Our call picked up again the following Friday where he proceeded to ask me more general questions about Syndications being a suitable investment and what the expectations of such an investment would be.
These types of questions I thought were a great way to decide if it made sense for his situation. Not everyone may be a good fit for a Syndication, although I may think so, I can be a bit biased as a Mobile Home Park Operator. So I am always careful to put the ball in other peoples court and allow them to decide if it makes sense.
Now eventually Ken did get to the money aspect. I knew he would and I am sure most people reading this or asking a GP about a Syndication all want to know the Returns they can expect. As I hope you gather, the returns are merely a result of the correct decision making of the GP. From acquisition to disposition, the Operator has a lot of things to balance. So you must look at those factors when deciding if the Investment will perform as expected.
Me: Hey Ken, now a good time to finish up our convo?
Kenneth: Yeah its perfect actually, just driving home from work, nothing but time to kill.
Me: Okay lets do it
Kenneth: Well, Brandin, you know my situation. Straight up, do you think a mobile home park syndication will be good for me?
Me: Nice, Ken. Honestly, it’s your call. Do I think you could benefit from them Yes of course. Do I think you’re able to do them, Yes. However, what I can say is you should ask yourself some questions to see if they align with you. Although I think syndications are a great way for passive investors to generate cash flow and wealth, it really comes down to your unique situation. So, how about asking these questions:
For Example, What are your investment goals?
Kenneth: What do you mean?
Me: Okay, what are your short-term and long-term financial goals? You want to take into consideration that your time horizon meets with the syndication’s hold period.
Are you comfortable with the risk?
That I feel is pretty straightforward. If so, then go for it. If not, do not do anything that will have you up late at night worrying about your future.
Do you understand the investment?
Never invest in something you don’t understand. You don’t need to be an expert, but don’t invest in something that is Chinese to you. Keep it simple. It could be the best-sounding idea, but if you can’t wrap your head around it easily, keep moving.
Kenneth: This makes sense, but then wouldn’t that count me out? I don’t know anything about mobile home parks.
Me: Well, maybe not specifically, but do you understand the need for affordable housing? Have you ever rented a home to someone, or heck, have you ever rented a home yourself when you were younger? You understand the need for housing and have firsthand knowledge of how it’s done. It’s like this: you buy Apple stock not because you are a computer software engineer and understand the code inside the phone or even the details of the hardware and how it’s built. You buy Apple stock because one day you needed a device and bought an Apple product. You saw its benefits, loved the way it worked, and how easy it made your life. You even saw how it did the same for others; the other products around didn’t have the same features. So you thought this could be huge; more and more people will need something like this. So you invested. The same holds true for this; you may not know the inner workings of a mobile home park and the home itself, but you do see the need for affordable housing. It’s in the papers, on the news, it’s an issue we encounter every day. You know that housing is a basic essential need.
Kenneth: Man, that’s a whole different way to look at it. I guess you are right, this is something I know about. I mean, my wife’s sister was just telling us how hard it is to find anything to rent under $1000, saying even a two bedroom was over $1500. Do Mobile Home Parks charge less than that? I assume they would if you keep saying they are affordable…
Me: Exactly, and yes, although I cant speak for every Mobile Home Park, a lot of ours have rents well below $1000 for even a 3bedroom 2 bathrooms, and those are in some nice locations too.
Can you commit long-term?
Remember these things can be 5-7 years or even longer, so if you need to spend your money tomorrow, this won’t be a good fit.
Kenneth: I know, that one is something I got to really think about. Not that I am opposed to it. Just never did anything like that, where I didn’t control when I could get my money back.
Me: Exactly. It’s not like a rental house you own, and you need money you can just sell it. Or even a stock. You are at the mercy of the syndication and the rules and regulations set forth in the documents when you bought it.
What is the sponsor’s track record?
Notice how we keep coming back to this over and over again. It is so important; experience is key. Remember what I said, their resiliency is the biggest thing I would consider. Things go wrong every day; their ability to handle problems is the greatest asset you can find in an operator.
Kenneth: How can I vet them?
Me: Well, talk to other investors they have. You can even go drive their current investment holdings, or at least ask for details on them. You need to get some background on them before you can be comfortable moving forward.
What are the fees and costs?
Make sure they are not hiding any fees. Fees are okay, they are running a business. However, make sure they are transparent. Also make sure the returns they are telling you to expect are Net of Fees and Costs.
Kenneth: What kind of fees?
Me: Acquisition fees for when the property is purchased. Disposition fees for when they sell it, kind of like a commission on the sale. Asset Management fee not to be confused with Property management of the real estate, but rather a fee to manage the capital they manage. Refinance Fees for when they get a loan to refinance the property and return capital through loan proceeds. Those are the big ones. I am not a fan of Disposition Fees or Refinance Fees. However, I would look at your Net Return on your investment, post fees, and its reasonableness to determine if its inline with what you want. If not, then those fees could be in the way of you getting what is more inline with your expectations.
What are the expected returns?
Really, are these expectations realistic and comparable to something else you can invest in? What they are advertising can tell you a lot about a GP. Just make sure it seems reasonable and ask them for details on how they got to those assumptions. See what and how they respond.
How is communication handled?
Some investors like to be kept in the know and others just want the statement at the end of the year. With a syndication, you will probably be somewhere in the middle, getting quarterly letters and statements. Is that something that you want? Also, you need to know how they communicate. Will you get phone calls, emails, or just something in the mail?
Kenneth: Well, does it matter? I mean, as long as it’s performing?
Me: You might think that, but I have investors that really want a phone call each quarter; they want to talk to me and ask me questions. They want a personal touch. But I have others that just want an email with all the details, financial reports, summary reports, and their distribution. Everyone is different. I think people like syndications because of how much closer they are to the guy operating the investment versus, say, a stock of a Fortune 500 company. You get the same if not better returns, but you cannot just call the CEO of General Electric up on the phone and have him realistically answer the call? Some guys love that.
What are the tax implications?
You will want to really talk to your CPA. Making one investment may not be a huge needle mover, but if this is something you may want to really get into as part of your retirement and wealth accumulation plan, you will want to work with a CPA to see how it plays in your tax strategy and planning. We discussed the different stuff related to this before, but just make sure it does benefit you to invest in these.
What is the exit strategy?
Not every investment is created equal and not every real estate syndication is created equal.
Kenneth: What do you mean by that? I mean, I get that they are all different, but what does that have to do with selling the property?
Me: Well, that’s just it. Are they selling the property to exit your capital? What do they mean by exit? Remember we discussed refinancing and returning your capital? So when we say the investment is 5-7 years, many mean they will refinance in 5-7 years, return your initial capital, but you still remain invested and get cash flow distributions. Others simply mean they are selling in 5-7 years. That’s it, investment over. Which one makes a better strategy for you? The payouts can be drastically different for either strategy and can have different tax implications.
Me: Oh also, goes without saying after all this, but make sure they are realistic about the exit pricing and terms. They may show you a 15% return annually, but does that mean they have to sell the property at 5x what you bought it for? Does it mean they are assuming someone will pay a 4% cap rate for the property when you bought it at a 7% cap rate? Or do they put down they assume they will get a 4% rate on a refinance loan in 5 years? Do they have anything to back up these assumptions? Many a smart man has been wrong trying to predict the future. Conservative is key here, but more so realistic is most important.
Kenneth: I get that, it’s a lot to take in to be honest, just to even determine if this is something I want to be in. We haven’t even talked about the deal or property itself. This is all about just the syndication as a potential way to invest. It’s a crazy amount to consider.
Me: Oh yeah, but it’s also a crazy amount of your money to invest. It should cause you to pause. Plus, nothing happens overnight, and luckily, you know me. I am sure you will be calling me later on to pepper me with more questions.
Kenneth: Hey, so are the returns pretty juicy? You kind of avoided talking about how much money I can make doing this. Gotta be better than stocks, right?
Me: Well, they could be in general. It just depends on, well…
Kenneth: …Let me guess, the operator…
Me: Now you are getting it, haha. Let me run through a few of the terms and returns and give you an idea of what they look like in general. In ‘general,’ Ken, some are better and many are worse.
Kenneth: I know, I am just curious. You spent all this time telling me about the boring stuff, I just want to know what the money side looks like.
Me: Cash on Cash Return, or COC as we call it. This is really how much the deal makes on the amount of cash invested into the property. So, for example, you invest $100,000 and each year you get $10,000 back, that’s a 10% cash on cash.
IRR: A lot of guys use this number. I am not a big fan of it; I feel it can be manipulated easily. It is a way to measure return that takes into account the time value of money, providing a percentage rate earned on each dollar invested for each period it’s invested.
Annualized Return: A much simpler way to calculate how the deal performed over its life. It does not take into account the timing of the cash flow like IRR, so it ignores compounding effects, etc. However, taking your total return and dividing by the number of years invested is a simple way to determine performance overall.
Equity Multiple: I do like this one the best right behind Cash on Cash Return. It shows you how you multiplied the money invested in a deal. Taking into consideration all cash flow and sale proceeds vs the amount you invested. So, for example, you bought the property for $1,000,000 in cash, got cash flow of $500,000 and sold it for $2,000,000. You got a total of $2,500,000, that’s a 2.5x multiple on your capital invested.
Preferred Return: Probably the most important for you as an LP, what is the rate of return they are promising you? 7%-8% is the typical market for these investments. Be careful though, because they can be cumulative or non-cumulative.
Kenneth: So I get a guaranteed amount of maybe 7% every quarter, no matter what? What did you mean cumulative or non-cumulative?
Me: Meaning, if they miss a quarterly distribution, which many do, so no it’s not guaranteed per se, will you be promised that money at the end of the deal’s life or not? If it’s cumulative and they missed paying you, say, $50,000 worth of distributions for you to realize your 7% preferred return rate, then that money will typically be distributed to you first at a capital event like a refinance or sale. I have to say it again, all this will be in your PPM and documentation, so make sure you read those to know what is promised.
Kenneth: I get it, but what can I expect from investing in a mobile home park syndication?
Me: Okay, well it can be depending on if you are buying into a stabilized mobile home park or one that needs a lot of value-add rehab to bring it up to great performing condition. Usually, the latter provides better returns but has more risk. I keep saying it, but it just depends on what fits what you are looking for.
Me: Overall, like I said before, 7-8% is a pretty typical preferred rate for LPs in mobile home park syndications across the board. I have heard them going up to 10%, but I am always curious as to what other stuff is hidden in there that they promise such a high amount.
Stabilized Mobile Home Park:
Cash on Cash Returns typically between 7%-8%
IRR 12-16%
Equity Multiple 1.8x – 2.2x over 5-7 years
Value Add Mobile Home Park:
Cash on Cash Return typically between 9-13%
IRR – is usually more like 14-18% on these
Equity Multiples are better for these too, usually 2.0x to 2.5x over 5-7 years.
Kenneth: Wow, that’s not bad at all. So much better than my stocks. I mean if it’s a 2x multiple like you said over 5 years, that’s really a 20% return annually on my money?
Me: Yes, that is how that would work, but not every deal performs like that; there are so many factors that can influence its performance.
Kenneth: I get it, the operator. I know you said it before.
Me: Yeah, true, but
Park Size and Location: The larger the park in the better area, the more stable income and higher potential for appreciation. Not to mention more tenants wanting to live there.
Occupancy Rates: Higher occupancy rates lead to more stable cash flow, which, as you know, affects the returns we just discussed.
Operational Efficiency: Here is your operator part, haha. But effective management is a huge part of performance. Reducing expenses, keeping tenants happy, increasing revenue ethically.
Capital Improvements: And you know I said this was tough too. A lot of GPs fail here, not having the ability to implement the value-add strategy. Failing to improve the infrastructure, amenities, and overall park conditions for the tenants. This needs to be done right to enhance those returns and get that performance you want.
Market Conditions: The condition of the local market and overall economy in the country is huge. Selling into a recession is not going to end well no matter how well it’s performing. Plus, a bad economy can affect wages and what people can afford to pay for rent. Loss of jobs can cause people to move from that area and decrease your occupancy. So, it’s important to keep an eye on the condition of the market locally and overall.
Leverage: The debt a GP is using can either help or hurt performance. Make sure they have secured sufficient debt that can be paid by the cash flow of the park and still leave money for distributions. Using the right debt can help amplify returns and deal performance. Using the wrong debt can kill a deal quickly.
Kenneth: I don’t know where to begin honestly. I know this sounds interesting and I really want to be a part of something like this. How can I become more knowledgeable on the subject?
Me: Well, go to my site www.themhpoperator.com and you can read some stuff I wrote or subscribe to my newsletters, and even watch my YouTube and podcasts to learn more. Ideally though, just start researching online; you will find a wealth of resources to guide you.
Kenneth: We should really get together; it’s been a while since we have all hung out. I know life gets in the way, but I would love to meet up.
Me: Sure, let’s plan a trip. Maybe we can all go, bring the families too.
Kenneth: Yeah, that would be great. We have not hit the slopes in a while; maybe we can plan something over the winter.
Me: It’s been a while for me; since I am in Florida, I don’t get much snow, but I’m sure I can manage to keep up.
Kenneth: Great because I was thinking we could invite a few other people I know; I was running this by some of my friends and they were really intrigued by the concept. I know they would love to have some conversations in between hitting the slopes.
Me: Hey, that sounds great my man. You know my motto, Let’s Talk Real Estate!
Kenneth: Have a good one.
Me: You too.
I hope this series has been helpful to you. Many Investors looking into Real Estate Syndications have very similar questions as my friend Ken. I thought it would be insightful to share our conversation and how it went to the best of my memory.
If, like Kenneth, you want to talk passive investing and mobile home and RV parks, set up a time with me with this link.
-The MHP Operator.
