For people who already understand the power of mobile home parks, the next challenge becomes finding the best way to invest. Buying a park yourself is an option, but if you don’t have the required specialized knowledge and experience, a simpler option may be to partner with an expert.
Before we explore those two options, let’s establish a few truths about parks:
- Larger parks are the best parks to invest in.
- Poorly performing parks that need to be turned around offer the greatest potential upside.
- Third-party management companies are not designed to turn parks around.
- Most people don’t have the access, the experience, the time, or the capital to buy large parks and turn them around.
Buying a Park Yourself
If you decide to buy a park yourself, you’ll need to have some unique experience and skills to be successful.
Initially, it will be important to understand the right kind of parks to pursue and how to navigate due diligence correctly. You may need to qualify for financing, and certainly will need to know how to properly take over the operations of the park at closing.
Once you close, you’ll need to know how to choose the right strategy for the park, how to hire the right kind of onsite staff, how to determine what capital improvements should be targeted, and how to find contractors who are skilled at working with mobile homes.
And, of course you’ll need to become proficient at the business requirements related to mobile home sales, licensing, bookkeeping, accounting, tax, etc.
After several years of making smart decisions to improve the park, the financial performance, and the resident experience, you’ll have a stabilized park that is performing in an efficient manner and producing consistent cash flow.
Partnering with an Expert
Given that most people do not have the access, the experience, the time, or the capital to buy large parks and turn them around, buying a park yourself is usually not the best option.
A much simpler way to invest in a mobile home park is to partner with an experienced park operator who is already good at all of the above. This offers a passive investment experience with all the benefits of mobile home park ownership, but without any of the hassles.
The most common investment vehicles used for this kind of relationship are called “real estate syndications” and “real estate funds.”
What is a Real Estate Syndication?
A real estate syndication allows a group of investors to place their capital with an experienced park syndicator, with the goal of investing in a specific park. The syndicator (commonly referred to as the “sponsor”) is responsible for all the tasks outlined above and the overall performance of the property, while the investors’ only responsibility is the contribution of capital.
What is a Real Estate Fund?
A real estate fund is similar to a syndication, but the goal of a fund is to invest in a “group of parks” instead of a single park. The main advantage of investing in a fund is diversification, simply because the yield is derived from the blend of performance across all the parks in the fund.
Syndications and funds are a simple way to invest in real estate because the ownership is broken into shares. Similar to the way you can purchase shares of public equities, you can purchase a portion of ownership in a much larger park or group of parks than you would have otherwise been able to.
Cash flow from the parks is split between the investors and the sponsor at regular intervals along the way. Profits from the sale of the parks are also split between the investors and the sponsor, typically at the end of the investment. In both cases, the distributions are calculated “per share” and paid out to investors in accordance with the number of shares they own.
Benefits of a Syndication or Fund
- Passive Investment. Investors can own a share of larger parks with smaller amounts of capital, without the additional requirements of time and experience.
- Access to Better Opportunities. Sponsors are experts and know how to find great deals that most people would not otherwise have access to. These are usually larger properties, creating a greater economy of scale that results in more stable returns.
- Direct communication. Another benefit of syndications and funds is the direct access you will have to the sponsor, which is not really possible when you invest in public equities. Investors like the freedom to communicate directly with the people responsible for the performance of their investment.
- Tax Benefits. Generally, the same tax advantages that come with ownership of any investment real estate are granted to the investors in syndications and funds.
What Kind of Investors are the Best Fit?
- Long Term. Mobile home park investments are best suited for longer term investment capital, so they are perfect for investors seeking a truly passive investment over a period of about 10 years.
- Mailbox Money. Mobile home parks are a good fit for investors seeking a recession resistant investment that will produce regular cash flow distributions along the way.
- Profit Sharing. Mobile home parks are also a good fit for investors seeking a bigger profit share at the end of the investment when the parks are sold.
- Retirement Flavor. Because mobile home parks tend to be at the lower end of the risk scale, they are a good fit for retirement investments. Investors can choose to invest with cash or through a self-directed retirement account, which allows moving investment dollars out of traditional investments and into real estate. In either case, these investments are attractive for retirement purposes because of their ability to reduce volatility and market risk.
What are the Requirements?
These investments can be designed for both non-accredited and accredited investors, but investors are usually required to meet suitability standards and develop a relationship prior to investing.
Minimum investment amounts can range from $50,000 to $500,000 depending on the type and size of the syndication or fund. Some sponsors will also limit the maximum amount an investor can invest.
How to Find a Good Park Sponsor
First of all, you’ll want to find a sponsor who specializes in parks as their primary business and who has a track record of turning parks around.
Most syndications and funds are private and do not allow for public solicitation, so you won’t see these advertised out in the open. Because of that, sponsors usually invite investors to participate by word-of-mouth.
You will not likely hear about these from your stock broker or your financial advisor. However, if you know an independent RIA who advises clients on alternative assets, they might have a connection to a sponsor.
The best way to find a sponsor is through referrals. Anyone who already participates in these types of investments on a regular basis will know the best sponsors, so don’t be afraid to ask the successful people in your life for a referral. The key here is to network with trustworthy people so you can get a reliable testimonial from them.
Many people invest in syndications and funds through a Self-Directed IRA, so companies that administer SDIRA accounts may be able to introduce you to a sponsor.
Other good resources are accountants, attorneys, or real estate brokers who work with mobile home park sponsors.
What Do You Do when you find a Sponsor?
Like most everything else there can be good and bad experiences, so before you invest with a sponsor, take the time to get comfortable in these four key areas:
- Character. Investments in a syndication or fund are passive by nature, without control over the day-to-day decisions, so if the sponsor is dishonest everything else will not really matter. Make sure to do proper due diligence on the sponsor and consider acquiring testimonials from current/prior investors.
- Experience. A really good sponsor will already have a track record of success and should also be able to demonstrate proficiency in their real estate niche related to underwriting, property management, business management, and all the components of syndications. Gaining clarity on a sponsor in this area will help you avoid jumping into an investment just because you know a good person who says they “have a great deal.”
- Fair Model. The relationship between an investor and a sponsor as it relates to how income and profits are split is extremely important. Investment models can include a host of fees to the sponsor, preferred distributions, claw backs, equity splits, inversions, lockups, tails, and more. These features can be complicated and confusing for investors, so make sure you understand the model completely before you invest. Consider these questions:
- Is the model simple and easy to understand?
- Does the model encourage day-to-day decisions to be made in the best interest of all parties?
- Does the sponsor get paid regardless of performance?
- Are there ongoing fees that could dilute your return?
- The Business. Most sponsors are good at real estate, but they can get so focused on the real estate itself that other business requirements get ignored. Some of the areas that can frustrate investors are things like regular reporting, timely delivery of payments, accurate and transparent financials, timely delivery of tax documents, and the ability to meet timelines, budgets, and target projections. To be candid, this may be the most important and most overlooked component of choosing a syndication or fund investment. Make sure the sponsor has a well-thought-out communication plan that can be clearly demonstrated. This will help you sleep at night.
It is extremely important to get comfortable with these four key areas before you invest. Once you find a sponsor who makes you comfortable about those items, you’ll have the opportunity to take advantage of one of the simplest ways to invest in mobile home parks.
Jack Martin is a principal at 52TEN, an Arizona company focused on Mobile Home and RV parks.
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