap rates are going to press quite a great deal in our space, and the types of deals we were buying four years ago, you’re not seeing as much of anymore back then we could easily be getting 15%, 16%, 17% cash on cash returns, sometimes upwards of 20% cash on cash returns quite often. It’s getting a lot tighter lot harder to find those types of opportunities today, however, we still like to hit those lower double-digit cash on cash returns between year one and year two, and sometimes sooner, sometimes it might take a little longer. But that’s really what the target is that we’re reaching for. And that’s a leveraged return, that’s assuming that we’re going to put some type of debt in place. The normal debt that we underwrite with is 70% loan to value 20-year amortization. Unless we know that it absolutely from day one will go either with CMBS or a Fannie or Freddie loan. In that case, typically, it’s going to be in the 75% loan to value range in a 30-year amortization. Right now the rates are somewhere in the low foursome are actually below four, depending on what rate of an asset it is. So I’m not sure if that answers your question, Don, but what we’re kind of looking for it doesn’t mean that folks are out there hunting if it doesn’t meet the criteria I just gave you, it’s not a good deal because that just means it’s a good deal for us and that actually fits our buying criteria.
As far as like quality of assets, I say the one big thing that’s changed for us over the last couple of years, not that we would ever buy low-quality assets, however, we’re much more picky with the great asset that will buy today than what it might have been maybe five years ago. It’s one of those things from a bandwidth perspective, you’re always you’re buying or dogs wanting to start parks. it’s manageable when you’re small when you’ve got a few communities, but just know that those dogs, if they’re in a primary that might be different because you can always change the tenant base if you’ve got just a phenomenal location area. But if you’re an okay area, but you got a low demographic that you’re serving in your park, it might not ever be more than what it is there today, you know, and so you might just have a little bit more of a challenging demographic that you’re serving. And it gets to a certain point where that’s just not scalable. At least that’s what we found when you’re putting out a million fires left and right because you got an older park, it’s kind of got a rougher tenant base that is just very demanding.
You’re always fighting them to get your payments on time. It’s got a really old infrastructure that you’re always repairing. Your bandwidth gets stretched very thin very quickly if you tried to own 10, 20, 30 of those parks, and so we’re very particular nowadays with not just the quality the park itself above the ground, but also below the ground. What does that infrastructure look like, be very particular about what’s the useful life that’s there is there 10 years left in the water and sewer lines? Are there five years or 20 years? When was the park built? How about the roads themselves? What condition they’re in? And how are they going to hold up over time? So we really put a lot emphasis on that, because we want to know that, number one, the tenant base that we’re serving isn’t going to be overwhelming for us that they’re going to be just a good solid tenant base, but also the park itself, the infrastructure that we’re not going to get surprised 10 years down the road with some major infrastructure improvements that we hadn’t planned for. Lots of parks out there were built 60-70 years ago. Pipes don’t last forever, sewer systems don’t last forever, wastewater treatment plants don’t last forever, and they’re incredibly expensive to replace. Anyway, that’s just some of the things that we look for out there searching.
Don: I want to ask you a few questions about that. Because from the way you say it, it looks like you guys are looking to buy parks that are already established, occupied, are in good shape, but how could you get like that?
Kevin: Yeah, give you an example. We got a parking contract right now, this is probably a perfect example for us. There’s a park down in Texas, we’re not closed yet, we’re in contract for some I’m not going to mention the actual city and state or I’m not going to mention the city but it’s in Texas. It’s 204 lots and total. Still, this is a good example to use. So, this park, it’s got 151 mobile home pads and then the remainder is RV pads, which is kind of a hybrid so it’s not 100% mobile home. However, the RV-ers are long term. There are some folks that live there for like three, four years, it’s very much a permanent type establishment. The mobile home lots of 149 of 151 are occupied and 26 of the RV lots of the 51 are occupied.
From a revenue perspective, the park is fairly stable, the lot rents are at 375 they could easily go to probably 450 so it’s got some move to run on the rents already. It’s got city water and sewer it’s already being built back so there’s not a lot of recapture or revenue to be had thereby building back the water and sewer. They do have some recapture issues but not big ones, you know, things that are fairly easy for us to go in and fix probably a couple of water leaks and a few people that aren’t paying their bills as they should be. But generally speaking, that upside has been kind of removed as well. However, where the upside in this park lies, is it looks like crap. The infrastructure is good. The water and sewer are good. It was built to the right specs. It’s laid out well, however, the family that’s owned it for the past 40 plus years, they just haven’t enforced any rules at all. These are all 10 own homes.
There are no park own homes here. I’d say maybe only a handful of homes have actual skirting and so the park looks loud. Hell, it looks horrible. The roads aren’t in great shape against got good infrastructure there it was planned out well as far as layouts are concerned. All the lots are a big enough size to where they can fit. newer model single-wide some double-wide. It’s got paved two car parking in each home. However, there are cars all over the place. It’s more of a cosmetic type deal for us to go and improve other than raising the rents themselves. So, our intent with that one we’re buying it for $5.65 million. More than likely what the first 12-18 months will look like there is trying to fix the minor water recapture issues that are going on.
There’s about $65,000 of water and sewer that’s going somewhere and it’s not getting recaptured. I don’t know if it’s a big water leak or what but we’re going to fix that. Normally, it’s pretty easy to kind of narrow down what the issue is there either if people aren’t paying it, or there’s a water leak in the water is going into the ground, one of those two things. We’re going to do that we’re going to go in and skirt every single home. It’s going to cost us $150,000 to do it, but it’s going to make that park look like a completely different part just by doing that every home will have a new skirting unit the home itself looks kind of like crap. It will look a million times better with skirting around it. We’re going to do a massive community cleanup. There’s lots of untagged vehicles, lots of crap around the houses, we’re probably going to spend upwards of $50,000 just by buying renting 30, 40 yard dumpsters to get in there, get some labor in there to help people clean your mess up that they’ve created over the past 10, 15, 20 years.
We’re going to fix the roads by about $150,000 worth of road repair that is needed in that park and then the RV lots there’s 25 that are empty right now all the hookups are there. I did some test ads to see what the demand was for a one-bedroom, one-bath park model home they’ll park miles like one of the small little 99 square foot homes. Within 24 hours we had like 55 inquiries on Facebook so there’s a great demand for that type of product in that marketplace. So, we’re going to go by 26 park model homes and fill in those remainder of RV pads or if any of the other RV lots turn in the meantime we’ll bring in a park model home. That way it looks more like a mobile home park then it does a mobile home park with an RV section with like fifth wheels and travel campers and things like that. So, we’ll do that over this period of the first 12-18 months. We’ll get rents up. I don’t know if we’re going to push them to $450 relegate but we’ll get them over $400.
Now here’s the best part about this. It’s in the best part of town it’s a right down the road from a Country Club. It’s right behind. It’s probably one of the nice neighborhoods in the area. All the major retailers are within a block away so if you got a good arm you can throw a stone that far. It’s very close by so it’s in the best part of town however it looks like death. But the revenues coming in such a desirable area and the schools are so good right there that the park is full the vans full however it looks horrible, and so it had been on the market for a while for a much higher price and it just hadn’t sold because it looks scares people away. However, I can see the underlying beauty because I know that the location in the market changes everything. I can easily take what’s there now because I know there’s enough people that are banging at the door to get in saying, ”Hey, I would love to live here and raise my family here because it’s such a great part of town and great schools,” that if I lose some of the bad people that are there, I know I’ll fill those places right back in with good people.
However, this park was in like the other side of town, it wouldn’t be a good deal to me at all, I would never be able to make it look better than what it does today. Even if I put money into it, it would revert to its old self very quickly, and it would never be a strong operator. Collections are phenomenal revenues high, we can get the rents to $450 within the first two years will bail turn around and sell this market we choose to pry for slightly over $10 million is what the evaluation will come in at. If we fill in the park models, get the lot rents up to $450, fix the water recapture problem and aesthetically improve the park which will help drive down that cap rate on the sales side that it becomes all day every day at $10 million parks.
Don: So okay, so let’s talk about the numbers. So right now you’re buying it based on the income I assume, right?
Kevin: Yeah, it’s about a seven cap. Now we’re buying it out.
Don: It’s a seven cap. What would you say right now is the renovations that it requires as far as the dollar amount.
Kevin: About a half-million dollars.
Don: Half a million. So, you’re buying it for 5.56? Right?
Kevin: We’re buying a 5.65. And then we got about a half million. Yeah.
Don: Okay. You got to be a little bit over 6 million, right?
Kevin: Correct.
Don: Okay, so how are you going to bring the park into a valuation of 10 million? Is that because you’re going to sell it on a lower cap rate? It’s almost an institutional park. Right. The buyer for that is institutional.
Kevin: So, it would it will be when we’re done with it. Yeah, right now, not even close. But it will be when we’re done with it. We evaluated a six and a half cap was where we ran it at.
Don: That’s your exit point?
Kevin: Yeah, that’d be the exit point. Things in Texas right now in this market are trading for like five and a half cap. So, but we were low conservative with the exit there in case it fluctuates. Six and a half cap is what we used.
Don: What’s the NOI of the park if I may ask you right now.
Kevin: Yeah, I don’t know. Don, I couldn’t do that. I’d be lying if I gave you a number right now.
Don: But you’re saying you could increase the NOI by roughly 35%?
Kevin: That’s correct. From a rent increase from a, there’s like $120,000 worth of payroll in this park. So, there are lots of family members working there, there’s a lot of expense line items that can be shaved down as well. Payroll being one big one. As I said, there’s about a $65,000 water recapture issue that’s happening. I’m not sure where it’s going. It’s either people aren’t being charged, or there’s a pretty massive leak.
Just between that and payroll alone, there’s $100,000 of additional revenue to be had. Filling in the remainder of the RV lots that are there with park model homes is a major boom, thinking assuming that you’re in the 450 range as far as lot rents are concerned. Adding those 26 homes there is a major boom for that park as far as revenue and then if you raise the rents on the remainder of the park, and you get to that $450 mark, which is $75 above where it’s at today. Let’s just say that on all 200 lots in that park that we were able to achieve another $75 of revenue so that’s another $180,000 a year of annual income that doesn’t have any costs associated with it other than a rent letter increase going out. There are no additional costs associated with achieving that additional revenue. So just between that and shaving off some of the lifetime expenses, there’s $280,000 of additional revenue there to be had.
Don: Okay, so I want to ask you a question regarding buying a park that is currently in such a bad situation and condition that it doesn’t cash flow, or it does, but not enough. So, it could be, you know, sometimes don’t have negative cash flow. So, is that something that you recommend if there’s a solid value on them, or that’s something you would never do? You always want to buy something that cash flows right now. And so, when you buy it from day one, you already make money?
Kevin: This one will cash flow. So, this one will support itself. We’re not going to pay for all these improvements out of the cash flow. That’s just a bad plan altogether. So, we’re going to put up all this capX money as of right from the get-go. This is going to be funded right in the beginning. So, this one, not that situation. This one supports itself. Would we get into it if it didn’t support itself? Probably not. It’s just there’s a lot of risks there on that size of a deal. If it truly is a negative cash flow. I feel very confident about it, but the timing gets Off relatively quickly, when you have such a major renovation project, just lining up crews and contractors. Missing a year off deadline on a big project like this is not unheard of, it could be very commonplace.
So, it gets very expensive if you’re truly losing money on a monthly basis, and you missed the target by a year of when these parks ready. So, if we’re off by six months or a year, the park still makes money and still makes sense. It’s still generating good levered cash on cash return while we’re making these improvements. Now, there’s a park we got in Georgia. Going into it, we knew number one, we didn’t want to be in that marketplace. I didn’t like the market all that well. However, what we’re buying the park for, it was kind of like, there’s no way we can lose here, especially based on the time that we can get the timing right of getting this place cleaned up and renovated, some of these homes so that we should be able to get in and get out and should have little to no risk associated with it. That’s what we did took us about 18 months to get in and clean the place up.
We did it with the intent of not taking any cash flow out the place didn’t pay for itself. I guess we probably could have taken some cash flow at some point or we just put it all back in property and got it cleaned up, got it stabilized, and then turned around and sold it to a cash buyer and moved on to the next. So that one, we felt confident we had such a low basis in it. However, it’s your first deal, and you gotta make it work, I will probably move away from something like that, man, there’s just so many things that can go wrong. And it’s like you’ve got all your life savings sunken into this thing or if you got your money and your investors money, but yet, you’ve never actually done a deal like that before, and you don’t have a plan B, then I think it’s incredibly risky. I think there’s easier ways to make money than to do that, the model I just shared with you. However, I’ve got experience doing it, I’ve done it before and allow the money than deal with my own money in a wouldn’t have sunk me if that deal wouldn’t have gone as planned. And again, our basis was so low that it would have been very hard for us to lose.
Don: I understand. Okay, so let’s talk about how you find these deals because I know that’s a big deal. That’s 200 and some spaces, it’s more of the institutional buyers typically the people are going to look for that. So how do you find these deals?
Kevin: We got a lot of relationships with brokers, but I will say that the majority of the deals that we own today and that we have in our pipeline are due to our efforts. And that is direct mail, pick up the phone and cold call owners. And we take on the role of a broker. I mean, we identify parks in certain markets that we like, and we try to build a rapport with the owner or someone in the family that has ownership of that property. And this particular deal in Texas I gave you, you say it’s an institutional it will be. However, it’s not today, no institution, the right mind would touch this thing in the current condition that it’s in. However, I know that it will be an institutional play once we’re done with it. So that’s where we hope to get it but that one was found via cold call, it was listed when we called on it.
However, it was not listed on like loop net or any of the big commercial side that had a local commercial broker that had it marketed. I don’t know where the heck he was marketing and Don, I’d never seen it before and normally I see pretty much everything that gets on the market. He had been asking, I think over $8 million for I think eight and a half million or something like that. He’s not a mobile home park broker. He didn’t understand the business. A lot of development happening right in this immediate area. I think that he’s a little off what that lands worth. However, that’s how he was marketing and it was like eight and a half million dollars. And we made a number of offers over the last six months and finally really took our offer knew we could execute on it. So that was a cold call.
We get a lot from the cold calls, we get a lot from direct mail. But our goal is to really build relationships with owners, not just send them a piece of mail saying, “Hey, we buy mobile home parks, you’ll call us.” That doesn’t work all that well. You know, our goal with the letter is a very personalized letter. And then we typically follow up with a phone call and just say hi, say hello, go to the relationship. You get to meet these folks at industry events that they’re going to be attending. If I’m going to be in the local area, if I’m visiting another property, I get on our spreadsheet, I see who else has a park in that area, how we communicate with them. So, I try to get together coffee, try to grab lunch, what have you. Just build these relationships doing the same things a lot of brokers do, but we do it on our behalf. The goal of doing that is that remove competition because as soon as it gets into a broker’s hand, it’s their fiduciary responsibility to get the highest dollar amount for it right even if it’s a pocket listing, per se. More than likely that pocket listing is going to get handed off to a number of potential buyers. We’ve never sold a property directly to the owner we’ve always used the broker. I get their capacity and where they fit in. I just don’t like being the guy on the buy-side that has to bid against five other people for the same property. So, we typically go right to the owners.
Don: When you get into a mobile home park and you see that it needs a lot of work, what would you say the price per pad? Of course, I know it depends on many factors that condition but what would you say is the dollar amount you have to renovate in case you have to put roads, in case you have to work on electricity and work on the septic tanks?
Kevin: I can tell you what we do as far as like setting reserves aside on an annual basis per lot per year, we set aside a certain amount of money for ongoing capital reserve items, right but as far as like day one, what’s needed. It’s all across the board. This park here in Texas is going to be half a million dollars, we closed on the park just a couple of months ago up in Indiana. Its pristine man. It’s so nice. We’re kind of joking with where do we spend 10 thousand dollars. There’s not much to do at all and all the water and sewers directly built by the city, public utilities built by the city, the roads are the perfect shape, all the structures are in good shape. So, we are not putting hardly any money into and it’s not because we don’t want to because there’s nothing to do to it, there are no improvements that make. Now that was a good deal. It’s probably one of the nicest parks we own. It’s gorgeous. It’s an 85 lot park, 42 the lots are occupied. It’s all double wides. Hundred percent double wides. We paid 750 for it. Lot rents are $317 a month in direct build city, water, city sewer. All the 85 lots are developed, all the infrastructure hookups are there for 85 homes.
However, there’s only 42 in there. I’m not sure the story behind why it never really truly got off the ground, but it’s a very high-end community. In fact, despite one of the nicer neighborhoods in this area to live even nicer than some stick-built homes. Some people just don’t know what the heck they’re doing. I mean, the guy was nice, the seller. He had known for seven years. There were three vacant double wides and then a fourth vacant double, which is the office. They have a nice office there, which will keep it as an office but it’s a big double-wide so that came with the sales probably $50,000 home. And three other vacant double wides had over the last seven years, people had just abandoned. This guy never did anything with them. They have just been sitting there locked up, kind of preserved, you know, they all need some rehab. But we just got done rehabbing the first one couple weeks ago, we sold it for $23,900. Put about $9000 into it, and we got it for free. We’re renovating the second one right now or I’ll put about 10 or 11 into it and total renovation. And it’ll probably sell for $24900. And then the third one about the same price point. So, the guy never does anything. He’s double eyes. They just sat there money going down the drain. Yeah, yeah, that was a cold call effort.
Don: You’re going to fill out all the lots, right?
Kevin: We haven’t fully decided yet. I don’t know what we’re trying to wait and see. We bought it with the intent that it made sense even without infilling lots because it’s a small town. So, we didn’t run the performer based on Hey, we got to fill in X amount of loss per year because I just don’t know what the demand. I’m not sure yet as to what that demand looks like and how many homes we could sell a year.
So, what we’re trying to use as a determining factor is how fast he’s used mobile homes will sell the ones that we acquired through the sale. As we renovate them, if I got people showing up left and right on these next couple of deals with $25,000 cash in hand, they’ll tell me that there’s at least a market for probably $25,000 to $35,000 homes. However, I’m still not dead set on that there’s a market for $60,000 or $70,000 homes. So anyway, the next couple of months will tell us a lot as to what kind of money people have that live there. And then that will help us decide what the next steps are as far as in filling that community. So that’s the plan. I just don’t know how many homes a year will be that we bring in.
Don: I also don’t like specifically on mobile home parks talking to brokers. So, I’m also calling and doing cold calls and talking directly with sellers and I have found out that it’s probably the best way to do this in this space. I don’t know why, I mean in multifamily, it wasn’t working quite well for me when I was trying to call the owners directly but in mobile home parks, it does. For some reason, you call people and they’re nice. Why do you think that is?
Kevin: I don’t like being cold-called. I hate being cold-called. However, one of my business partners that I own some of my private portfolio with, he picks up the phone, anyone calls. He also talked about a lot of the owners are still of the older generation, like our parent’s generation. They’re nicer, they’re friendlier. They’re used to having conversations in person, not just on a text message. Back in their day, how they communicated, right, they spoke with each other, they had an open line of dialogue. So I think that’s why 15 years from now, I think that you might find that a completely different story, as far as mobile home parks are concerned, like who the owners are on the other side and are you able to have good quality conversations with them or is it just going to be in order to take on the other side, and you will never be able to get to the decision-maker.
Don: So, what do you think is the best way for somebody who’s trying to learn that asset class? What do you think they should do? Is it listening to podcasts and reading books? Where do you think it is the best information?
Kevin: Education is the start with everything right? Thank God today we have podcasts. There’s so much free information out there. We’ve got a mobile home park-specific podcasts, we’ve got 100 plus episodes. Lots of our earlier episodes are very granular. They go into like the operational side, we go into very deep intricacies on the finding the value and underwriting a park. Go listen to, you know, the hundreds of hours where the podcasts that are out there ours and there are other ones as well that are good. There are places like bigger pockets that have a dedicated mobile home park section of their forum. There’s another dedicated mobile home park forum out there, you know, so there are lots of places to get free information.
However, at some point in time, it’s a matter of actively doing something. And sometimes it doesn’t mean by yourself. I’ve always had partnerships, I enjoy it. I know what my strengths are, I know my weaknesses are. No one’s good at everything. So being able to identify someone who’s out there already doing it can help fast track your success in the space, find out what their weaknesses are. And maybe that’s where your strengths lie, and your team up with something that’s already got a little bit of traction, and has already done some deals or they’re doing deals currently. You can kind of dive in and help them grow their business. That’s a much faster way to do it then going at it all by yourself. However, some people don’t want to partner they want to go at themselves, but you gotta take action some point of time. I’m going to buy a deal and everything that you’ve learned in theory, you know, will come into play. However, you’ll learn things that don’t pan out exactly how they did theoretically right? You learned by being in the trenches and doing a deal.
Don: Of course. So, in case anybody wants to get in touch with you and kind of do something together, what is the best way to connect with you?
Kevin: They can find me on my website. It’s Kevinbupp.com. I do two weekly podcasts. One’s real estate investing for cash flow. It’s a commercial real estate investing podcast, you can find that on the kevinbupp.com website, or company website is sunrisecapitalinvestors.com. So if you want to see what we got going on the mobile home park space, that’s where you can find that. And then we also have a mobile home park investing podcast. You can find any of our podcasts on iTunes, you just search my name, or search mobile home parks or real estate investing, you’ll find it there. I’m not too hard to track down, Don. So, between a couple of those ways, yeah, they can’t find me then they’re not looking hard enough.
Don: Okay. Well, Kevin, I want to thank you for being on the show today. And we appreciate all the insights you gave us.
Kevin: Yeah. Thanks, Don. Thanks for having it’s been a lot of fun.
Don: All right. Thank you. Have a great day.
Lady: Thanks for listening to the real estate investing podcast with Don and Eden. Stay tuned for more episodes. Till next time.
