Interview with Marcus and Millichap Broker and MHP Fund Manager Charles DeHart
Updated: Nov 11, 2022
Listen on Apple Podcast here: https://podcasts.apple.com/us/podcast/interview-with-marcus-and-millichap-broker-and/id1520681893?i=1000507419464
Welcome back to the Passive Mobile Home Park Investing Podcast, hosted by Andrew Keel. On this episode of the Passive Mobile Home Park Investing Podcast, Andrew Keel talks with Charles DeHart, a mobile home park investment Fund Manager and Broker with Marcus and Millichap. Andrew and Charles do a deep dive into Charles' background in military and private security and what brought him to real estate investing. They dive into the transition Charles made into the world of mobile home park investing while living overseas! Charles has an amazing story to tell, building and managing a mobile home park empire worth over $75,000,000! Andrew and Charles talk about how Charles met Kevin Bupp and how they formed Sunrise Capital, a mobile home park investment fund. They also talk about common mistakes in underwriting, how to properly vet a mobile home park operator, and what you need to do in order to manage upwards of twenty on site mobile home park managers at once!
Andrew Keel is the owner of Keel Team, LLC, a Top 100 Owner of Manufactured Housing Communities with over 1,500 lots under management. His team currently manages over 20 manufactured housing communities across ten states - AR, GA, IA, IL, IN, MN, NE, OH, PA and TN. His expertise is in turning around under-managed manufactured housing communities by utilizing proven systems to maximize the occupancy while reducing operating costs. He specializes in bringing in homes to fill vacant lots, implementing utility bill back programs, and improving overall management and operating efficiencies, all of which significantly boost the asset value and net operating income of the communities.
Andrew has been featured on some of the Top Podcasts in the manufactured housing space, click here to listen to his most recent interviews: https://www.keelteam.com/podcast-links. In order to successfully implement his management strategy Andrew's team usually moves on location during the first several months of ownership. Find out more about Andrew's story at AndrewKeel.com.
Would you like to see mobile home park projects in progress? If so, follow us on Instagram: @passivemhpinvesting for photos and awesome videos from our recent mobile home park acquisitions.
00:21 - Welcome to the Passive Mobile Home Park Investing Podcast
00:52 - Charles DeHart's background and his MHP story
08:20 - Building and using a database
10:37 - Forming Sunrise Capital Fund with Kevin Bupp
15:54 - The story of Sunrise Capital
18:38 - Mis-managed mobile home parks
20:50 - The models that Sunrise worked with in the beginning
22:35 - Transitioning from military/security work to the MHP business
26:17 - Becoming a broker
28:38 - Common mistakes in the underwriting of mobile home parks
31:30 - Capitalized vs not-capitalized income
36:36 - The future of the economy
40:15 - Their first park in and out of the $10 million fund
44:20 - Charles' model for their park owned homes
48:30 - The hardest part about park owned homes
50:10 - What Passive Investors need to look out for when investing in mobile home
50:50 - Vetting operators
53:42 - Charles' perfect mobile home park
56:15 - Getting a hold of Charles
57:33 - Conclusion
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Links & Mentions from This Episode:
Charles email: Charles.DeHart@marcusmillichap.com
Charles phone: 276-237-4311 The Requity Group Website: https://therequitygroup.com/
Keel Team's official website: https://www.keelteam.com/
Andrew Keel's official website: https://www.andrewkeel.com/
Andrew Keel LinkedIn: https://www.linkedin.com/in/andrewkeel
Andrew Keel Facebook page: https://www.facebook.com/PassiveMHPin...
Andrew Keel Instagram page: https://www.instagram.com/passivemhpi...
Andrew: Welcome to the Passive Investing Mobile Home Park Investing podcast. This is your host, Andrew Keel, and today we have an amazing guest in Mr. Charles DeHart. Before we dive in, I wanted to ask you a favor. Would you mind please heading over to iTunes and taking an extra 30 seconds to rate this podcast with five stars? This helps get more listeners and it also encourages me to know that people are tuning in. Thank you so much for taking the time to do that.
All right, let's dive in. Charles DeHart spent over eight years in the military first as an aircraft technician in the Air Force and then as a sniper in the US Marine Corps. After that, he spent more time overseas serving as a government contractor in Baghdad. Charles is a well-known former mobile home park owner who has owned and operated a portfolio of home parks worth in excess of $75 million dollars.
Charles now works with Glenn Esterson at Marcus & Millichap as an Agent Assistant and Operations Manager. He's also buying a few parks, opportunistically, with his current business partner, Dylan Marma. Charles, welcome to the show.
Charles: Thanks for having me, Andrew. It's a pleasure to be here.
Andrew: Awesome. I'm really excited. You're one of my idols in this space. I've heard you on several different podcasts. Maybe you can tell us and our listeners a little bit about your story and how you got into manufactured housing.
Charles: My start was Frank and Dave’s boot camp. That was my entry point. That was around 2013, I was still working overseas in Baghdad. The job I used to work at, everyone had a little scheme. It paid really well, it was always—nobody had a college degree—how am I going to replace this income and not have to work in Baghdad anymore?
Mobile home parks became my little scheme. A lot of guys did stock trading. Some guys were doing little companies in oil field work and setting up tactical shooting courses. There were two other guys doing real estate, and I was the only one doing mobile home parks. I was the weird one, but it took about two, two and a half years to go from learning about the industry to finally buying a park and then leaving Baghdad and starting full time with Kevin.
Kevin was my mentor and business partner getting started. We met during that time period, and it was through buying parks that I was able to get a passive income to finally start living in the United States again. Then I moved to Florida and we started doing things full time. Over the course of maybe three years or so, we've built Sunrise. That went really well. Then I transitioned over to brokering, and that's where I am at today.
Andrew: Wow, that's fantastic. What was the initial thing? Was it you came across Frank and Dave’s content somewhere and got glued in? What was it that really piqued your interest?
Charles: I first started doing contracting, it was 2011, 2012. Got overseas, made a pretty good amount of money. I went there with almost nothing in my bank account and left with about $50,000. That was the most amount of money that I've ever seen at that point.
Andrew: Was that security detail type of contracting?
Charles: Yeah. The state department, the embassy in Baghdad—the people that work on the embassy needed to go meet with either local officials out in town or in the green zone and we would take them to those meetings. It was actually a rather boring job. We didn't work that much. We didn't work that hard, but when we did work, we’re usually taking some guy to some meeting, sitting around, and waiting for him to get done and take him back. But it paid really well.
I came back. I had moved in with a friend of mine in Atlanta, and his landlord lived in the same building. He was house hacking a quadplex and he was really the first guy who turned me on real estate investing. My grandfather had mentioned it. He had a couple of rentals, and I kind of learned a little bit from him. But that was the guy that once I had money he was like, you should start buying some rentals in Atlanta because Atlanta at that point of time had been crushed by the recession. It was every bit as bad as it was in Florida, in Atlanta.
I got started doing real estate investing doing that, a handful of rentals. But maybe a year and a half into it—it was the day I was heading back to Iraq—one of my rentals I was selling and it was the night before I was leaving. I don't know if it was a crackhead or something, broke into the house and the agent told me that it was the most amount of damage he'd ever seen in a rental property.
They tried to steal the HVAC. They made it to the wood line and just couldn't carry it the rest of the way. We were able to get that thing back but they busted all the pipes in the house. The place was flooded. They stripped all the copper wiring out. It was a disaster.
Andrew: I take it this is an affordable housing type of rental.
Charles: Yeah, it was a rougher neighborhood in a little part of Atlanta called Decatur. I had a good renter in there. Looking back, I mismanaged the selling of that. I thought that someone buying it would want to live in it. I didn't realize that was probably a rental neighborhood. I had talked to the tenant and non-renewed their lease, and we had it all worked out to where they were going to find a place to go. But it was probably a day or two after she moved out when it happened.
What it ended up being, we were in a cul-de-sac and the neighborhood behind us was extremely rough, and it was someone that came in from that neighborhood that did it. But that was pretty much the experience. It was like, I'm about fed up with this. I'm going to have to find some other thing to do. It ended up being multifamily. It was what I started looking at was apartments.
I was looking at apartment buildings that were maybe 10, 20 units. I was working with a couple of local brokers. When I came home the next time after that, one of them took me through a mobile home park and the owner of that place walked me through the business model. It made sense, and that's when I started looking around for something. Frank and Dave had the only thing at that time period. That was the only place you could learn anything about it.
I went back overseas. They were doing a thing in San Antonio and early in 2013 ended up attending that course. I actually got some time with Frank to talk through what I should do to get started. He told me to build a database, and so for two and a half years, that's pretty much all I did was build a database. Cold called a little bit but pretty much just nose to the grindstone just databasing for just two and a half years just to find one park.
It ended up serving me later on to buy many parks, but when it started out, I found it so difficult to get one that it was just like maybe I got to make this thing bigger or something. It was humongous by the time I finally bought one.
Andrew: That's fantastic. I know you did an interview with Ryan Norris all about your database. I know you've been called the database genius by more than one person.
Charles: What wasn't very genius is that I built it all myself, which now being in the business professionally, looking back, that was a humongous mistake. But building it myself, it's in my head. I can reference it because I've just seen it over and over again for two and a half years. I've almost memorized the thing.
Andrew: Have you used that then on the broker side of things? Has that come in and helped you in cultivating those leads, obviously?
Charles: It has. It's something that for brokers, it's probably unique. On the park-buying side of things, I don't think a lot of people have gone that route. But all brokers have done that. Anyone who's been in the business for five, six years, has done exactly the same thing that I did.
Glenn’s got a database. Every bit as big and impressive as the one that I've got. The same thing, he's got that thing memorized. He's probably even better at it because I don't do most of the calling or anything like that. He even has the benefit of knowing the people personally that are in that thing.
Andrew: Wow. That's awesome.
Charles: Brokers are very familiar. It's not that impressive for them to do that, but that's really how I got started.
Andrew: That's great and maybe you could tell us how you came across Kevin Bupp? For those of you that aren't familiar, Charles and Kevin work together to help create Sunrise Capital. That was the first fund, right?
Charles: Yeah. We did two funds. We ended up buying, I think, around 20 parks together. When I got back to Iraq at the beginning of 2014, I started building a database, and I'd started in areas like North Carolina that were pretty close to where I grew up. I grew up across the state line in Virginia, but it was pretty close to Winston-Salem, Greensboro, and you keep going and get to Raleigh. I had that whole place mapped out. About three months in, I had all of it mapped out.
When you build it yourself, you start seeing things. You can't really quantify it, but this guy might be a seller because of whatever reason. Just looking at large amounts of data, you just come across like this guy, there's a little bit of something different here and he might be worth calling.
I started building a little side list, and about two weeks before I was slated to go back home, I started making calls on that list. It wasn't a very big list, maybe 20 people. Got down to the 13th lead that I had on that list and he was the guy that I was under contract with when I came home.
That deal never did end up closing. By today's standard, it would have been a pretty good deal, but back then it was probably still a pretty decent deal before a new guy trying to get some money together. It was more about me not having any experience and how are you going to manage it when you're not even there. Through that process was how I met [...], which I think you're familiar with him. And Matt introduced me to Kevin. That's when Kevin and I started talking, that's June of 2014 was when that started.
He obviously saw the opportunity with the database that I had already built, and he had a wholesaling background from a single family so he really knew what to do with it in terms of marketing to it. He didn't have a lot of the limitations that I had.
One thing, I hated cold calling. I was not very good at it, but it was also really difficult for me to make calls. I didn't have a good internet connection while I was there so doing Skype calls most times didn't work out. Either it wouldn't connect, it would drop, or it would do this weird robotic voice thing on the other end. Then I had a really cheap cell phone in Iraq, but when it came through, it was a number you wouldn't pick up.
Andrew: It was those really long ones that are usually a spammer and you're like, no, I'm not answering this. Who's calling me here?
Charles: I think the country code for Iraq comes through as five digits in front of the already ten digits that you got. It wouldn't fit on your iPhone. You would have to scroll it. No one's going to pick that up.
Then I used my personal cell phone, but it was about $3 a minute. Which wasn't a huge problem, but it did at least tell me the need to make sure that when I called somebody, that there was a good reason to call them.
Andrew: That's probably why you made sure your database, you narrowed it down to those 20 people and you're like, all right, these are the most valuable leads I have. I'm going to make sure I get a lot out of this.
Charles: The way that it worked out was very much in line with my previous experience of you got to prioritize really, really well what you do because you've only got a couple of chances to do something here. It was probably better that it happened that way because it didn't seem that strange to me to have to do it that way.
When I got up with Kevin, though, at that point we had a cold caller, we were sending out mailers, and that's really where it started. The light bulb started to go off like this. It could go beyond just buying one park. My entire goal was to buy one park, use the G.I. bill, go back to school, then have a job, and have this side park to supplement. Maybe I could get close to my income. Then it became—there might be something here where I can make a career out of this, and that's how it ended up doing. It ended up going that way.
Andrew: That's so cool. Maybe you can tell us—from when you met Kevin in 2014—how it progressed into Sunrise Capital, which is still around doing awesome things and providing great returns to a huge portfolio of over $75 million. That's an amount most people dream about. Maybe you can tell us about your time building up to that and then your time managing the fund and in operations. I know you had some time there, maybe you could share that with us.
Charles: Sure. At that time, Kevin really was in the mode to buy one really good deal a year. That was our mantra for probably a year and a half, at least while I was overseas. We're going to do a lot of marketing. We sent out lots and lots of mailers, made lots of calls. He did make lots of calls and I was doing the database.
Any area that we were like, this is an area that we should maybe try to do something in, I would pick that area up and start gathering all the data on it, and I managed the cold caller too. I was updating phone numbers for him and trying to manage that process.
It was fortunate because there's not a lot to do overseas when you're doing that job. It fluctuates between maybe you might get 60-hour workweeks if a big client comes in like a senator or something like that. You might be working really hard down to—there were vast amounts of time where we wouldn't work at all. I remember one rotation going over there and not working, not having anything to do for 13, 14 weeks. I had all kinds of time to do this.
Anyway, it started with that mentality, and when we bought our first deal, it was a massive home run. It was probably worth $1.4 million and we bought it for $650,000.
Andrew: Oh, wow. That's awesome.
Charles: The guy wasn't running it very well. Actually, we probably paid three caps for it, but he was overspending on a lot of things. When we took over, we just stopped spending money on that stuff. The first year I think we did $160,000 on the NOI in the first year, and we bought it for $650,000. I don't know what that works out for the cap rate but that’s pretty large.
Andrew: That's huge. Maybe you could share a little bit about what he was spending money on that he didn't need to be spending money on whether it's overpaying for the management or what those details were.
Charles: He had done tree work that previous year and it was a small park of 52 units. I think he spent something like $40,000 on tree work, but really what it was if he had negotiated an hourly rate and didn't really keep up with it. This guy was extremely wealthy. He really had no business owning it, he just owned it. He owned it for 35 years or something, and he didn't really care. It put a little bit of money in his pocket and he just did not care.
Tree work that should have cost him $2000 ended up costing him $40,000. It was a ton of stuff like that. It was so obvious to pick out. We can probably do better than this. But we're very fortunate to get that deal though. It was a very easy seller to work with. He was very good to us. In the end, he realized a little bit that the park was worth much more. He acknowledged it around closing time and just told us he was really happy it was us that we're getting a deal.
It was a good transaction and ended up being the thing that got me out of Baghdad. I went back one more time while we were running that park, did another four months there. Through the guys I worked with, I had pretty much dropped my pack at that point. I was like, I'm making $5000 a month in this thing. I don't need to do any of this crap anymore.
I wasn't easy to work with during the last three and a half months. I came home in April and moved down to Tampa in October, and then Kevin and I just continued. We ended up buying five parks back half of 2016. We had built a lot of momentum and things started really happening. By the time we got through all the money that we had and all the credit cards I could advance to get money in deals, our pipeline was still full of deals, and that's when we started raising money.
Andrew: Awesome, and did you guys go straight into the fund model, or did you guys do any like one-off syndications?
Charles: We did one one-off syndication. He raised it from his wife's parents. It was a little deal out in Paducah we did. It was an up and down deal. I think that was our sixth park. I've always been behind where I should be in a position where I should be delegating but not smart enough to do it. That's when the delegating really comes into play is that fifth to sixth park. When you get up to that level, that's where your make and breakpoint is. Can you delegate well? If you can, you can go beyond that. If you can't, you're going to really wish you didn't go beyond that level.
Andrew: Yeah, 100% agree. That's a crucial point. I mean, how many lots? Is that right around 500 lots, maybe a little bit less?
Charles: It depends on what size you're buying, but I think it's more about the number of parks because there are six managers to manage. Five managers, six managers, you don't have scalable systems and you can't quickly manage them and make sure they're doing what they're supposed to do, you're going to have a real hard time when you get 20.
When we got to 20 parks, I was dealing with some other problems at that time, just normal things that happen to people when they come home from stuff like that. But also then—on the work side—have to delegate at almost nothing and deal with 20 managers just blowing your phone up at all times.
Andrew: Yeah, maybe you can share a little bit about that. I can only imagine coming home from Baghdad, which is obviously a very stressful environment, to then coming into this kind of bee's nest of managers that need communication consistently.
Charles: The business turned into, for me, something I couldn't get away from. I couldn't take a vacation because if I was on vacation, normally I was still getting calls from the managers and still needing to do stuff with them. Or I was thinking about like, oh, my gosh, I'm going to get called, I know it. Wake up in the morning and the first thought you have is, I'm going to get a phone call and I did.
When I came home, I had a bit of a drinking problem and I had a bit of weed. I guess those who don't consider that drugs, but it was a drug problem. I had both of those two things going on while doing all this and it just became so overwhelming. They've been able to keep their business going, but I was in a bad spot for a long time. That really was what would characterize the beginnings of Sunrise was we all had to deal with that.
When one of your partners is going through that, everyone's going through it. That was a really tough thing to go through, but I know they're doing really well now, and Kevin and I talk pretty frequently now. But it was a hard period of time for all of us to go through.
I think we, for the most part, kept it pretty reasonably quiet that I don't think a lot of people knew it was happening. That was more them and I've always appreciated that part of it. It was not an easy go for a while. Glenn ended up being the guy that kind of pulled me out of that.
Andrew: That's great to hear, and I appreciate you sharing that. I think that's more common with people coming back from overseas than we really consider. First off, thank you for your service.
Charles: I appreciate that.
Andrew: That means a lot. Glenn, I've spoken with several times—and a very stand up guy and the same thing with Kevin. Just to be able to keep things going and to cover as needed speaks volumes for the character of the people you surround yourself with.
Charles: Yeah. I got very lucky. A lot of friends that have gone through the same thing and they didn't have—no one that I know has had the amount of support and dedication from those people around them to pull them out. Some people have nobody so I got really lucky.
Andrew: From there until now, looking at what you're doing, I know you're opportunistically buying. Maybe you could share a little bit about what you've been up to recently on the broker side, then also with Mr. Marma with your couple of acquisitions, and maybe where you see the market moving forward.
Charles: Sure. The brokering thing has given me a really good education on just really what the market is doing and who the players are. It makes me a lot more confident as a buyer, and so I've started buying some things. Glenn and I are still working through how do we make this not a conflict of interest because he and I both are very committed to each other to continue working together.
We want to make it work to where I can still buy some stuff, then support the brokerage team, and do the things that I have been doing for the last year and a half over there. We're taking it pretty slow on the buying side of things.
Dylan and I got a good mentor over there who's helping us out. We've bought two parks already. We've got a third one that'll probably close by the end of next month, and we're going to buy a fourth one. This time we're going to stop and we're going to get everything squared away, make sure everything is properly planned and delegated correctly, and then we'll go forward after that. That's really what we're doing on the buying side.
On the brokering side, we're putting as many coals in the fire as we can get in there. We sold 27 deals last year, which I think our average deal size was maybe $3 million or $4 million. We're a pretty inexperienced team. Outside of Glenn, I think everyone was on their first full year as a broker.
What was important to us is getting the experience, the motions of closing, and our guys have that now. We're starting to take on bigger projects, and that business is going very well. It's still very much in its infancy. It still creates lots of stress and there are lots of ups and downs with brokering anyway, but I couldn't be happier with the way that business is going at this point.
Andrew: That's awesome to hear that. I have a couple of questions. The first one, I would say, piggybacks on the brokering. What are maybe some of the common mistakes you see in the underwriting process of mobile home parks? Maybe you can start there and share that with us.
Charles: One of the biggest things that an owner can do to mitigate any mistakes that a broker might make would be it's really important to go line item by line item on the P&L and break out the two businesses. In any mobile home park, there are two businesses. There's one business that's capitalized, and the other business is not.
Just that quality about it, if it's not broken out and it's not provable and clear, it's very easy to misvalue the property when it's not clear what expenses belong in what bucket, and the same thing with revenues. Revenues are a little bit less of a problem, but there are still owners that dump all their revenues into one bucket and you're trying to figure out how to split it out and then prove to a buyer that that's accurate to at least some degree of accuracy.
That's one thing that a lot of owners should consider when they're looking at their own P&Ls, and don't wait until like three days before you're going to list either. Those are structural things that you should be doing in your company to make sure that your exit goes smoothly. You could do everything great and then have an unsmooth exit and your IRR is not going to look that great. That's what you sell your investors on is that IRR.
Your exit makes up a big portion of that. Take the time to look through that and make sure that it's pretty clear to, at least, the person who’s going to help you sell it to give him the best chance of success for you.
On the broker side, I think the biggest mistake is it’s really just that. The market moves really, really fast, and so it's really easy to get into a big hurry and not take the time to more or less nitpick the P&L and make sure that we're doing everything correctly on that side. That's been something that's been challenging for us.
We'll sell anything as a brokerage team. We've got no problem selling something that needs to go to auction all the way up to a $100 million deal. We've got experience on all of them. There's very little consistency between those types of sellers. We've dealt with lots and lots of different scenarios, but the biggest thing for us has been not breaking out the park owned home stuff, those expenses in [...] way.
Andrew: Maybe we could touch on that a little because I know you mentioned capitalized and not capitalized. Just for those listeners that don't know what you're referencing. The capitalized portion of the income would be the lot rent where you don't own the homes and you're paying for the dirt rent. Then the not capitalized would be the park owned home income. If you're renting homes or selling them on a rent to own type of contract. I just wanted to make sure we touched on that.
Charles: Any income that's generated by real estate, any income, and expenses—the easiest way to think about it is if you had no park owned homes, what would that thing look like? There are some adjustments that would be made if you had park owned homes—your real estate expenses will be slightly higher, mostly in the collection loss category.
The park owned homes, the reason we don't capitalize those is it's basically like a car. The thing is worth whatever it's worth. If you took that home into California and put it out there, there is some adjustment because it's in California with that home would be worth, but it's not on a capitalized approach.
If I got that home down in a market where I can get let's call it $600 above the lot rent, if I'm capitalizing that, the value of that home might be twice what it's actually worth if I was to just buy it from a dealer. You're basically referencing NADA Values—which is like a Kelley Blue Book—to price something relative to that value for those homes.
Then if you got someone selling them on a rent-to-own contract, it's a note buying things. Mobile home parks are, I would have to say—I don't have any experience anywhere else, really, but I could imagine how it would be valued in an apartment complex, retail, or any of those things. This is the most complicated one.
Andrew: There are other components, right? If there's a mobile home park, there's an RV component to it. They have some RV lots. Those are capitalized differently. If there's self-storage, that would be potentially capitalized differently. I agree with you, and it says a lot about you and Glenn as brokers to look at these types of things and value them the way you do—NADA values and things like that—because there are other brokerage firms, we've all seen them that are capitalizing that park owned home income. That's where things get scary because it's not the same value on the income stream that's coming in. That's a big deal. One of the bigger deals, I think, when buying parks.
Charles: We probably spend more time than we should. We like to view pricing as a measurement, almost. It's somewhere between where it sits today and what it could be. The market is willing to pay something for the opportunity to go where it could be. We view that as a measurement activity, and we spend lots of time looking at deals that we've done, deals that other brokers have done trying to measure where the market is on that so that we can do the best job for our clients.
I don't know what other brokers are doing, but I know we probably spend more time than we should doing that. That's something that we feel is going to pay dividends in the long run, because once you—I hate using the word algorithm—can create some consistent measurement tool for that—our underwriting is a representation of the basic concepts of how we measure price.
Once you can do that, then you can move fluidly with the market when it makes a change. Glenn wants to be doing this for a long time. He wants to bring lots of brokers in through his program and be a long-standing name. To be able to move fluidly with the market changes, the measurement tool is critical for him, and that's why we've spent so much time doing it.
Andrew: That's huge. As we move forward, you mentioned slowing down in your acquisition of parks and doing it right, and making sure the operations are ready for growth. Maybe you can elaborate on that. I know before we started recording, you mentioned that you're kind of pressing pause for 6-8 months to get the operations in order. Does that also have anything to do with the economy right now and the new administration? Maybe you could just share a little bit about where you think the market's going in terms of manufactured housing and what your thoughts are there.
Charles: I think we're just well-timed with the pause. I've not been as concerned, I think, as a lot of our clients have, but there is a general consensus in the market. There's at least a lot of uncertainty and a lot of people telling you what will happen.
I don't think it's going to be as bad as most people are making it out to be, it usually never is. I really don't think that Biden's going to come in and try to shake everything up really, really hard because if you think about it, our economy is pretty fragile. If he starts doing shock treatment on this thing, he might end up with something he didn't want. But there are a lot of changes that he's trying to make, and that's typical for any president in their first 100 days. They feel like they have to go do a bunch of stuff, which who knows? I don't want to get into that.
Outside of that, we're pushing pause mostly for our own purposes. We got the advice from our mentor that we're raising a $10 million fund. Our first two deals are going to make up about $2.5 million of the allocation. We're looking for a big deal this time, something in the $7-$8 million range to take up the other quarter so that we can get to the halfway mark.
I think from his standpoint, he really wants us to have our KPIs in order, have our management systems in order. Six months is enough time for us to do that. There's enough scale there to where we will have to develop scalable systems. We won't have to be looking at one park and trying to be like, oh, well, imagine it being 50 parks.
We are going through those motions, but one of the reasons that we really wanted to do it was we feel pretty strongly that we're going to hit our numbers on those parks—what we've told investors we're going to do. We're kind of taking a gamble and saying we're going to push pause, we're going to operate them for six months, and then we're going to raise the next half of the fund on the operating history.
We provided incentives for the people that came in early. We gave them a ton of extra depreciation and some other perks to get in early. We've kind of balanced those two risks out, but I think it'll just be a lot easier on us to raise the second half of it if we do the job that we're supposed to do. Whether it be 6 months, 8 months, maybe it's 12 months, maybe we'd run into some issues and our operating history doesn't get to where we can raise the other half in 12 months.
Whatever it is, that's the process that we're going to go through to do. We don't want to scale too quickly. We don't want to scale too quickly, get a big mess on our hands, and then try to fix it. That's what we're trying to avoid.
Andrew: Yeah, that is very smart. That’s similar to our story. We could've raised a lot more money and bought a lot more parks early on, but without the right systems, it wouldn't have been a business that I wanted to be a part of. It would've been a lot more stressful.
We've bolted on employees if they were the right fit versus just hiring to hire people because one of the bigger things that we struggle with is the human resource component as I'm sure you guys can acknowledge as well. That's awesome. When did you guys buy your first park in the $10 million fund?
Charles: We bought one outside of the fund in October, we raised money for that one.
Andrew: 2020, just last year?
Charles: Yeah, it was October 23rd, I think. We bought that one. It's in Jacksonville, North Carolina near Camp Lejeune. Ended up being a military town, most people avoid that for that reason but it ended up being a really good deal for us. We've done really well with that. It's only been three months. December's always a bad month for collections. If there's any month that's the worst it's always that one, and also move-ins. But we did really well in December despite all of that. We got a bunch of park-owned homes in that park. It’s 140 park-owned homes.
One of the things that I've teased the idea on, at least, is doing potentially large-scale infill projects—which there's not many of those left anymore—or looking at development. It's still nothing more than just an idea but things are starting to happen in Florida where development is looking very, very possible. We already saw a project get approved at [...].
The park-owned home deal has ended up being a blessing for us because we're really getting to set up our systems to handle large amounts of homes, do large-scale advertising, and do large-scale selling activities. Those are the things that we're going to need to demonstrate before anyone's going to want to do a development deal for us. We understand that.
This thing wasn't planned that way but we're viewing that park as that's the park that is going to create the operating history that we need to at least prove that once the thing is built, we can do something with it. We're having fun in that park. It's a really good asset.
We bought another park in Knoxville. That was her first park in the fund. That one's a nice property. We'd like to scale in Knoxville, but it's one of those things where if we can scale in Knoxville, we will. If we can't, we'll probably hold onto that park. We've got a couple of things that need to be fixed until I can get a Fannie Mae loan. We'll probably go back to the market at that point with that park maybe three, four years from now if we don't have anything else in that market.
The third park is in New Bern, which is about 10 minutes from Jacksonville. That's 122 units. It's got 100 park-owned homes. I know people are on the call like, oh, so you got 240 park-owned homes in 1 market, you guys are insane.
Andrew: What is the average age of those homes?
Charles: In Royal Valley, that one's 2006, and then in New Bern, 1998.
Andrew: Those are pitched roofs, nice homes?
Charles: Yeah, those are nice homes. We got a really good crew. We got a four-men crew right now. We're going to hire another one once we close. We got a five-man crew to handle renovations, and they do really good work. We're managing their average down days, cracking the whip on them to make sure that our units are rent-ready on average the 30th day, and get on lease by the 45th day. If we can do that, then we can maintain roughly a 6% vacancy loss, which is pretty good in my eyes.
Andrew: Yeah, that's huge. Maybe you could share a little bit about your model there. Do you plan on selling those park-owned homes and converting existing renters into owners? What does that timeline look like? What are your expectations for converting all of those park-owned homes to tenant-owned homes?
Charles: Realistically, there are two things at play. I believe very strongly that Fannie Mae will change their guidelines over the next 5–10 years. We don't go into deals with the assumption that that's going to happen, but I'm pretty bullish on Fannie Mae eventually waking up until these park-owned homes are not really that big of a deal.
I say that because there are financiers now like Vanderbilt, First Bank's been in the business for a while, KeyBank, and some others that will finance these projects at loans that look very similar to Fannie Mae with only the interest rate being different, 5% versus 3.5%.
That's the loan that we got on Royal Valley. We got 30 [...], 2 years of interest only, 25% down, and 5% rate. The only difference there between that and Fannie Mae is the interest rate. We got that on all of it, the park-owned homes and everything.
I don't think it's going to be long before Fannie Mae at least reviews their guidelines. Maybe they don't lend on the homes, but maybe they'd open their doors for properties that have more than such and such amount of homes as long as they're new or something like that because I don't think that guideline makes a whole lot of sense for them.
Outside of that, it's a long-term plan. Our customer base is the right customer base for those age of homes. Most of our prospective customers can come in, they can put a down payment, but we're mostly in-house financing those to them. We've got a rent-to-own program. Most of our homes sell at a price point of around $20,000–$30,000. We're usually asking for around $3000–$5000 down.
A lot of the loans that are out there available to them, in my eyes, are predatory in a way where they stretch the amortization out really long so they have a long runway of interest. Basically, if they were to go with another finance company, the payment might be $200 or something like that. Our payments, we keep them at the same level as the rent and these customers will get through their RTOs in about 6–7 years.
With normal turnover and everything else, we feel like we can probably get within Fannie Mae guidelines by somewhere between year 8 and 10.
Andrew: I think that's a good timeline. Gives you plenty of time to roll that out.
Charles: Yeah. That's what we're shooting for on those properties, but at the end of the day, if they're managed properly, they have the highest cash flow than you think that you can buy at a market price.
Andrew: I believe that. Like a flat apartment complex, right?
Charles: Yeah. They have a great cash flow. At least nowadays, they have really good debt options. That was the reason not to buy them before aside from the operational challenges, the financing was very difficult. Now it's relatively easy. There's an opportunity in those properties. A lot of the bigger operators aren't set up to take on those kinds of projects. It's really an opportunity for smaller guys to do, and I think that there's going to be a lot of that out there.
If I was starting out, I'd look at those things because they throw off a lot of cash flow and they're not hard to do nowadays.
Andrew: Totally. The biggest risks are the potential turnover being higher than the tenant-owned homes, then just the relative condition of them, and you have to have a good rehab crew like you said you guys have. But that's just been one of the tougher things for us in the business is finding good, reliable handyman-type of guys that will rehab these things at scale.
You can't just go out and hire a general contractor like you could on a multi-family project. The GCs are too busy. You got to find a handyman-type that is still insured and has his wits about them. That has been the toughest part for us, would you agree with that?
Charles: Yeah. We wouldn't touch one of these things unless we could afford a full-time crew to be on the payroll. That's our criteria for these types of projects. Now that we got into that one in New Bern—that area has a lot of communities, they have lots of parked-owned homes, which is funny because if you go there, people would tell you that it's a rental area.
We found the exact opposite. We have had all kinds of interest from people trying to buy a home, but the price points are a little higher and everything else. In that community, we have enough income to afford a pretty good staff. If we didn't have that, I wouldn't do one of those with contractors. I just wouldn't go through the brain damage of that.
Andrew: Yeah, I'm with you there. Our most important question, what are the most important things that passive investors need to look out for when investing in mobile home parks?
Charles: It starts with the operator, and it doesn't mean that the guy has to have tons of experience. I think there are a lot of guys getting in that have a good story as to why they would be successful. That's not ground-breaking or anything that you need to look at the actual operator, but there are a lot of guys that are getting their start right now that are going to be good people to put money with.
Andrew: What's a good way to vet an operator, vet someone like that?
Charles: If you're going to be a limited partner, you should learn at least enough to be able to interview the person who's going to operate it and get a gut-check on do they know this industry. If you're going to get into the industry, it's worth learning about it and going into rather good details so that you can do those interviews properly.
I'd say the next thing is I would be open to anyone's idea of what type of deal that they're going to chase because there are people out there that chase things that are very, very specific. That's something I've learned as a broker. But I would just make sure that they're very crystal clear on what it is that they're trying to deal with.
There are a lot of guys out there that are just getting their start and they want to chase after every single thing that comes across and not specialize. If I was a limited partner putting money out there, I would spend most of my time interviewing people that specialize and do a niche within the industry. Someone who's good at infilling projects or good at expanding parks and that's what they go after, or they're good at doing some other thing. Taking something that needs a facelift to go into a higher quality loan and that's what they do.
Just some kind of niche. I would look at that especially if you're working with someone that's a smaller operator. If it's an established group, then that's not as necessary, but if you're looking at smaller operators or guys getting their start, I would really want to see them have a niche.
Andrew: I love that. That's a huge advice right there. Number one, ask good questions, educate yourself so you know the space through podcasts, books, otherwise. And then specialize. I think that's key, whether it's converting park-owned home parks.
I heard recently there's a new fund that's acquiring only mobile home parks on private utilities. Again, that's a niche because a lot of operators don't even look at parks with private utilities. That says a lot about the operator and the cognitive side of it, are they thinking ahead?º
We had an interview with Rhett Trees, Seneca Capital. If you ask him what his deal criteria is, he's spot-on. We only buy stuff that's going to get a Freddie Mac supplemental loan. I love that. That was a huge aha moment for me. That's really good advice, Charles.
I know this has gotten a little long-winded. I think we've covered a ton of awesome information.
One question that I ask every operator is what does the perfect mobile home park look like in your eyes? What would you say to that?
Charles: We have our fund model right now. We have three (I guess) avatar parks is what I would call it. We like a heavy park-owned home deal to deal with the Alpha on the frontend, then we like to do something where it's a little bit operationally easier. Either we have a short-term track to a Fannie Mae loan, whether it be at close or within a year, and then we’re attempting to round out our fund model, at least this is the idea for now. We're hoping that the Alpha allows us to build up enough of that early-year cash flow to take down a legacy asset.
We'd like to go on the competition at times with the Treehouses, the Carlisles—the big boys—and be able to win. We think that's a way to do it, and then pull in probably an asset that we wouldn't have any business-owning because we're not of the caliber to be in that discussion. That's really what we're trying to do with our fund. It's both a return aspect and also a balance of risk. My perfect mobile home park is that last park though. It's that legacy asset.
Andrew: The legacy asset. Sam Zell’s parks in the coastal areas, what does that look like for you?
Charles: To me, it's a 55+ Florida park that's 100 lots. I don't want to deal with some guy to get the persons' rents to market kind of thing. I want the rents to be within 10% of the market. If you're going to leave me on the upside, then just leave me with 10 lots to fill in. That'll be fine. Give me some marginal home sale stuff.
The perfect mobile home park is one. We can get in real easy with a really nice loan. It’s big enough to where—just like Rhett said—you could take a supplemental out. Some of these parks are big enough that time will just take care of that. Five years from now, you don’t have to do any value-add and you get a supplemental. That'd be my perfect one is how lazy could I possibly be, I guess.
Andrew: But it does the work for you. That's key. I love that. Three avatar parks for your specialization. I really dig that. Charles, thank you so much, man. How can our listeners get a hold of you if they'd like to do so?
Charles: My email address is email@example.com. That's probably the best place. I'd give you my phone number. It’s (276) 237-4311. Either place is fine. If you try to get a hold of me at other places, I got so many different places that I'm supposed to be in that sometimes I might not get back to you. I'm still trying to build the habit of being on 20 different social platforms. I'll get there, I guess, or at least I'll hire somebody.
Andrew: There you go, the delegation we were talking about earlier. Tell me, do you have a website for your fund with Dylan?
Charles: We do. It's therequitygroup.com.
Andrew: Awesome. I'll put that in the show notes as well. Thank you so much for coming on the show, Charles, and sharing so much valuable information. There were several golden nuggets in this interview that I'm sure the listeners are going to eat it up. Thank you so much, it was a pleasure having you. That's it for today, folks. Thank you so much for tuning in.
Charles: Thanks a lot.