Encouraging Signs From a Younger Demographic By Frank Rolfe

The other day I was driving through one of our communities in Illinois and I noticed a nicely dressed young couple on the deck of a new Clayton home we had brought in. I’m
seeing more and more of that these days, and it’s great news for the industry, as we seem to be attracting a more upscale, youthful crowd all of a sudden. Is this a fad or a permanent trend?

Attraction to smaller living spaces

It’s no surprise to anyone who watches the “Tiny Homes” show on HGTV that young people are willing to live in spaces much smaller than other age groups. Some say that Millennials are the next “Greatest Generation” and, if that’s true, then they are
definitely on the right path regarding housing expectations. Of course, manufactured homes are perfect for those who are seeking small square footage in a detached dwelling. Unlike Baby Boomers – who often have bathrooms as big as some
manufactured homes – Millennials are not that in tune with the concept that bigger is better.

Focus on relationships

About a year ago I was given a private tour of Airstream Village, the manufactured home community that was built by Tony Hsieh, the billionaire founder of Zappos.com. He chose to live in this property over a penthouse condo he owned nearby. The
attraction was the concept of living shoulder-to-shoulder with a group of about 60 people in a very confined environment. All of the units in Airstream Village are either tiny homes or Airstream travel trailers – with no unit over 30’ in length. There’s a giant stage in the middle, as well as a converted cargo container structure for a business center and another for a laundry. So why did he want to live like that? The answer is that Millennials are huge believers in the power of relationships. Studies have shown that relationships are one of the top goals of this younger crowd both in business and their personal life. Manufactured home communities are perfect for this goal of building relationships, as the social interaction of residents is well known (just look at Time magazine’s article “The Home of the Future” for their take on this).

More respectful of their budget

Millennials seem to be much better at keeping their expenses in check that other age sectors (the reverse of Baby Boomers). Since they value relationships over materialism, they don’t need a lot of stuff to be happy. In this manner, manufactured homes offer one of the least expensive methods of having a detached dwelling with privacy and a yard. And millennials are huge into getting good deals, as they were born of the internet
shopping age where everything is a commodity and seeking the lowest price becomes a sport. With most manufactured homes costing around $1,000 per month less than a traditional apartment, the price attraction for Millennials is huge.

Everything old is new again

Everything in life seems to cycle over time from hot to cold and back again. Furniture from the 1950’s (“Mid-Century Modern”) is extremely collectible and valued by young people today because it’s different and interesting to them. And manufactured homes are also a big part of 1950s and 1960s culture which, frankly, makes them “cool” again. If you never had any prior exposure to our product’s design, you would find it unusual and intriguing – kind of like the first time you see “Viva Las Vegas” or a film in which Elvis lives in a “trailer park”. Every decade has its time to shine in this perpetual design circle of life, and the current era is the time of the manufactured home. Up to bat next,
I imagine, is a return to appreciation of the ranch house.

Lower negative stigma

Let’s be honest, our industry has a really bad stigma. There’s no denying this. The good news is that the Millennials missed out on all the television and movie programming that built that stereotype. “8-Mile”, “Trailer Park Boys” and other offerings were produced either before the Millennials were born or when they were in kindergarten. As a result, they do not harbor the same negative thoughts that other age groups do. This allows
Millennials to give our product an unbiased, fresh perspective.

RVs are leading the way

One of the main reasons that Millennials are attracted to the manufactured housing product is because of the extremely positive marketing and efforts of our cousin, the recreational vehicle industry. Just as we have done such a lousy job of putting our best foot forward with American consumers, the RV industry has hit home run after home run. Their sales are the highest in U.S. history, each and every year! They have created the perfect blend of product design and price point, and then coupled that with one of the best public relations efforts I’ve ever seen. I see the “Go RVing” in many of America’s most upscale publications such as Town & Country magazine, and then on TV during such events as the X-Games. They’ve snuck RVs into everything from the Neiman’s catalogue to Hot Wheels. And, in so doing, our close relative has opened the
door to a higher opinion of our product. It should be noted that young people are the second strongest segment buying RVs behind Baby Boomers.

Conclusion

I expect Millennials to be a significant part of the manufactured home community business going forward. Our product matches well with their goals and lifestyle choices. It’s affordable and “cool”. But let’s all try to be more like the RV industry in promoting to this age group – this is our chance to finally put the negative stigma to rest.

 

Frank Rolfe has been a manufactured home community owner for almost two decades, and currently ranks as part of the 5th largest community owner in the United States, with more than 23,000 lots in 28 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top-selling ones in the industry. To learn more about Frank’s views on the manufactured home community industry visit www.MobileHomeUniversity.com. This article originally appeared in the Manufactured Housing Review, subscribe for free here.

Calculating Repair and Maintenance on a Manufactured Home Community By Dave Reynolds

Of all the expense categories to get a handle on when buying or operating a manufactured home community, perhaps the hardest is “repair and maintenance”.
In over twenty years of pouring over budgets for various properties, I’ve discovered many facts and assumptions that I use today when tackling this difficult calculation.

Inaccuracy of seller data

Seller numbers on repair and maintenance are notoriously wrong. They either don’t even report these costs (as they often do the labor themselves) or they do so incorrectly. Let’s take, for example, a repair to the main water line. If you called
a normal plumber to come out and fix it, the bill would be $1,500. But the mom & pop seller used their own back-hoe to dig the hole and then bought some parts for $20 and installed the patch (even though the repair is not done correctly) and, as a result, the repair cost $20 on the owner’s books. Is that accurate? Only if your intention is to keep on fixing leaks that way yourself, and you value your own time at zero.

Too many variables

And then what happens when the patch fails and the water is leaking again two weeks later? Should you count that as a real additional repair cost, or is that still part of the original problem? And then what if the backhoe breaks while your digging it and costs $3,000 to fix? As you can see, there are many variables that make trusting mom & pop’s numbers somewhat risky. And, unlike the water, sewer, electrical, insurance and every other line item cost on the budget, the repair and maintenance number has no source for the information but the seller.

Capital expense vs. repair cost

Another problem is that many sellers get confused on the accounting issue of “capitalizing” vs. “expensing” the cost. A “capitalized” cost is one that is based on adding permanent value (like pouring a new concrete pad for a home to sit on)
and a repair “expense” is one that is just a one-time cost to keep something working. “Capitalized” costs go on your General Ledger as an asset which can be depreciated, while an expense goes on your profit and loss statement. I’ve seen sellers capitalize repair expenses and vice-versa. I’ve even seen sellers buy new cars and put them in as repair costs. These are huge issues when trying to provide accurate estimates.

Using an estimate for “older” properties

So if it’s nearly impossible to track down the real repair costs for most properties, how do you budget going forward? I have found the answer to be using a “plug” number that is reflective of past experiences. The industry “plug” number for repair on older properties is $100 to $175 per lot per year. In a 100-space property, that would equate to $10,000 to $17,500.  Is that 100% accurate? No, it’s a best guess. It may be that your property only has $6,000 in repairs that first year, and then $14,000 in year two, so my general experience has been that it’s pretty darn close. And what is an “older property”? That would be one that has older utility lines, such as galvanized metal water lines and clay-tile sewer line construction.

An estimate for “newer” properties

The industry defines “newer” properties as ones that have modern PVC water and sewer lines. And on these properties most operators use a “plug” number of $50 to $100 per year per lot. The reason that it is substantially lower is that PVC garners only a fraction of the water line leaks and sewer blockages/cave-ins as the communities with the older lines. That being said, you are still going to have many of the same issues as the older communities – people driving over water risers on vacant lots and cooking with lots of grease that blocks the lines and requires roto-rooter. While the repair costs may be lower, they are never going to go completely away regardless of how your property is constructed.

Being patient

Most manufactured home communities we buy have been around for over a half-century and will be here for centuries to come. Repair costs go up and down and you have to see your performance over a long timeline. Just because your older community has only $2,000 in repairs for the first two years, don’t mark your budget down to $2,000 for year three, as that year you might be at $20,000. It’s all in normalizing numbers over the long term, and you may need ten years of operations to truly see what this property’s repair numbers should be. If you use my “plug” numbers, don’t mistake being lucky for having uniquely low repair issues. Give it time.

Conclusion

Calculating proper repair and maintenance expense estimates requires a leap of faith, as you really can’t take past performance, as reported from mom & pop, as accurate.
Consider using a “plug” number based on past experience, and you’ll be miles ahead in formulating an accurate budget

 

Dave Reynolds has been a manufactured home community owner for almost two decades, and currently ranks as part of the 5th largest community owner in the United States, with more than 23,000 lots in 28 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top-selling ones in the industry. He is also the founder of the largest listing site for manufactured home communities, MobileHomeParkStore.com. To learn more about Dave’s views on the manufactured home community industry visit www.MobileHomeUniversity.com. This article originally appeared in the Manufactured Housing Review, subscribe for free here.

Why Cap Rates Can Sometimes Be Misleading By Dave Reynolds

Cap rates are the generally accepted method of comparing different properties and sorting piles of listings into the “make offer” and “don’t bother to make offer” stacks. But cap rates can be misleading in some cases – especially when you are buying properties from non-professional owners who have not been operating theproperty to its full potential.

Going-in cap rates are often based on flawed operating numbers

You would typically expect a seller to maximize net income before placing a property on the market — but that’s not always the case. Often the seller has failed to perform market rent analysis annually, and has set their rent at low levels that are not warranted. They may also have piles of vacant community owned homes as the result of a general lack of marketing effort or willingness to renovate them. And in some cases the property labors under the weight of expenses that could be reduced substantially with no ill effect on the property or its operation.

Many properties offer significant rent increases or utility bill backs in the near term
If target properties are not being operated correctly, then the near-term performance is subject to immediate improvement if you simply fix what’s broken. Typically, that is a combination of raising rents, making residents responsible for their own utility costs, filling vacant community-owned homes, and cutting unnecessary costs. Some of these changes can be staggering in net effect. We purchased a property in Austin that had $250 lot rents in a $500 market. We acquired a property that was burning $5,000 per month in water leaks. These items can boost your cap rate up two to four points
within 90 days of purchase – and take that 5% cap rate to a 8% cap rate as a result.

But be careful when you include factors you don’t control

Raising rents, metering utilities, filling homes and cutting costs are very achievable as there is nothing to hamper you from successful completion. These are completely within
your control, assuming there are no laws or ordinances to preclude them. However, not all methods to increase net income are as simple. Filling lots can be capital intensive and you have to really understand your potential customer base and fine tune to get the right fit, which can be time intensive – so you would not want to make any wild assumptions on the speed in which you can fill vacant spaces and the impact on cap rate. Similarly, filling RV lots in some markets requires getting just the right marketing effort in position, and you can never predict how long it will take, or if it will work at all.

And don’t make assumptions that are not based on scientific fact

If you do the lot rent comps in a market and find that $240 per month is the standard rent, then don’t use the assumption that you can raise your rent to $300 day one. If it will take you two weeks per vacant home to renovate, show it and sell it, then don’t assume you can knock out six in two weeks. Remember that you cannot alter the facts to meet your own goals. Being conservative in your estimates is always prudent and will save you from embarrassment when your performance misses your estimates. Try to be a scientist in a white lab coat when it comes to planning your budgets on how you will turn the property around and do not let emotion play any part.

Case study: a recent Texas acquisition

We recently purchased a property in Texas that is a good illustration of how the seller’s cap rate can often be deceiving. The property is 94% occupied in a metro of nearly
7,000,000 people, where the median home price is a healthy $150,000+ and the three-bedroom apartment rent is nearly $1,300 per month. The market lot rent is $400 per month net of utilities. Despite these facts, the seller’s lot rent is currently $325 per month including all utilities, which yields a going in cap rate of roughly 8%. While that’s not bad by itself, installing sub-meters and making the residents pay for their own utilities (which is the norm in this market) increases the cap rate to around 10% — and that can be accomplished in roughly 120 days. In the following two to three years, the
lot rent can be increased to the market norm of $400 per month, which yields a 12% cap rate. So in two steps, fully within our control and supported by scientific market data, we can increase the cap rate from 8% to 12%, and the deal goes from being good to spectacular.

Conclusion
Sellers mean well, but their estimate of potential net income is often far off the mark when professional property management skills are employed. Always make sure to
review the seller’s assumptions that support their announced cap rate, as there is frequently room to increase net income substantially. It would be a shame to miss out on a great deal  just because the seller’s cap rate appears unappealing, when actually you can push that cap rate way above your normal buying threshold!

Dave Reynolds has been a manufactured home community owner for almost two decades, and currently ranks as part of the 5th largest community owner in the United States, with more than 23,000 lots in 28 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top-selling ones in the industry. He is also the founder of the largest listing site for manufactured home communities, MobileHomeParkStore.com. To learn more about Dave’s views on the manufactured home community industry visit www.MobileHomeUniversity.com. This article originally appeared in the Manufactured Housing Review, subscribe for free here.

 

The Importance of Population Size in Market Selection

One of the most important elements of any manufactured home community is location. On the micro level that includes the surrounding neighborhood and such items as the proximity to schools and shopping. But on a macro scale, one of the most important components is the physical size of the metro market. Selecting the right metro market is an essential step in ensuring that your manufactured home community acquisition is a success.

Understanding how a “metropolitan statistical area” is derived
Webster’s defines a metropolitan area as “a region consisting of a densely populated urban core and its less-populated surrounding territories, sharing industry, infrastructure, and housing”. However, these areas are not subject to speculation.
MSAs are defined by the Office of Management and Budget (OMB) of the U.S. Government and used by the Census Bureau and other federal government agencies for statistical purposes. Since you have no input in what the metro area of a property is, you must make sure that you get the correct information. One of the best sources of the metro area for any zip code is www.bestplaces.net.

Making sense of how a large metro differs from a smaller metro
In my 20+ years of experience in this industry – buying and selling over 300 properties – I have learned that there is relatively little performance difference in a metro area of
100,000 and a metro of 1,000,000+. If you look at the map of any large metro, you will see that it is basically formed from abutting smaller metros. Dallas, for example, hits a metro population of over 7,000,000 by adding in many cities of 100,000 or so, such as Grand Prairie, Arlington, Plano, Allen,etc. Basically, once you exceed 100,000 in metro population, it’s overkill. In a metro of 100,000 or so, you will have a very strong Chamber of Commerce, a very capable City Hall, solid infrastructure with reliable water and sewer, a dependable school district, every big box retailer and franchise, and adiverse blend of employers – everything you need for a successful acquisition.

Housing dynamics and employment sectors are more important than sheer size

I would much prefer a smaller metro with a median home price of $160,000 and an average three-bedroom apartment rent of $1,200 per month to a much larger metro with half those housing stats. Since we are all in the affordable housing business, you have to have high prices to even need affordable housing. High housing prices makes your phone ring off the hook and customer retention rates extremely favorable. Another key driver is the construction of the economy. We  have found that the most important employment sectors in any metro area are 1) education 2) healthcare and 3)
government. Markets that have high levels of these types of employment are what we call “recession-resistant” since you can’t really make staff reductions in these sectors regardless of the direction of the national economy. For example, we have a high level of holdings in Champaign-Urbana, Illinois. Even when the U.S. hit the Great Recession in 2007, this market had low unemployment thanks to the fact that it’s the home of the giant University of Illinois, as well as related healthcare centers. While Champaign-Urbana is not a giant metro – 238,984 in total metro population – I would stack it up against any metro ten times larger in terms of a successful market for manufactured housing.

An example of a small metro being more desirable than a large one

Let’s look at two different metro areas: Durango, Colorado and Jackson, Mississippi. Durango has a metro population of 54,688, and Jackson has a metro of 578,777 – over ten times larger. Durango has a median home price of $341,200, a three-bedroom apartment rent of $1,453 per month, and an unemployment rate of 3.6%. Meanwhile, Jackson has a median home price of $131,700, a three-bedroom apartment rent of $1,029, and an unemployment rate of 5.8%. Despite the fact that Jackson is the State Capital of Mississippi, I would still choose Durango any day over Jackson. The moral is that size isn’t everything when it comes to successful metro areas to buy manufactured home communities in. It’s one piece of the puzzle – an important one for sure – but by no means the sole ingredient to success.

Conclusion

Understanding metro areas is an important part of any manufactured home community buyer’s arsenal of analytics.  It’s very hard to do well unless you can select good metro
areas that can deliver the type of environments in which manufactured home communities flourish.

 

Dave Reynolds has been a manufactured home community owner for almost two decades, and currently ranks as part of the 5th largest community owner in the United States, with more than 23,000 lots in 28 states in the Great Plains and Midwest. His books and courses on community acquisitions and management are the top-selling ones in the industry. He is also the founder of the largest listing site for manufactured home communities, MobileHomeParkStore.com. To learn more about Dave’s views on the manufactured home community industry visit www.MobileHomeUniversity.com. This article originally appeared in the Manufactured Housing Review, subscribe for free here.