Jonathan Tuttle 0:00
Allow the big Wallstreet of the biggest private equity groups and sovereign wealth funds are coming into our space because it’s been so resilient and especially this year too. It’s about a 93% collection rate reported by institutional owners but go back to a question mom and pop mostly so that’s another way to add value a lot of these people they’re not super tech you know they’ve had these parts for you know, 40-50 years they’re worth every parks worth a few million if not more, obviously a lot more they’ve you know, the cash flowing few hundred thousand year they don’t really they’re not really super focused on having you know, QuickBooks and, you know, Facebook ads to like bring in new residents. They’re still you know, this is what got me here I’m sticking to it. So when you take over you could bring in some management efficiencies technology efficiencies.
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J Darrin Gross 1:03
Welcome to Commercial Real Estate Pro networks, CR e pn radio. Thanks for joining us. My name is J. Darrin Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly, we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
Today, my guest is Jonathan Tuttle. Jonathan is the principal at Midwest Park capital, a mobile home park fund. And in just a minute, we’re going to speak with Jonathan about trends and opportunities going forward in 2021 and beyond, in commercial real estate. But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us and we’d love if you would you would do the following. You can subscribe, like and share. And please consider leaving a comment we’d love to hear from our listeners. Also, if you’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find us on youtube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Jonathan, welcome to CRE PN Radio.
Jonathan Tuttle 2:24
Thank you so much for having me. I’m excited to be here.
J Darrin Gross 2:27
I’m looking forward to our talk today. Before we jump into it, if you could take just a minute and share with the listeners a little bit about your background.
Jonathan Tuttle 2:36
Sure, sure. Yeah, it’s a pretty extensive real estate background. I grew up in a real estate family. My dad was a general contractor. So he built around 8283 Custom Homes, single family. And so I was a kid growing up, he had the real estate brokerage offices, yeah, three of those. They developed custom homes. And then also he did flips with investors. So basically, as a little kid, I’d be playing with the staplers in the office or being on the job sites. And even as a, you know, as I got grew up, I’d work on the job sites like clean the dumpsters and fill the dumpsters, you know, like all the trash and being all around real estate from the ground up. You. You pick up some things over time. On Yep.
J Darrin Gross 3:21
So you started off on the job site, kind of osmosis, kind of watching your dad and and just taking it in. That’s That’s great. So now I’ve got you down is the principal of Midwest mobile. What was it? Say mid? I’m sorry, Midwest, Park capital. mobile home park fund. What are you doing there?
Jonathan Tuttle 3:49
Yeah, great questions. Basically, we’re acquiring a portfolio of secondary tertiary market mobile homes parks with a focus obviously with as the title says, Midwest we’re also we also like Texas and Tennessee because they have strong growth, growth drivers and great economies. Basically, the goal is to help keep affordable housing for the everyday Americans while also providing a credit investors a nice stable return. So
J Darrin Gross 4:17
Got it. So do me a favor and compare the mobile home parks to some of the other asset classes. That you know, I know, a lot of times it seems like we talked with people about, quote, multifamily, the traditional sticks. You know, one one building kind of thing. Can you kind of break it down for us kind of compare and contrast? How the two are different from an investor standpoint?
Jonathan Tuttle 4:48
Sure. Yeah, that’s great question, because we our closest similarity is definitely multifamily. What’s gonna be like C class apartments most likely. The challenges it’s the same premise, the whole Ideally, when you’re buying a mobile home park, there is a little complications, one of the things that differentiates us is we have a lot of like older laws like grandfather laws, because it’s called legally not legal but non conforming, for zoning. So a lot of these were built in the 50s 60s and 70s. And the laws have changed, they’ve kind of become, you know, some of them have somw stigma. And so suddenly, cities don’t, or towns don’t want parks in their, you know, in their communities. So that’s the one biggest differentiator because harbor buildings, you could pretty much as long as they have the zoning, it’s pretty easy to get approval, comparatively, there’s only about 10, or about maybe 10, new depart developments in the last 20 years. And then there’s some been a few more, they’re kind of under the table, but they’re usually RV conversion, so has an RV component or has a self storage, it has some other but a strictly mobile home park, it’s almost impossible to get the zoning and it’s also not really economically viable. Unlike you know, what the family where you’d actually develop it, you bring in the market, and you fill out the units. And you know, it fills up right away mobile home parks is kind of like building a subdivision if you had to do it from the ground up, because you have to bring in all these, you know, manufactured housing, and it’s not cheap, and that the new the average price of a new mobile home is about $80,000. So you can just imagine if you have two or 300, lots, you know, it’s multifamily. If you’re doing ground up development, it’s a lot better play. But our true value is just buying a park that’s already, which is almost all of them is buying a park that’s already cash flowing. And that’s where you could you know, you’d already know the cash flow. And actually right now, to kind of give you some context, is the first time ever that Fannie Freddie, so Fannie, Freddie, obviously, there’s financing the government backs in the cmbs and traditional banks, but for the first time ever, Fannie and Freddie, they have to allocate about 30 or 35%. Towards affordable housing. So who’s available? 10 years, it was almost impossible to get. Now
J Darrin Gross 7:06
you can you back up just one second, you were the audio broke down a little bit, I just wanna make sure we get this. You were talking about Fannie and Freddie, and you mentioned 30%, but I didn’t catch the balance of that
Jonathan Tuttle 7:18
about 30% is allocated towards affordable housing. So which is a new thing that passed with a, I think was the cares act or when they act in 2017. I don’t remember the exact name. But it’s the first time in history that Fannie and Freddie’s financing terms are better with mobile home parks than they are with multifamily. So we’re seeing high twos, low threes, nonrecourse. And it’s about, you know, I think we’re just a little bit slightly better than multifamily right now. So again, that type of financing so we have those nice spreads. And that’s where you get the cash and cash. You know, if you have a six and half – seven cap, which is kind of what you’re seeing for parks nowadays, depends obviously your market and the quality of the asset, you get that nice teen cash and cash if not a little bit higher. So we’re IRR eventually, too, as well. So that’s another aspect of you know, the zoning, it’s almost impossible to evolve that. And just as you know, a lot of different laws with the city, the city kind of is your biggest challenge, usually because they have, you know, their own preferences of what they want for, you know, type of commercial properties. They want their neighborhood because, you know, mobile home parks don’t necessarily have like the Greatest Name. You know, people kind of have the stigma behind it. But if you’ve driven through some of them. There’s a lot of really nice ones. I mean, most of them if it’s maintained, right, it’s a nice asset.
J Darrin Gross 8:44
Got it. So your strategy is to to go into these markets. You mentioned secondary and tertiary markets. Midwest. Is it a value add play? I mean, I typically I think of, you know, from a value add standpoint, it seems like there’s something you’re updating certain aspects, you know, and, you know, making it a more desirable place to where tenants are willing to pay more thereby increasing the the cash or the income. Can you describe what a value or what is the the strategy is basically just take it over and then refinance or can you break it down a little bit? Sure, sure.
Jonathan Tuttle 9:27
The biggest probably, there’s a couple of key components to really bringing the value of the park and bringing the noi up. The first major is if the water and sewer are of the tenant, if it’s built back to the part. You want to bill it back to if it’s allowed. You bill it back to the residents. So right there, that’s your biggest expense. One of the first ways you could bring it in, obviously doing little a cap x, like the signage, you know, amenities You know the you know the roads, trees depending on where you’re at cutting down the tree is to make sure there’s not a trees falling down on the houses because a good thing would be also like make the park look like you know beautified three obviously raising the rents ethically raising the rents taxes always go up most likely unless there’s some some because they haven’t mostly the assessors Haven’t you know, they don’t have any idea what this thing’s really worth. So yeah, being able to you know, raise the rents you know, ethically and then just a bit better management of the asset so faster like if there’s any vacancies, making sure you get them on you know, market them correctly online and having your manager on top making sure you bring in the right tenants. The average tenant says 14 years this is another competitive you know, on average because typically what happens mobile home mobile home owners in the country they typically own their actual unit so yeah, that tenant like two or three especially like apartment buildings are hopping to the next apartment building or the newer apartment building. So because it’s there’s nothing cheaper than mobile homes. So and then the last
up for the value add obviously at the last moment info loner and Val can
J Darrin Gross 11:30
Hold on, can you hear me? The the audio is breaking down. You said, “the last thing”, what was the last thing?
Jonathan Tuttle 11:36
J Darrin Gross 11:38
Jonathan Tuttle 11:38
Yeah. So bringing in, sorry about my internet Comcast, give em a little word of mouth.
J Darrin Gross 11:45
No, I just wanna make sure it sounded like is important. I want to make sure we got
Jonathan Tuttle 11:48
Yeah, yeah. So the infill? Yeah, that’s infill. Easiest way to bring it wasn’t easy, but bringing it in empty lots or lots bringing in new units. Because every unit you bring in depends on the valuation the park and obviously the area. It’s 30, or 30 to 50,000 equity to the asset plus the cash flow. So right now there’s a short like everyone’s trying to buy the older units depending on you know, the age of the park and what the homes are, but because you get the homes for so much cheaper. So if you’re buying a new home, it’s $80,000. But if you get for $20,000 houses, obviously that’s a really value add. So,
J Darrin Gross 12:27
Got it in these markets. Do you find that most of the parks are managed professionally or they managed by mom and pops?
Jonathan Tuttle 12:37
Mostly? Yeah, that’s a great question. The industry is about 92 to 93 mom owned, mom and pop and Blackstone, which is the biggest private equity. Paolo, a lot of the big Wall Street are the biggest private equity groups and sovereign wealth funds are coming into our space because it’s been so resilient. And especially this year, too. It’s about a 93% collection rate reported by institutional owners. But going back to a question mom and pop mostly so that’s another way to add value a lot of these people they’re not super tech, you know, they’ve had these parks for, you know, 40-50 years they’re worth every parks worth a few million if not more, obviously a lot more. They’ve you know, the cash flowing few hundred thousand year, they don’t really they’re not really super focused on having you know, QuickBooks and, you know, Facebook ads to like, bring in new residents are still, you know, this is what got me here, I’m sticking to it. So when you take over, you could bring in some management efficiencies, technology efficiencies, like rent rent managers, like an online billing system, which is really efficient and keeping track because obviously, if you’re not keeping track, some payments could slip through. And even though things are getting paid mom and pops, you know, they’re they’ve got their money they don’t really care about you come in as a good more seasoned investor, that’s one of the things you definitely improve upon is the technology aspect.
J Darrin Gross 13:54
guys got it. So when you purchase the park I’m assuming most of the the actual units are owned by the resident’s. Correct?
Jonathan Tuttle 14:08
The ones we go for? Yeah, it’s called like a land lease community. But there’s about 12 million mobile homes in the mix. But the parks we acquire are definitely we want we want to have that offer hands especially to if you’re doing for institutional going back to Fannie and Freddie financing. They will only allow up to like 20 to 25 units to be owned by the park. And that’s an actually that’s another way to acquire Park. Getting those off your books is another great way to add you know the value add. So those are some techniques you could use.
J Darrin Gross 14:40
Got it. And you mentioned that the the communities, the local cities, and they’re not really gung ho on these things. I can see that being an issue and like a primary or a larger city is you find it all the way down and tertiary markets as well?
Jonathan Tuttle 14:58
Yeah, those actually And that’s part of the due diligence, we’re taking over property talking to when we looking at property, we boots on the ground walk in, like we’re our Grandma, our mom’s moving in. So we get a voice for the residents, what houses community like, not just what the owner says, but actually what the residents say, cuz I’ll actually give you a paint a better picture, go to the local police, local government see what their, their viewpoint is. But something if you’re in the tertiary markets we’re looking at, we’re also looking at bigger parks like 75 to 250 units. But if you have like a 30 unit Park and a small town is something small towns think they own, you know, it’s it’s like that saying, we’re here like, like, if you’re in a major city, and you’re driving 10 miles and over their name, you’ll look at you. But if you drive in a small town that has like, 5000 people, and you’re going five miles over, it’s like, that’s their big highlight of the day, you know, the big crime of the day, it’s kind of the same premise with the park industry, the small, really small town a 30 unit park, and it’s somebody on their high horse, and they kind of feel powerful. So that’s kind of that’s kind of what we know, in our industry here. So get rid of that son, it’s crazy.
J Darrin Gross 16:07
So on the the acquisition and kind of the due diligence, you mentioned, you kind of you you know, you do some boots on the ground, you talk with the residents talk with the community. Describe what what are some of the things you look for in a in the physical due diligence, since you’re not really buying the structures, right, what what else? Kind of give us a rundown of what what are what are some critical things you could look for?
Jonathan Tuttle 16:39
Yeah, yeah, I’d still recommend going into the units and trying to see especially if there’s any park on homes, because it might look good on the outside, but you come in the inside and it looks like somebody ransacked it. I mean, it doesn’t cost too much to replace, like an actual, the fixed inside of units like four to 5000. Like top to bottom like that’s, that’s like top notch. But that could be you know, four or 5000 times 20 units, obviously, it’s an extra hundred K. But yeah, definitely like the roads, the potholes and also going back to some some towns or townships, while a lot actually. Like for example, in the Midwest, if you’re by like a you know, if it’s snowing, for example, some communities will actually plow the streets for free and maintain the roads for you for free, or the lighting. It’s pretty cool. Let’s actually, to give you an example our operating expenses are about typically for sure. You mentioned before with multi family, typical operating expenses around 50-55, sometimes 60, the average mobile home park operating expenses, because like you said alluded to, it’s there’s not a lot of structural components mostly land. So you’re about 35-40. I think 42 is for institutional owners. So you have that much lower operating expenses, but the things you want to look for the trees, we can sure if these big old trees I have a huge branch falls down that’s gonna take out a home, obviously, the blacktop, obviously cement is way better, but 95% of time is to be blacktop. So doing just to make sure that the blacktop, you know, how many potholes. The community center. If you get in the old homes that’s Park owned, definitely check those out. Talk to the residents talk to local police talk to the city kind of get a vibe what’s how the park and community is run. So making sure you’re not buying like a like, you know, a meth lab park or whatever. But those are those kind of things you would notice if you drive through and you’re actually boots on the ground. But that’s a lot of stigma. Like the ones a majority, the parks are just everyday Americans looking for affordable housing. And when you live in, for example, in like Illinois, if you lived across the streets, I’m a glare if you lived across the street, and because we have really high real estate taxes and the say it’s $150,000 house in the same town, and you live in a $300 lot rent mobile home park, you’re only paying 10 bucks a month for real estate taxes and across the street, you’re paying $4,000 so at the end of the day, get the same schools which taxes pay for fire, police schooling, everything’s the same, but they’re saving three, three to $500 per year. And it’s kind of like equity, you know, like how people like oh, I’m gonna buy my house and over time and build up equity as I paint my note for 30 years. It’s kind of the same thing with home parks, but they’re doing it through real estate taxes. And that’s another reason why the cities don’t like it because they don’t get they lose money and the tax bases. The park owner pays the majority of it obviously, but the tenant they it’s 10-20 bucks in a lot of these states. You know, obviously it’s, you know, California Oregon, West Coast would be different than Midwest but every it’s going to be significantly cheaper than the surrounding houses. So
J Darrin Gross 19:43
So in property taxes paid by the the park owner
Jonathan Tuttle 19:49
Park taxes, an individual unit has to pay their real estate taxes.
J Darrin Gross 19:53
I was going to ask it based on that. I always thought the mobile home itself given it that it has As a VIN number like, I thought they were like registered with the DMV almost as opposed to do they? Do they also, is there a property tax? Like a residence as well?
Jonathan Tuttle 20:11
Yeah. And it’s like, yeah, 10 15 20 bucks a month, and they have to have insurance. But yeah, you’re correct. It’s just like a, yeah, when you want your titles and your VIN’s, it’s just like, when you’re when you’re fixing them up, it’s kinda like flipping cars.
J Darrin Gross 20:24
Jonathan Tuttle 20:26
Which makes a it’s like, there’s not a lot of the beauty about it, too, you’re going to have a lot of complication. So even if you’re going to flip a unit or remodel a unit, you’re not tearing down walls and putting in custom kitchens. Right? I mean, can but it’s like, it’s very minimalistic stuff you could do. So it’s not very complicated. There’s not going to be any challenges in that regard, which is a really nice thing about mobile homes. So
J Darrin Gross 20:49
got it. So how many parks do you have in your fund?
Jonathan Tuttle 20:54
Well, we have to individually with a family we had, we had a third one, we just launched the fund about two months ago, okay, we’re going to be acquiring we’re doing a 10 million raise this fund run. And then next year when do 20 25 million raise but we’re looking to add about 2000 units aproximately, because the pricing is actually getting another byproduct of this whole COVID situation is like alluded to before the 93% occupancy rate currently being reported. Everyone’s trying to get into our asset class, because for the last 50 years, we’ve been the most stable real estate based on being data. And then Wall Street Journal had an article this year, that they’ll since the last downturn, there hasn’t been any other real estate as the class has been performing as well as ours. I think Self Storage is very close second, but we’ve been kind of running away with the, just the stability during downturns. There’s 60 million Americans in affordable housing. So we’re going to try to add about 2000 I think that’s kind of a number but the pricing is basically getting the cap rates are going down because it used to be you can see articles like all mobile home parks have such great cap rates. They do but it’s not the five years ago pricing because everyone’s trying to get into space where competition prices, you know, prices go up the sellers like well, I get this for it, I’m gonna just sell it for way more the cap rate 10 cap was big, like 10 years ago, then eight cap was like five years ago now we’re seeing six six and a half for like Midwest. But like if you’re in the coastal stuff like fours, just like multifamily. So the but the other play about it is too it’s it’s its to stability, so you don’t have to worry about you at least rather have a four cap that pays you then a four cap that’s not getting paid, you know, especially if you think in retail, you know, restaurants can open so many states, they can’t pay you hospitality hotels can open so although byproduct of that least we get the four cap and still get paid. And another benefit to I forgot to mention is the taxation. multifamily has a 27.5 year tax, depreciation schedule, which is really, really good. Traditional commercial estates 39. mobile home parks are 15. So the taxes are better for your K ones, because you depreciate the about 75% 70 to 75% of the the purchase. So land improvements, basically, the land improvements can be deducted 15 years.
J Darrin Gross 23:16
So was it basically your blacktop and and signs and you’re community center?
Jonathan Tuttle 23:21
Yeah, exactly. And then you have like you do cost segregation, but they and everything could have some things like 20 years or something and then you personal property is like five and you have your you got your accountant CPA come in, basically. And it’s it’s pretty, it’s pretty fascinating that we have that ability hopefully doesn’t change with whatever happens with the election. So we’ll see. Right? hearing from some investor owners and investors.
J Darrin Gross 23:47
Right. I’m just kind of curious to do. I mean, the things you can see are also like the underground, is that your stuff to them?
Jonathan Tuttle 23:55
Yeah, that’s a key. Yeah, that’s implemented diligence. Yep. I forgot to mention that for that’s when you’re really you’re doing your due diligence for 30 days. That’s the key is the underwater, the water sewer, the lines making sure that’s good. Because sometimes then also making sure I mean, due diligence as a whole, it’s a whole stack list of things that could go on, really in depth zoning, obviously setbacks, because if what’s grandfathered in, because if sometimes these part would go on like this small towns, you acquire a park and all of a sudden they say on the setbacks now is different than it was when you it was really developed. So now, you know, you can’t add any more units because, you know, we need 15 feet, and you only have 10 feet, because it’s like the grandfather rules. So they don’t like to bring in new units or because the older units, let’s say from like the 60s. Now we have double wides and we have a lot of bigger units that’s not going to fit so you have to have a smaller unit in there, which obviously less rent so yeah, but also the main Yeah, underwater, the water, all that electrical all the underground is definitely key to making sure there’s nothing no No hidden surprises, because if you have to replace, you know, all that that can be hundreds of thousand dollars or you know, if it’s water treatment plant things of that nature, usually, I mean, the old school way everyone wants city sewer city wire, because obviously, they maintain it and has the highest standards, but there’s still avenues for some of the other, you know, the lagoons water treatments, depending on a case by case and depending on what it costs, you know, the local city. So it’s not all you know, they will book the books would say, hey, you have to be city water to see store. Obviously, that’s usually best, but there’s also some opportunities, sometimes other water sources on a case by case scenario.
J Darrin Gross 25:40
Got it. So give me an idea on on what space rent runs kind of the What are you seeing what’s what’s, uh, I mean, I’m sure it varies from Market to Market, but just kind of curious if not, if you can even compare to like what, uh, you know, multifamily, you know, space rent, or not a space but a unit rent, or, and I just kind of curious how you assess.
Jonathan Tuttle 26:08
No, that’s no you’re a hundred percent on the money with that question. That’s one of the best ways to evaluate because do you, typically a mobile home is about one third of a single family home or half the same an apartment building. So I would say the house is 1500. And the apartment is $1,000, then you want to be like $500, they need to go up to that it still makes sense. Market a market, Midwest and they did a survey for economics professors as I bought two years ago from Duke. And it said if mobile home parks, a lot of these, like I said, alluded to in the beginning is a lot of these parks that are 60s and 70s developed. And some of these people are second third generation, they’ve got millions of dollars of equity. And you know, they’re making 300 – 400,000 revenue a year just from cash flow. So they sometimes they don’t raise their rents, because they already have as much money that they need. And especially if you live in like a small town in America, and you have like $400,000 coming in a year, you’re doing pretty good. So a lot of times they’re saying that for the going back to the Duke professor, he was saying their lot rents than say the early 60s are 50 50 bucks approximate across America, that would equate to about $500 today, and today’s you know, with inflation, but we’re seeing if you don’t include you’re in Seattle, correct, like washing problem for that same same thing. Seattle, California, the whole coast up there is that it’s crazy compared to what we see in the Midwest. So Midwest, we’re seeing a lot rents depends on market three to 400. If it’s closer to a bigger city, five to 600. Same with like Texas and Tennessee, but California, Oregon, and some of those states are seeing high like seven 800. In California, obviously you have the park in Malibu when Matthew McConaughey lived and Pamela Anderson, that thing was like $2,000 a month. But you’re right on the beach in Malibu, and the houses across the street are like $30 million. So yeah, see, it’s all across the board. But on average across the country about 350 to 425. It’s kind of like the number you proximately. See. So it’s still below what it should be if you’re doing it based on inflation, according to that Duke study.
J Darrin Gross 28:20
But even even with those numbers, you’re able to I mean, they’re trading it like said, anywhere from a six I mean a six cap, is that kind of acheivable based on? Yeah. So I mean, it’s easy to get caught up in the big numbers opposed to the rate of return, which is really at the end of the day. That’s, you know, what, you’re what you’re looking at there. You mentioned financing. You know, typically you think of like, you know, I guess a you know, a larger Freddie or Fannie property you can get by more often I think we’d like 20% down. How is that? In your experience with with a mobile home parks? What’s kind of the Down Down Payment requirement?
Jonathan Tuttle 29:05
Yeah, it’s actually for us. It’s about we’re seeing about 30 35% right now. And then reserves have gone up from about six to 12 months, and sometimes up to 18 months depends on the asset. They hold it for about a year. So obviously, what the the basis, the 10 year Treasury were like historic lows, it’s just it’s, it’s it’s a no brainer to get these things financing right now, because we’re about 100 basis points less than last year, this time last year, and they were kind of expected to hold for this next two years, kind of to provide stability for investors and they’re kind of you know, mentioned that, but about 30 35% down cmbs it’s pretty similar. And then like I said, two and a half or 2.753 and a quarter rates non recourse great. 10 year 10 to 12 year terms, mostly 10. So your most common. Local banks is your biggest curveball because if They’ve had a relationship with the other Park owner, like they were collecting the rents and they saw the revenue, they might take it over, because they just know they’re familiar with the asset class. You could run into issues like in a small town or even like a secondary market, like oh, yeah, we love mobile home parks. Yeah, we’ve heard so much good things about them. And then they go on the, you know, they go once you’re about to close, they’re like, Oh, we went through our board. We’re not comfortable with this.
J Darrin Gross 30:27
Oh, really? Have you had that happen?
Jonathan Tuttle 30:33
sloshed Rania their backs down and like, it kills deals? Not us. But I knew a lot. I’m not alone. Yeah, no, not for us. We haven’t had that happen for us. But I know people have had that issue with the banks. Definitely just backing out at the last moment. So and the rates are higher, they’re about five, five and a quarter, five year terms. So they’re not, they’re not as attractive. And usually, if it comes to that, and if you have relationship with the seller, see if they do a seller carry for a few years, then go back, improve the park and make it appealing to Fannie Freddie. As long as it has the visual appeal and you hit their you know, their checkmarks thing go back to Fannie Freddie like here. I know you guys have a 35% whatever quota for affordable housing, I got this great asset personally managed by me. Can you do? You know? Can you do a loan on this?
J Darrin Gross 31:20
Got it. You were talking about the expense ratios? 35 to 42% kind of a range? That includes third party management are you guys manage it yourself? Or how do you take care of that?
Jonathan Tuttle 31:35
Yeah, that’s including that’s why it could be in number 42 is like using what third party management? Yeah, but we have the biggest property manager or the ones we own personally and we do it ourselves. They’re they’re smaller parks, so it doesn’t need as much but and we’ve we found still is when you’re buying parks, the bigger is easier. It’s more operational efficiencies and 75 and above, that’s why we’re focusing on that 75 or 250. For our fund. We have a third party manager which is the biggest third party management in the country, they have 32,000 lads they manage including Apollo groups and they’ve 35 years experience so we have that plus we train the management that in place in 80% will stay but we’ll have them we have certain criteria what they have to do and we’re going to bring in technology efficiencies over each other management call rail, everything to make sure we’re monitoring them like trust but verify Ronald Reagan, but still provide best practices but we’re on top of everything.
J Darrin Gross 32:31
Got it. okay. So describe for us what a an ideal just you know, I’m a fat pitch looks like for you guys something that would be just something you would love to have
Jonathan Tuttle 32:45
pretty much everything right now for Parks. It’s a four or five year run, in our opinion to acquire. It’s, it’s because you can’t remember, you can’t develop new ones, it’s almost impossible or it’s not economically feasible for four or five years before you can start breaking even. So right now and that’s why you’re seeing all these, you know, other institutional players coming in they’re building portfolios, and people are just trying to build portfolios to funds or, you know, high net worth families and these mom pops are getting these huge paydays. But if you build a portfolio, we want to build a big portfolio and then sell it later. Right for in terms of acquisition, like Tennessee, Texas, Midwest, six and a half cap and above, depending on like, I mean, there’s not just cap rating, obviously, there’s other factors like what’s the property manager, like the shape of the property and the underlying issues, but just to clean Park, senior parks love SR products, they do extremely well. Obviously, they don’t, you know, they stay forever, then they’re great tenants, they’re cleaning their yards and maintaining it and like we have one of our parks is senior Park, you have a former military guys kind of like the police. You know, the sergeant of the parks have any suspicious vehicle drives by he’s out looking at it. So drives away any issues like senior parks are phenomenal. Just like pride of ownership because they come in they it’s their their pride of ownership live in this park. So those are great, fantastic. And then anything we’re the expenses are a little bit in the high 30s low. Anything below 40 is great. So because it’s comparatively if you compare it to multifamily or other asset classes in the 30s. I mean, your your expense ratios is so much cheaper. So
J Darrin Gross 34:26
No that’s awesome. I appreciate sharing them. Hey, Jonathan by day, I’m an insurance broker. And if we could, I’d like to shift gears here for a second. One of the things we do with our clients is to do some risk management, we kind of try and assess the risk and come up with a strategy. And there’s a couple different strategies we typically look to the first as we look and see can we avoid the risk. If we can’t avoid it, then we look to see other ways we can minimize the risk and when Those aren’t necessarily options. And we look to see if we can transfer the risk. And that’s what an insurance policy is. It’s a risk transfer vehicle. And I like to ask my guests, if they can look at their own situation, it could be your, your way you invest your clients, the market, interest rates, the economy, however you want to identify or, you know, focus on what you consider to be the biggest risk. But I, you know, I’m just trying to get a range of risk. And for clarity, I’m not necessarily looking for an insurance related answer. But if you’re willing, I’d like to ask you, Jonathan Tuttle, what is the biggest risk?
Jonathan Tuttle 35:46
Sure, sure. One thing we try to do as mitigate risk, and that’s one of the reasons we call ourself as the safest risk adjusted return in real estate. I mean, we’ve, it’s historically been really low. But the biggest challenges are like, could be the city if it’s a small city and not allowing you when you’re purchasing making sure that they don’t allow to not allow you to basically transfer ownership of it, or you can’t bring in new units, which I mentioned with the setbacks. We’re not we’re not doing coastal. So we have to worry about hurricanes, and flooding and things of that nature and making sure you’re not in a flood zone. Because even though you’re you know, 30 to 36 inches off the ground, you still want to be in a like next the Mississippi River and it goes over the house. In California, obviously, we’re trying to be away from California with the fire. So we we’d like to Midwest we don’t have as many challenges. It’s usually more snow related stuff. And that’s, you know, it could be accidents, you know, cars driving through. But, and our industry specifically has a lot of insurances really tight. Like you can’t even have certain dog breeds, because or pools or trampolines they’re really stringent and like what could be allowed in a park before they’ll even do insurance on the park asset because like a dog bite or, you know, kid falling off a trampoline or break his neck, it’s, you know, the park owner has multimillion dollar asset, they’ll get money off of that, obviously. The other challenge, I guess would be to, it could be rent control. We’re fortunate enough to be in states that really don’t have rent control, and we identify that but long term and even like multifamily or any real estate, investing, rent control, is going to be a big issue because people have to look at two ways then when the investor comes in. Taxes always go up, maintaining things, just think of anything you buy anything after you have it 10 20 30 years, your car, your house, your each fact goes out your roofing goes like breaks down your car, engine, whatever your breaks, there’s always routine maintenance. And if you can rent raise your rent in accordance to a) inflation, b) to also maintain the capital expenses that need to be put back into the asset over time it’s going to the perks are in real estate, it’s going to quality is going to go down the park owner or the real estate owners be like, I can’t even make a profit on this. If I can maintain rents to pave a) to keep up the inflation and b) to maintain this asset. There’s going to become slumlord. So that’s kind of like an issue. It’s kind of how I find that happy medium. The rent control could be a big issue where I know because you guys did something but it was like eight or 10%. Right? It was like percentage, and then it was a percentage above inflation. They factored it in I forgot exactly what it was or eight or 9% I think Oregon, but which is which is fair for both sides. But because that’s still the average mobile home park. rent increases like 4%. So it’s basically a little bit above inflation. So it’s not like the big issue is some people here the private equity comes in, and they buy some mom pop, they’ve had it for 30 years. And like I said they haven’t you know, care, because they have millions of dollars of bank, they have three hundred lot rent, and private equity, Wall Street comes in like, well, let’s charge 600 because we can. So then that goes around and then the local governments like all you raise the rent double This is not fair, which Yeah, I mean, we try to do you know, 25 50, whatever is reasonable, and also put in improvements. They come in and like double it, it gives a bad name. And then then of course they have these huge returns their investors. That’s why you if you Google, some of the articles like manufacturing, mobile home parks have had crazy returns because people have had the assets for 30 years. It’s supply and demand, you can’t develop them. And then you have you control the price of like what you want to charge for rent because there’s nothing cheaper. So that’s fine, that happy balance. And I think that goes back to the whole risk is like as long as governments don’t come down on rent, because rent is the biggest driver of the noi. So that’s the biggest risk for shurearing his future regulation.
J Darrin Gross 39:52
No, I appreciate you sharing that the that whole rent control thing here in Oregon. I know it was if you look at historically It was basically one year, where the rent actually increased beyond, you know, on a percentage basis, whatever this I forget what the percent was. But historically, it’s always been like three to 4%, ya know, what people have gotten. And basically it was it was a function of you had a lot of people losing their homes, and the demand for rent rental properties far exceeded the and so what ended up happening was, you know, you just had this influx, kind of a market thing, which was, so it’s kind of funny how they, they blame the landlord on that, but but you’re right, though, I mean, with with the the fear of, you know, some of these big wall street funds coming in and in buying it and not being sensitive to how you can do that. You could throttle it up so fast that it draws attention, and kind of sours the whole thing. I think that’s, that’s a, that’s a real risk. So I appreciate her now. Hey, Jonathan, where can listeners go? If they would like to learn more connect with you?
Jonathan Tuttle 41:05
Sure. Sure. Yeah. So the fun is called MidwestParkcapital.com, or if you’re looking to see the ppm, which is like the private placement, which actually breaks down the company in depth, go to Midwest Park, capital, fund.com, everything how sounds are 833MHPfund.com somehow got that. So that’s kind of for somebody wants to find more about mobile home parks. The good thing about the fund aspect is you get a taste of the industry get the tax benefits. We do all the heavy lifting for you, you get quarterly payments distributions. And you get a nice stable, you know, sleep a night return without all the risk. And it’s a way for people to get in without putting down to even buy your own small park and have to put in five times seven times just the down payment. And you have to do diligence and you have to run it, we do all the work for you. So MidwestParkcapital.com, or my Facebook is a Jonathan Tuttle official. So those are the two best ways.
J Darrin Gross 42:05
Got it. Well, those will be in the show notes. And, Jonathan, I want to say thanks for taking the time to talk today. I’ve enjoyed it and learned a lot, and I look forward to doing it again soon.
Jonathan Tuttle 42:18
Sounds great. Appreciate it. Thank you.
J Darrin Gross 42:20
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