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Interview with Mobile Home Park Fund Manager Sam Hales




SHOW NOTES


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 talks about the details of investing in mobile home parks with Sam Hales, a mobile home park fund manager. Andrew and Sam chat about how Sam got into manufactured housing, how he and his colleagues got over the hurdle of third party management, and what his perfect mobile home park would look like. Sam also talks with Andrew about the QOZ Finder web bot built to scour the internet and find homes in opportunity zones. Andrew delves into Sam's expertise when it comes to his street lighting implementations and other value add techniques. If you've had any qualms about investing in trailer parks, let Andrew and Sam's skill and knowledge put those fears to bed in this episode of the Passive Mobile Home Park Investing Podcast.


Andrew Keel is the owner of Keel Team, LLC, a Top 100 Owner of Manufactured Housing Communities with over 1,400 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.


Are you getting value out of this show? If so, please head over to iTunes and leave the show a quick five-star review. I have a goal of hitting over 100 5-star reviews by the end of 2021, and it would mean the absolute world to me if you could help contribute to that. Thanks ahead of time for making my day with your five-star review of the show.



Talking Points:

00:18 - Welcome to the Passive Mobile Home Park Investing Podcast

01:28 - How Sam got into manufactured housing

07:33 - The hardest part about the mobile home park business

09:32 - QOZ Finder web bot

14:30 - What is an opportunity zone?

22:45 - Biggest risks that passive investors face when looking at deals

25:45 - The hurdle of third-party managers

29:20 - Value add implementations

35:15 - Infill and other ways to increase NOI

40:00 - Buying homes, and lending programs like the 21st Mortgage Cash Program 42:23 - Sam's perfect mobile home park

52:00 - Pro forma to keep occupancy

54:00 - Typical fees investors should expect

56:13 - Reaching out to Sam

00:00 - Conclusion



👇 SUBSCRIBE TO PASSIVE MOBILE HOME PARK INVESTING PODCAST YOUTUBE CHANNEL 👇

https://www.youtube.com/channel/UCy9uI3KGQmFgABsr9lUtRTQ



Resources/Links:

Asana: https://asana.com/

Link to lighting manual: https://drive.google.com/file/d/14z4IPCdWksHt-YOiw0atOtmdF10GIbbV/view?usp=sharing

LinkedIn: https://www.linkedin.com/in/samhales/

Email: sam@saratogagroup.com



Links & Mentions from This Episode:

Mobile Home University website: https://www.mobilehomeuniversity.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...

Twitter: @MHPinvestors


TRANSCRIPT


Welcome to the Passive Mobile Home Park Investing Podcast with your host Andrew Keel. This is the podcast where you can get the education you need to invest 100% passively in a highly profitable niche of mobile home parks.


Andrew: Welcome to the Passive Mobile Home Park Investing Podcast. This is your host, Andrew Keel. Today, we have an amazing guest in Mr. Sam Hales. Sam is the founder and CEO of the Saratoga Group, a fund manager with a specialty in opportunity zones. Sam received his MBA from The Wharton School of Business. He now has over 15 years of real estate and management experience.

He has developed and purchased office buildings, industrial buildings, multi-family buildings, and even a boutique hotel. Since 2017, the focus at Saratoga Group has been the purchase, revitalization, and operation of mobile home parks.

Sam, welcome to the show.


Sam: Thank you so much, Andrew. If I listen to that every morning, I think my ego would get a little inflated. I appreciate the intro.


Andrew: No worries, man. Would you mind starting now by just telling our listeners a little bit about your background, and how you got into manufactured housing?


Sam: It's a good question. I think anybody that gets into manufactured housing always kicks themselves for not doing it sooner. I've got a lot of years, as you mentioned, in real estate. First established Saratoga Group about 11 years ago, doing single-family homes to raise the fund. Actually, money from China for that. We're doing single-family homes in the Northern California area.

That was a good time to be in real estate in general and certainly, in single-family homes. There was great yield and of course, we saw a lot of price appreciation. Price appreciation to the point that to me, in terms of the yields, it just didn't make sense, so we started looking around and dabbling. That's why here, the office building, the multifamily, some development, boutique hotels. We’re just kind of dipping our toe in a few different areas trying to find something we could both scale and also that made sense in all economic cycles.

Anybody that's been through that exercise, at the end of the day, you probably come to two assets, self-storage and mobile home parks. For us, we just felt because of some of the motes around manufactured housing that make it a lot more difficult for other people to build another park or whatever. You've seen self-storage, you're working to have that competition over time. You got a fixed supply, and increasing demand just seems like great fundamentals for investment thesis.

Funny enough, two different people in my life did turn me onto manufactured housing all at the same time. One of them was a buddy of mine. He had another friend that's an operator in the space. He just started feeding me a little bit. I'm like, man, I really need to look into this.

The other one was actually our banker. We'd done a lot of financing of these tranches of homes and things that we had bought through purchase. They love mobile home parks. Not all banks do, but this bank did. They were nudging me as well.

Once I started learning and finding out, I'm like, man, I should've done this seven years ago. I'm going to try to make up for the lost time. That's what we've been doing.

In 3 years, we've purchased 26 communities. We actually have over 20 in contract right now. Our goal has been basically to double our lot count every year. Obviously, that gets very difficult at some point. That would mean for us, buying probably 5000 pads next year. We have closed on probably about 3500 by the end of the year. That's us. That's what we have been going on.


Andrew: That's fantastic. Are all of your communities in opportunity zones that you guys purchased?


Sam: No. We got an interesting thing that happened with the opportunity zones. Actually, another couple investments that we had were in a downtown area here in Northern California that was an opportunity zone. That's how I found out about it and started looking into it. It didn't make sense for this multi-family investment to build out what we're doing and also the boutique hotel.

We didn't end up using any OZ money for those projects. Once we started getting into mobile home parks, I realized, hold on, the OZ requirements, I already knew those pretty well, that's what we're doing. We're going in, we're investing in these communities. We're helping people that the Legislation was designed to help.

Often, it doesn't. Often, you're building a really nice multifamily or a really nice hotel. It may be an area that's gentrified or needs to be gentrified, needs some help, needs some money. I said that incorrect. It does not need to be gentrified, but it needs investment capital.

Every mobile home park should probably be in an opportunity zone because those are the folks that it was designed to help. Anyway, it just seemed like a great marriage and we raised our first fund beginning of 2019 for opportunity zones and manufactured housing. We recently closed our second fund at about $16 million. We will probably launch our next fund in the next 4–6 weeks with the target raise of $30 million.


Andrew: Wow, talk about massive growth. You guys must have a really big team that helped explode like that. That's fantastic.


Sam: We're trying to hire early, as they. It's hard to make sure we're doing the right thing with everything we already have, not to mention what we could be buying. Yes. In the last 12 months, we're looking at this because that's another way to look at the growth. We've got about 70 new employees in the last 12 months.


Andrew: You need them, you got to have them.


Sam: We do. We'll probably have 30–35 in the coming 12.


Andrew: That's great. Sam, what would you say is the hardest part about the mobile home park business in your eyes?


Sam: Good question. In the past, I would've said—and I think this is still true—it's finding appropriate acquisition opportunities. If we're doing an opportunity zone fund, then we've got that extra filter. But just because it's in an opportunity zone doesn't mean we're necessarily going to buy. We still have to go through the underwriting criteria, make sure it's a decent area, and there's the economy and jobs to support the long-term investment.

When I look at it, if we're going to raise $30 million, we're typically pretty low leverage especially in an OZ fund. That's probably $60 million dollars worth of real estate at purchase.

Is there that much available in opportunity zones? We think so. We actually just started closing on our last deals in that $60 million fund. That'll be 14 parks. It took nine months to find those, all told. Part of that is we knew what our capital constraints were. I think we could've done maybe 50%–100% more, that better criteria in the same amount of time if we knew that capital's available.

They're out there. They're definitely out there but as you know, it takes a lot of relationships, a lot of work finding those.


Andrew: Are you guys buying primarily through broker relationships, or is that direct marketing to owners?


Sam: We have a couple of things in the OZ space. We call it the QOZ finder. It's basically a web bot that we developed. It goes out, scrubs the internet, and finds mobile home communities that are in opportunity zones.

We've got two things going. We've got the database that we've identified and just did a lookup table based on map coordinance and stuff like that. We matched that against what we find on the internet. That's one thing that really helps on the OZ side of it. Otherwise, it's a combination.

We've got two portfolios we closed in that were both through brokers. We have a good-sized park, 220 spaces in Memphis that's an off-market deal, direct-to-seller. We've got another one in North Carolina, it's going to be our largest park. It's almost 500 spaces. That's also direct-to-seller. Fortunate to get that deal, we're super excited about it. It's a combination.


Andrew: You have that extra filter, an OZ zone, is that the hardest part of the business? Just finding good opportunities to pursue?


Sam: Right up there, what we've had a challenge is operating. We just really run in these communities.


Andrew: Especially with that massive growth. Hiring that many people, in and itself, could be difficult.


Sam: Right. Another buddy of mine who's in the business, he has been in this business a lot longer than we have. Like our conversation here, Andrew, I love just talking to other operators and sharing what we've learned. Also figuring out what other people know and trying to adapt it.

I was sharing our org chart in our put together. He's like, some doesn't make sense. He's like, there's no way that you have two regionals handling that many communities. We started talking about how we divide the workload, who's doing what.

As soon as I went through that, it described everything that our on-site managers are responsible for. His response was, okay, it really makes sense, you're basically pushing a lot down to those on-site managers.

That has been our attitude. It's like, we'll pay our on-sites more than probably most people will in the industry. We give them health benefits and we get them 401(k). To me, they're truly a part of a team, but we also expect a lot. We're really pushing some of that workload down to that level.

We've got Greenville, North Carolina. We have 5 communities there, about 500 pads. We've got a main manager and an assistant. She's almost like a regional, that main manager. We've got the two of them really running those five communities. Paying them a little bit more and getting the kind of results that we insist on and that we're getting seems to be a good model.

The challenge is, if you go into a new geography and your first park’s 100 pads, it's pretty expensive to run that with that kind of a team. We're always mindful of if we're going to a new geography, we need to make sure that there's a runway to be able to pick up some more communities to amortize those costs. That's been our approach.


Andrew: It totally makes sense. There's more than one way to skin a cat, right? There's a lot of different ways to set up management structure on these. Would you mind explaining to our audience what an opportunity zone is? Maybe a little more detail just to provide some of the benefits that they offer to investors.


Sam: Yes. People can run a fact check on me here if I get all my details correct. I believe there are 8700 opportunity zones in the country. The way that that worked was federal legislation. The other one is a federal tax credit. It's administered on a state level, meaning the states were given the authority to go designate the opportunity zones.

I've read, I've talked to people, and I've heard a lot about that process. As you can imagine, it was a little bit political. For example, in California, the entire campus of Stanford University was submitted as an opportunity zone. We can sit here and laugh about it. In some ways, it ticks me off.

Obviously, if you do that, that's the sort of thing that takes away the credibility of what it was established to do. Fortunately, the federal government was like, no, I don't think so. There was a check and balance there.

The opportunity zones, there are certain requirements they had to meet in terms of income relative to poverty levels and all that sort of stuff. Like I said, that was left up to the state government. From there, the way I think about it, is it's really pooling capital that otherwise would not be earmarked or invested in the real estate.

What I mean by that is, I spent a lot of years in the tech industry in the San Francisco Bay Area. A lot of the colleagues that I had and my associations are in that area. Our latest opportunity zone fund—I don't want to say 100%, but a high percentage of the folks that invested in the opportunity zone fund, they were coming out with capital gain events in real estate. They were coming out of capital gain events with their stock options, or with the business they sold, or things like that.

There has never really been tax advantages for those scenarios. You sell business, you pay your tax. You sell your stocks, you pay your capital gains. That's what it's been. This changed that.

To me, that's the beauty of it. Why would somebody who works at Facebook and just sold a million dollars with the shares—how in the world will they ever think of, you know what, what I really want to do is I want to go invest in these communities that nobody else is investing in, that need help. Even if that's how they felt, how are they going to do that? They're not in real estate. They don't know how to attack that problem.

Anyway, it was set and designed. You can only do it through a fund. Even if somebody says, I want to do this on my own, they would have to establish a fund. You can't just actually do direct investment. I think it was very well thought out. We're obviously in the early stages of it.

The other part of that is what are the impacts for the investors? What does that mean? There are three tax advantages that an investor gets. The first thing is, in real estate, there are also tax advantages. One of them would be a 1031 exchange. You've got your property sold and the other rolled into a new property. If you take any money off the table, if you had all this price appreciation, take out some of that money and invest the rest.

Whatever you take off the table—whether it was an original contribution or profit—gets taxed. In the opportunity zone, that's not true. If you sold something for a million dollars and half of it, $500,000 was profit, the rest was your basis, you could take your basis off the table and there's no tax at all. You just have to roll in whatever the profit is. Whatever you don't roll in does get taxed.

The first thing that happens is, that money, the capital gains of money that gets rolled into a fund, you're able to delay paying taxes on that. It's out until 2026. In 2026, you still have to pay those taxes. You get the tax deferral and in 5 1/2–6 years.

The second part of that is that you get a step-up in your basis. I was just trying to think about where we are in the timeline. I believe that through 2020, you get a 10% step-up basis. In other words, if it was $500,000 that you were investing all capital gains, then you step your basis up by 10%. Basically $50,000, the $500,000 would not be taxed at all. You'd only be taxed on the remaining $450,000.

The third advantage—which is really the biggest advantage—is that whatever appreciation that happens inside the opportunity zone fund is tax-free. If you choose a good investment and sell it after 10 years—you have to invest for a minimum of 10 years—that could all be completely tax-free when you sell.

Again, that could be the biggest advantage. Just one more comment on that. A lot of these funds, they'd say, hey, it’s a 10-year fund, we plan to sell it at year 10 or year 11. Our approach is, actually, you don’t have to sell at year 10 or year 11. You can continue to hold it and it continues to grow tax-free.

In other words, if you held it 15 years and sold it after 15, it’s still a non-taxable event. You can hold it all the way out until 2056. Right now, if you sell in 2056, you’re still tax-free. This is what we describe to our investors and nearly everyone agrees with us, okay, this makes sense.

If you sell, awesome. You don’t have to pay any taxes. What are you going to do? Maybe, you want to buy a yacht but probably you don’t. Probably, what you want to do is like, I got to roll that into something else, so it’s going to generate income.

Whatever that other investment is, it’s obviously taxable if you were to execute that. We tell people we’re staying in because as long as we don’t have to sell—and we know that’s a tax event when we do—it makes more sense to stay in than it does to try to find another investment and have to pay taxes on the other one.

Long-winded explanation, sorry.


Andrew: No. I appreciate you explaining that. That’s really, really high detail stuff. I’m sure it can get confusing at points, but the value is there. That’s tremendous. Sam, tell us what you think for passive investors interested in investing in mobile home parks. What are the biggest risks that they face when they’re looking at deals? This could be on a micro level or a macro level. What are the biggest risks to LP passive investors?


Sam: Like you said, this should be just a passive investor looking at investing in a syndication or a fund. It's got to be the operator, right? You are going to find very few people, especially right now, that would not agree that the investive cases of affordable housing makes a lot of sense, specifically manufactured housing.

Relative to even other commercial real estate classes, the operational risk is pretty high. That would just be my recommendation. You just want to make sure you got somebody that has done it a few times, knows what it takes, and what to expect.

Andrew, I know you probably hear this all the time. It’s like, hey, manufactured housing is like owning a parking lot, it’s super easy. I don’t even know where that came from. I’ve heard people say it. Some people are even in the business. First I was like, what am I doing wrong they’re doing right?

You realize at least what we're doing—we're doing value-add. To us, that's what makes sense in this investment environment. If you’re doing value-add, you got to dig in, you got to get dirty. Communities that we’ve gotten up the ramp and they're there, they’re a lot easier to manage.

I don’t know that they're, even then, as easy or easier than a similar quality multi-family. I’m not convinced. You still have dynamics of people in their home, in this community but just the interactions that happen in that situation versus an apartment building, that's just what nuances are.

My main thing is you definitely want somebody that's experienced in doing this type of investment. Of course, I'd say that, everybody has to get started. You did, I did. Investors that had done some other things with us were going to take a chance on this with manufactured housing. It’s been a lot of work, but it’s been fun.


Andrew: Do you guys have your own property management company? I spoke to some other fund managers that have tried third-party management. There are very few nationwide third-party property managers that manage mobile home parks. How do you guys overcome that hurdle?


Sam: Yeah, you’re right. We didn’t even really take a serious look at it just because we had a couple of conversations. It was just clear. My thesis going in was, even if we wanted to do third-party at some point, before then, we need to do it ourselves so that we know when we hire the third-party, hey, here’s what we want them to do.

The way that we’ve looked at is processes, systems, and people as well. I did talk about the people portion of it. In order to make people successful, we needed to have processes and we needed to have systems that made it easy and efficient for them to do those things.

I'll just give a couple examples. We require each of our managers to do a weekly video. We buy a phone for them. There’s no excuse like, oh, my phone, and this, and that. It’s like, no, here you go, you get issued a phone, put it on a plan. Then, we set-up these Google photo albums that automatically as they take their videos, it gets uploaded.

We’re able to just easily, basically get a snap shot every week of, hey, here’s what’s going on, here's this project over here. We kind of coach some of that stuff.

Another thing that we do, we use project management software. In our business specifically, because we’re doing so many improvement projects, it was clear, we needed project management software to ensure that we’re meeting timelines, budgets, and all sorts of stuff.

We’re using Asana. What's nice is we’re built on Google Apps. All of our systems that need to be able to integrate with Google Apps, it’s all synchronized through email. Sometimes, you’re looking and you're like, oh, gosh Trying to train people on this stuff, because everybody just wants to use what they’re used to. Like, I'm not logging into that, I’ll just send you an email. It's like, I will not respond to this email. If you want a response, you just have to do that stuff.

Human nature, we’re all just the same. We just like doing stuff we’re comfortable with. We're really insisting on that thing so that we could use some tools that we knew would help us to be more efficient. Our monthly bill on software is pretty steep.


Andrew: It's worth its weight in gold, right?


Sam: Yeah, absolutely. Like, how else would we do what we’re trying to do without some of those systems? I don’t even know. It’ll take multiple people.

Sam: Totally. Can you explain a little bit about the value-add components that you guys have implemented in some of your current portfolios? A lot of our listeners come from other asset classes where they're familiar with the value-add model. You build it up, refinance, and hold, or you build it up and sell. Tell us a little bit the value-add that you guys have implemented. What were the harder ones and what were easier?


Sam: You mean just in terms of what kind of projects we did?


Andrew: Yeah.


Sam: I’ll just go over some of our budget-wise, dollar-wise. A lot of times, if you're buying one of these older communities, they’re typically built like 70s. I don't know what happened in the '70s exactly, but I tell you, I think 80% of our mobile home parks were built in the '70s.

You think about that, it's like, okay, so that means probably, your sewer lines are 50 years old. A lot of your water lines are 50 years old. Your electrical distribution and pedestals, some of those things are 50. You just go down the list, you're like, okay. That's probably rated for 20 years, some of this stuff.

We've re-piped entire parks, sewer lines, and water lines. We just got done completely redoing some electrical. Not only the pedestals but having to redo distribution lines, and then there are the more obvious ones which are the roads.

I don't know your experience, Andrew, but what we found was height. It's like when people remodel a house. You can go online, you can look up, hey, if you want the most ROI for renovating your own, like starting the kitchen and then it's the bathrooms, and it's the master suite, whatever.

I think—this is not scientific—but our experience is if we redo the roads, it just attracts people, everybody's happy. It seems to be the big thing that really is impactful for the residents, and for prospective residents.

We almost always do that, somehow. Sometimes the roads are in pretty good shape. It's like, well, we'll resell them. That's just what we do typically, within a short time of owning the community.

Here's another one. I don't know if I shared this with you before, but we were looking at lighting, and as you know, in the industry a lot of people have used gamma sonic and that's talked about.

When I say lighting, solar lighting, LED solar lighting. We test it out. We purchased a couple of gamma sonic poles and lights. I'm an engineer, my brother Luke is an engineer. We look at the specs, we're like, that's some very bright.

Sure enough, we get it in, it's like, well, it lights up a little bit of area, but not what we wanted. We've got a project manager here, Fletcher, and I said, look, you don't have to figure this out overnight, but I'll give you a couple of months. We need to figure out a good solar lighting solution.

When you talk about impactful projects, asphalts are huge, lighting up the community so that people feel safe and right, it just had night. That's a big deal and that's probably number two, I think.

I told Fletcher, he's like, look, this probably going to take a little while, but we're going to need to do some testing. We need to make sure how bright these are? How do they work?

It took longer than two months. It probably took six really, but what we ended up with is streetlights. They're 17-18 feet in the air, and they literally light up like a streetlight. They'll light up a radius of like 50 feet.


Andrew: That's great. What's the brand on those?


Sam: It's called Tenkoo, it's a Korean company.


Andrew: You saved me six months right there.


Sam: No, absolutely. We have a whole manual we put together because like I said, this was something that was important to us. We've had a lot of people share with us, and we're like, you know what, let's go ahead and put a whole manual together. Here are all the parts. Here's how you put them together. Here's how you cement it. Anyway, so I can send that over to you. It's something we develop for ourselves so that as we do it with these different parts, we can just hand the manual to that manager and their staff, and make it happen, but we're putting 50 of them in a community down in Texas.

It's exciting. The residents get excited about that as well because that's a big complaint. If you have any crime or concerns about crime, visitors, or whatever—they have an auto-sensor on them. They'll be in a dim mode, and then somebody drives or walks by and they brighten up significantly.


Andrew: That's very cool.


Sam: We've got it down to about $800 for the whole assembly.


Andrew: Wow, that's fantastic. I'd love to get that manual for sure, and I'll put that in the show notes. Tell me in regards to NOI value add, to increase the NOI. Obviously, infill has been one of the big ways to do that, and it's known as the hard way to increase NOI.

Would you agree with that? What struggles have you come across through that process? Maybe there are some utility bill backs or other things you've done to actually affect the bottom line besides obviously the CapEx that you mentioned previously?


Sam: Yeah. You're certainly right. The infill is an important piece, but it's not the easiest way to improve your net operating income. For example, we purchased two communities in Phoenix City, Alabama. The part of Columbus, Georgia, it's right across the Chattahoochee River there, but it's really part of Columbus.

It is probably our worst market in terms of median income, median home prices. What is a three-bedroom rent for, all that stuff, and we've had fantastic results there. Now, that being said, we bought two communities, one of them was actually 90% full. That was losing money every month, I'll explain that one in a minute. The other one was 126 spaces with 100 park owned homes, and 70 of them were vacant. It was like, oh, man, and this is one of our first acquisitions. It was tough.

What we said is you know what, we believe even though we didn't pay much for those homes, we know that there's value there, and we think we can extract it. We don't let anybody move in as a renter. We want communities where people own their homes.

A lot of times you have to give them a path to get to homeownership, and so we use a rent credit lease option type contract. What that means is that even if somebody is buying a home that we didn't renovate yet, we give them three months of free lot rent, and they fix it up or whatever. Even then, we require at least $1000 upfront, just for that part of it.

We're at two years now. I think we have 7 or 8 homes left out of the 70.


Andrew: Wow. I'm sure we're going to have a whole episode just about that one community.


Sam: Oh, no, no, no. It's been amazing, but the funny thing is we had some vacant lots as well, not that many, but we were like, well, we're going here with the used homes. It's like we had the homes renovated. We had the homes that needed renovation, we hadn't got to yet, and then we were like, well, let's do some new homes as well. I'm trying to remember exactly, but it took over six months to sell two new homes in the community.

I think now, it would go a lot quicker because it’s mostly full, and we've got more momentum there. But I guess my point is, depending on the market, infill can be super challenging, because like I said, it took us a long time just to sell two homes in that market. If instead of vacant homes, we just had vacant lots, I’ll be telling a different story about that park I'm pretty sure.

Like I said, in most of our target markets, the fundamentals are better. For example, we own one in Marietta, Georgia we bought about a year ago. We've brought in about 35 new homes so far. We have a waiting list for new homes there. It's obviously market dependent, but that would be the thing is that in this market, it's hard to get homes, it's hard to get inventory. If you're in a geography where it's going to be harder to sell new homes, you have to be pretty creative with how you infill your community.


Andrew: Sure. Have you brought in used homes to communities, and then where do you get your new homes? Are you using the 21st Mortgage cash program or something similar?


Sam: Yes. We've done some used homes, very few, just a handful. Like I said, we weigh it out of the used versus the new, and just used homes right now, they're selling at a premium. Unless you know something I don't know about it, a good source.

Just from what we found, people that that's their business, they know what they have. They know that it's six months weight from Clayton and whatever, and they're like, yeah. I'll sell you the home and here's what it's going to cost.

We've just said, yeah. For that price, we'd rather buy a new home, typically, but what it has done is this situation I was describing where you've got a whole bunch of vacant homes. I think we would probably be inclined previously to—if something needed more than, let's say, $7000 worth of work. It's like, oh, let's yank it out and bring in a new one. We'll take a little deeper into those and we'll take on a bigger home renovation, then probably we would if the market wasn't so tight for used inventory.

As far as new homes, we pretty much have just used two vendors so far, Legacy. As you probably know, they have their own financing arrangement, and then Clayton. We've done the true product, and then we're buying quite a bit out there Maynardville plan.

We use 21st, and we're getting set up with First Bank as well, if you know those guys, there out of Knoxville as well. That's what I will do in the info. How about you guys? I realize maybe I'm supposed to be answering, but I'd love to hear what you guys are doing for that?


Andrew: Yeah. We've used Legacy before, we've done the 21st Mortgage cash program. I prefer Legacy just because it’s a little bit quicker, and then we do infill a lot of used homes. That's my specialty. I started out as an Alani dealer, so we have to connect on that.

Quick question, what does the perfect mobile home park look like to you? After being in the business, where would it be located? What tips would you give passive investors that are looking at a syndication deal? Just a real quick deal review, what were the top things you would look for so that a passive investor can say, yes, this is a good deal, or no, I don't like this. The median home values in the area are $30,000 or something like that, and that would be an X.


Sam: Maybe I'll start out like a high level and drill down a little bit, but I would start off thinking about what is the geography that you want to invest in? Meaning just the general area of the country. For us, we went through that exercise, and we decided that what we really like is the southeast.

When I say the southeast, it can swing all the way over to Texas and the lower Midwest. But anyway, the reason that we like the southeast is generally a very business-friendly government. Generally, long term demographic trends are positive with people leaving colder climates coming to generally warmer climates as the population ages and all of that.

Success begets success. When you've got Toyota and BMW, I'm just thinking of these different markets that we're in. We're large. When I grew up, it's like, if it was an auto manufacturer, it's in Michigan. What are you talking about Tennessee? I've never heard of that, or South Carolina, but that's what's happening now. Alabama is really—I love Alabama. They've been very thoughtful, and I think very proactive about bringing business, and the right kind of business to the state.

Obviously, in Texas, everybody knows that story and what's the explosion that's happening there. I would start there and just think about the geography. In terms of more specifics on geography or because, look, if I say the southeast, I do not mean like Podunk Town, Mississippi because you're going to get crushed. I've looked at a lot of opportunities in the southeast that didn't get past five minutes because you pull it up in the best places, and you figure out, yeah, this place is dying. That happens all over the country. There are certain areas in the southeast that's generally very rural that you want to avoid.


Andrew: Just to comment on that, I'm on a list of a bunch of repossessed homes. Every month, I get an email of that list of repoed mobile homes, and Mississippi and Louisiana always have the most homes that are being repossessed from usually private purchasers that have purchased direct. It's interesting that you got to watch out for some markets.


Sam: Yeah. We should probably set up a trucking company from Mississippi to Alabama, or something. We might make a lot of money just pulling homes from one place to the other.

It's crazy. I studied this a little bit one time in terms of when you've got bordering states that have different philosophical government policies, and then sometimes it's the income tax or whatever, but just, you can see the stark differences in what are otherwise like the same place. You look at most of Louisiana, for example, versus Alabama. Twenty-five years ago, when I lived in Georgia, Alabama was Mississippi and Louisiana, and it's amazing what they've done to turn it around.

From there it's the general things I'm sure you guys look at or in that city, in that MSA, what is the population? Is it growing? What's the economy? What are the top employers? How long does real estate sit on the market when somebody is trying to sell it?

Charles's background at Duke University, he studied the mobile home park industry, and one of the things that he's concluded is that really the replacement housing for manufactured housing are three-bedroom rents. It could be a home, it could be an apartment, but that's really the very best proxy in a mobile home community. That's a big one we look at. We definitely want to see a strong three-bedroom rent. That's the next thing that we look at, and obviously, we want to pay attention to where that community is in the town? What is the crime rate like there and generally, what are the schools like? We don't get too bogged down in some of that stuff, though, because, again, it's affordable housing.

If we said, hey, all the schools have to be magnet levels. It's like, well, we probably wouldn't buy mobile home parks, because there are hardly any in those areas. I've been thinking about that question as soon as you said it in terms of the ideal mobile home park investment. I think my favorite so far are communities where the previous owner, usually a mom-and-pop owner, was very hands-on, and they made the decision that they were going to fill up their park and they were going to keep all their homes, so they rented out their homes.

I love buying those communities where they're highly occupied. I have a whole bunch of park owned homes, because we've shown and we've proven ourselves, hey, we can sell off those homes in a relatively quick amount of time, and we can reallocate value or rent away from the homes and towards the lots in the community.

For example, we've got a small portfolio in Greenville, South Carolina, that we're going to be purchasing there pretty soon, and their average lot rent is $170 a month. The market is probably $350-$400.

Again, it's almost all park owned homes, and they're attributing or allocating $400-$500 worth of rent in the home. We're going to do an acquisition, are we sending out a new lease agreement, and it's like, okay. Maybe your rent went up to $25, but the important thing is that your allocation between your lot rent and your home rent just flipped. Now, your lot rent is $350 or $400 and your home rent is $150, and then we start selling off the homes, so we're able to capture quite a bit of that value, while also offloading those expenses.

What's nice about that is you're turning it from a real renter mentality community into an ownership community, and it's like it switches like when that switch gets flipped, it's such a difference go into that community where it's like, all of a sudden, people have gardens. There is just care and a concern that they have, that you never saw previously. I love that but economically, it's great, because while we transition, we've got a ton of cash flow.

It's cash flowing from the time we—like this one in Greenville, when we include all of the income from the homes and the lots, were like a 12 cap going in. It's not really a 12 cap because I don't consider the home income as recurring revenue, and that's like a 67% expense ratio. That's with heavy expenses which we know we need when you've got all those homes, but as you start selling those off, your expenses go away actually faster and your income because you're now pushing that to the residents. They're taking care of it themselves, and so that transition is great.

Once you reach the other end where you've got mostly tenant owned homes, it's like an arbitrage because all of a sudden the banks like it, they don't like park owned homes, they love tenant owned homes. Now you can get super cheap debt, you can get more leverage, and it just like the value of your asset just went up significantly.


Andrew: Yeah. That is different from a lot of other operators that I've spoken with and different from our model. Do you guys have a certain way you perform that upfront? Do you say hey, we have 100%, park owned homes upon acquisition, we expect a third of them to stay, a third of them to leave, and a third of them to continue renting. Now I've heard that model before. How do you guys perform for which ones you're actually going to be able to keep occupied?


Sam: Yeah, no. We typically based on our experience, it's about 25%-30% don't want to own their own home. They're hey, man, I'm a renter. There's no way I'm fixing the toilet when it starts leaking, I need to call somebody.

We include it in the proform. We're going to probably need to do a make-ready on this percentage of these homes, and then we project it. It will take on average, like two, three years to transition most of the community, and that's what it's been.

I know what you're saying, because a lot of people I talk to, it's like they don't want to mess with that, they don't—and it's fine with us because it's more work. It's definitely more work, but we've been able to do it a few times, and so that's probably my favorite time.


Andrew: Wow. Well, that makes you different in the history of the show interview, so kudos for you, man. I'm sure you'll get more deals because of that. That's awesome.


Sam: I think so. Just because a lot of people look at that and say, yeah, I'm not. The thing is, it's like, so whether that home is currently vacant, or currently occupied, you and I know this. It used to be in the industry, you could have a vacant lot, and dealers and other people would bring homes in. That doesn't happen really, not much. One way or another, you've got to get a hold on that lot, I'd rather it was already there.


Andrew: That's a good point, and then a new one in. That's it.


Sam: Bring it in and pay $7000-$8000 to get it shipped, set up, skirting, and all the rest of it. That's just how we look at it, and there's a little bit of friction as we transition stuff and some challenges, but it's worked out well for us.


Andrew: That's fantastic. Last question, what are the typical general partner, limited partner splits? Are you raising capital now for that fund? What are some typical fees that investors could expect?


Sam: Okay. Generally we'll have a preferred return, depending on the deal. It's usually 6%-7%. We generally do like a 40:60 or 70:30 split, and then there's usually a second tier where it goes to 50:50, which means probably investors getting 14% or whatever by the time it gets to that split. That's pretty general for us.

We charge property management fee, we have an acquisitions fee. We have to refinance a property, we'll take a 1% fee there. I'm trying to think if I'm missing anything there. The opportunity zone fund, we also charge an asset management fee, and the reason is there's just for every community and an OZ, there's heavy lifting. We have the personnel in place and everything to manage all of that. It's just more expensive for us, and the way we do that is because we like to align incentives. It's like, okay, so if we're doing a 10-year fund or an evergreen fund like I talked about in an OZ.

Over time, all of those got fixed up. Do we really need that fee, as much as it would be great to keep collecting the 2% fee? It's like, well, that's not needed. Once we've renovated those communities, they're stabilized, and we're not doing those major projects, we don't need that fee.

Basically, the way we have it structured, once we recapitalize and return investor’s capital, the fee is just based on their contributed capital. If that goes to zero, that asset management fee goes away. That'd be the one difference with the OZ Fund, but yeah, that’s how we’re structured.


Andrew: Wonderful. Thank you so much for adding value to our listeners and for coming on the show. Sam, how can people get a hold of you if they want to reach out?


Sam: Awesome, yeah. Probably, the best place would be LinkedIn. I'm on LinkedIn. I guess it'd be like /samhales, I believe. I think it was the first one on there for Sam Hales on there, or my email is sam@saratogagroup.com. Those would be a couple of good ways to get a hold of me. Andrew, thanks so much.


Andrew: Yeah. Thank you so much for coming on the show. To all the listeners out there, if you like this, please hit the subscribe button to get signed up to receive all of our future interviews with other rock stars like Sam Hales. That's it for today. Thank you all so much for tuning in.

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