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Jefferson Lilly has been building a real estate empire of mobile home parks…
He explains it as, “Investing in parking lots that generate 20%+ returns.
“Through his fund, Park Street Partners, he's acquiring about $5 million worth of mobile home parks a year.As a former startup executive and MBA, Jefferson understands overlooked investment opportunities better than most people.
I'm excited about this interview, because mobile home parks fit my criteria for great investment – shrinking supply, increasing demand, secure investment, increasing value, and overlooked by most investors.
In This Episode, You’ll Learn:
- How Jefferson is earning over 20% returns buying the entire mobile home parks
- Why most investors overlook mobile home parks, and what makes these a great investment
- How a new real estate investors can quickly get started
- The three different ways to profit from mobile home parks
Jefferson’s required reading for real estate investors:
Links & Resources From This Episode:
Subscribe To The Pathways To Wealth Show:
Hey everybody. Welcome back to Pathways to Wealth. In this interview, we’re talking to Jefferson Lilly who is actively building a real estate empire with something that we’ve talked about before which is mobile home parks.
Now, for anybody that has heard our previous interview with John Fedro, my good friend and mobile home investor, you already know why I like mobile homes as an investment but Jefferson is doing it on a really big scale. He has a fund and he is buying up about 5 million dollars a year worth of mobile home parks and he is getting over a 20% cash on cash return, really really cool stuff. And in this interview, he just adds so much value. He talks about new investors can get started investing in mobile home parks, meaning, buying the entire park and basically owning a parking lot that pays you incredible returns. He also talks about why investors overlook mobile homes and the specific criteria that make mobile home park investing so solid.
Again, I don’t care if you're an entrepreneur, a trader, or an investor, you need to hear this interview because a lot of the concepts and the terminology and his thought process you can apply to different areas of your life. Without further ado, Jefferson Lilly.
Chris Dunn: Alright, hey everybody welcome back to Pathways to Wealth. In this episode, I'm really excited because we’re focusing on an industry that I'm really excited about which is real estate and in particular, mobile homes. The return on your investment that you can get in mobile homes is really incredible and it’s often an overlooked segment of the real estate market.
Today, we have Jefferson Lilly who is a mobile home investment expert. He spent a decade prior to investing working with venture back startups in a sales management role. And Jefferson, I’ll pass it over to you, what else should everybody know about you.
Jefferson Lilly: Well, I'm a new dad and I've got two kids under 2 at home now, so I'm trying to balance real estate as well as diaper changing. There you go.
Chris: Nice. So you're from San Francisco?
Jefferson: Yeah, exactly. Well, Denver originally, 3rd generation, Colorado but yeah I've been out in San Francisco about 18 years now since business school and as you mentioned, kind of rode the dot-com bubble up, down, and sideways and transitioned part by playing and part by luck transitioned into mobile home parks about eight years ago. So yeah I was selling basically mobile messaging software. So I say, I've transitioned from mobile phones to mobile homes.
Chris: And where do you buy most of your parks?
Jefferson: We like to buy in the Midwest. We really like cash flow and Chris as I'm sure you know the coasts tends to be, for any kind of real estate, tend to be more pricey, sort of average mobile home parks in California might easily be a six-cap and we’re buying comparable parks in the Midwest for 9 or 10. We’re just all about cash flow, so we’re paying maybe not quite half for our cash flow, you know, what we’d otherwise have to pay in a sexy market like California, Oregon, Massachusetts, New York, or what have you.
Chris: Nice. Yes, somebody was telling me a story recently that there was a mobile home park somewhere in California that ended up, this was before the housing crash, some divided out the lots and were selling them for a million each. It was some kind of ridiculous view but mobile home lots for a million dollars. I was like, that’s insane.
Jefferson: Yeah. It’s almost certainly either in Silicon Valley or more likely maybe Southern California and on or near the beach. I don’t know exactly that one. I do know one of the big Wall Street buyout firms, I think it was Carlisle, just bought a mobile home park right in Silicon Valley. I believe it was Sunnyvale for about $180 million dollars and that worked out to be about, I think, a quarter million per pad. Those aren’t the kind of parks were buy. I just don’t see the return paying that kind of price. I just much rather own in the Midwest. Money is great. I live in California, I can earn it in the Midwest, spend it in California, works just as well here. It doesn’t matter where it comes from.
Chris: So Jefferson, why mobile homes? Why not go and build single family homes? What’s attractive about mobile home parks in particular?
Jefferson: We’re talking mobile home parks, not so much the mobile homes. Pretty much, every other kind of real estate, they're still building more of it. They're building more single family homes, more apartments, more self-storage, more office, more retail, more of everything except mobile home parks.
Pretty much, every city and county over the last maybe 25 years or so has basically made it against zoning, I won't say illegal but they made it against zoning to build any more. This niche has an undeserved reputation and that is most people think, “oh guns, drugs, prostitution” I don’t know. Which one of those three went through your mind first Chris when you heard you were going to be doing a podcast about mobile home parks? Maybe the bottom 1% or 2% of parks are that bad, the other 98% to 99% of parks are just fine. They're perfectly safe. They are not full of the bad element. They're full of hardworking folks.
Anyway, but because they have a bad reputation, most cities and counties don’t allow them. So that makes for a particularly interesting dynamic because the demand curve still grows about 1% a year with population. This is not a shrinking or dying business, it’s just that supply is shrinking. Again, it’s basically fixed and then it actually does shrink because we guesstimate about 1% of all mobile home parks get redeveloped every year. They get torn down and turned into a sexy condo development or shopping mall or what have you. So those folks that usually own their own houses, those folks in those mobile home parks that are closing, they have to move their houses somewhere, well, that goes into the parks that still survive and then—so that’s a very positive dynamic there, plus, again there’s just demand growth of about 1% right along with the population. That supply-demand curve imbalance means that rental rates do tend to go up faster than inflation. Anyway, that’s just a tremendous tailwind to have.
Another thing that makes this a particularly attractive business is simply, as I alluded earlier, we typically don’t own the mobile homes. We just own the land underneath, so we have dramatically reduced maintenance costs. For anybody who’s actually in real estate, just think through how much your repair and maintenance budget went to those proverbial leaky toilets and leaky roofs versus what went into the land, cutting grass, doing sewer on stops, maybe every decade or more repaving roads or parking lots. Not a lot of your maintenance budget goes into the land. That’s all we own.
Chris: So you're not fixing toilets and leaking roofs and stuff like that, you're just maintaining the land.
Jefferson: Sometimes when we get a house that’s maybe abandoned, we will fix it up. We will put good money into a house to fix those leaky toilets and leaky roofs once and then we put those houses out on a rent to own agreement. So we look to build communities of owners, folks with pride of ownership, folks that step up out of, say, a rental apartment building and again want to become an owner.
Chris, when you give folks a shot at home ownership, they treat their four walls better. That same tenant that might not have been a great apartment tenant because again they had no pride of ownership, no shot at home ownership, you move them into a mobile home park and you say, hey like in our parks, most of our homes folks are going to own in four years, maybe five. There’s no 30-year mortgage in our business. Folks can see the light at the end of the tunnel in single digit number of years.
Again, you take that same tenant, you give them a shot at home ownership, four or five years down the road, all of a sudden they take better care of their house, they maintain it, it’s a win for them because four or five years down the road, they only pay the lot rent which might only be $200 or $300 bucks versus, again, what they were living in was probably a smaller apartment for about $850 in most of our markets. Anyway, it’s a win-win for everybody. Tenants get to own something and reduce their cost of living from $800 or $900 down to $200 to $300. We get, again, a more responsible tenant that shows pride of ownership and we get to run a parking lot which is pretty relatively easy to do. I’d certainly rather run a hundred-spaced mobile home park than a hundred-unit apartment building.
Chris: Nice. Let’s talk about the economics of a typical deal. How many units are in a park or I guess you call them slabs?
Jefferson: No. We tend to call them either pads or spaces. There are concrete slabs on most individual pads, I don’t know why. I guess the original thought was you could place a deck on it or something. But yeah, most parks I would say would be probably about a 40-space park is probably the average. Here at Park Street Partners we’re buying parks that probably average right around 60 or 70 pads per park. We’ve got a couple that are over a hundred. We’ve got one as small as 20. That would be a good range. That’s our range. There are parks that are just a couple of spaces or 5 spaces, so folks with very little money can get started pretty cheap in this business if they want. Again, we arrange from 20 to a little over a hundred.
Chris: Okay. And how do you find these deals. Are they only on the list? Are you doing marketing? Are you going directly to the sellers?
Jefferson: Yeah, we do a little bit of everything. There isn’t single panacea in this business, so we do direct marketing to park owners. We also market to brokers. We let them know that we’re not a broker, that they're commission is fully protected, and we, in particular ask for pocket listings for deals that have not yet been shopped because again a broker lists a deal publicly, if somebody who’s a buyer with a buyer’s broker makes an offer on that deal, then the commission has to get split in half. We make it clear to brokers that they get to keep their entire commission whatever they might show us. Be bought, again, some pocket listings.
We have bought properties that have been more widely listed on sites like LoopNet and some others. It has been a broad range of things. We’ve also got some folks now that are bird dogging. We’ve got a couple of partnership deals, so we’ve worked with folks to help them learn the business, and so again, so far, a couple of deals have been found by some of these bird dogs. They’ll put up some of the capital, we’ll put up some of the capital and then, again, we operate it jointly. We’re open for business, whatever works.
Chris: What’s a typical purchase price or price per lot and how are you financing that?
Jefferson: Typical price per lot would be, let’s just call it $20,000. So for, say, a 70-spaced park, that’s about a $1.4 million purchase price, very ball park financing would be that you could borrow 75% loan to value at about 5% interest rate fixed for 5 years. That’s the way the market price is today.
Chris: Cool. And are you going through banks to do that?
Jefferson: We think one of our upcoming deals will be able to tap the CMBS market as deals are larger. They appeal to the CMBS market and/or the conduit, so we hope to tap some more creative debt, if you will, but so far, about 85% of our deals so far have been financed with bank debt, that’s something my partner and I are signing personally on and we’ve got about 15% of our deals that have been financed with seller carry and that’s typically not personal recourse.
Chris: Okay, got you. You're either doing seller financing where the existing owner is financing that to you or you're going through a traditional mortgage bank and then now you're looking at mortgage back security, something that can get a little more creative.
Jefferson: Yeah, exactly. Non-recourse, longer term, and lower interest rate. But it can take longer to get that put together and it can be more expensive upfront. There are pros and cons. There are a bunch of ways to finance mobile home parks to be sure.
Chris: Absolutely. Are you guys raising capital for the down payment?
Jefferson: We are, yeah. I got started in this business purchasing my first two parks entirely with my own capital and then my partner and I, Brad Johnson, we’ve formed the Park Street Partners partnership so in 2014 we did 4 deals deal by deal and then this past year 2015, we raised our first fund, and so we think we’re going to stick with the fund model and raise a fund every year, so we should be opening up our 2016 fund in another couple of months but we raised $5 million in our most recent fund so we’ll be buying about $20 million worth of property with it.
Chris: Nice, so what would that look like for an investor, say, if somebody was like, “Okay, well I'm interested. I want to invest in mobile home parks with you guys” what would be the economics and what’s the process of that?
Jefferson: Our fund is a 506 Reg D fund which means it’s registered with the SEC. We can talk about it widely as I'm doing here on your fine podcast but in exchange for advertising widely, we are limited to only taking accredited investors, so that’s folks with a $1 million dollar and up net worth, exclusive of their primary residence, or folks that have a $200,000 a year income or $300,000 if married.
Any of your listeners that are accredited, we’d love to have a conversation with them. Our fund pays out an 8% preferred rate of return and then any additional profits are split 50-50. Our first deal that we raised money for on a deal-by-deal basis, it’s our most mature deal, is grossing about 24% cash on cash, so our investors get the first 8 where we then split the remaining 16 evenly, so our investors get about another 8, so they're getting about 16% a year cash plus we think appreciation has been another 10%, so they're earning somewhere in the mid 20s what we think is a very safe below average risk niche. We think that’s pretty good.
Chris: I want to pause right there and just talk about how powerful that is because a lot of people, when they think of mobile homes, like you said, and I know about this space because my good friend, John Fedro, has been doing this more on like an individual deal-by-deal basis for several years but you guys are operating at a larger scale and what I love about it is it’s an overlooked niche. A lot of people think, “No, I don’t want to invest on mobile homes” but like you said, you're investing in basically a parking lot that gets an incredible return and it’s backed by real estate. It’s not going anywhere. It’s not a tech startup that could become irrelevant tomorrow.
Jefferson: Yeah, exactly. There’s no Google of this business. There’s no 800-pound gorilla that’s innovating. There’s no [OPEC 00:17:49] of mobile home parks that sets pricing. It’s a very fragmented business. There are three publicly traded REITs. The largest one by Sam Zell, billionaire real estate developer out of Chicago but he and the other two REITs collectively own, I think, about 1.5% of all mobile home parks. Again, 98% something of all parks are mom and pop or perhaps owned by folks that own a handful, but I still it’s well over a half are true mom and pop, a mom and pop that only own that one park, so it’s a very fragmented business and if you're willing to work and scratch around for deals, you can probably find pretty good deals.
Chris: Nice. What has been the biggest challenge in this business? Is it finding the deals? Is it making them cash flow? What’s the biggest thing that keeps you up at night or the biggest challenge to getting to profitability?
Jefferson: Most all of our deals are profitable right from the get-go. Again, buying with a 75% leverage and we get into parks typically at 9 or 10 cap rate. You just do that math there. We’re starting off if we do nothing. We’re starting off at about 16% cash on cash, again, through fixing up, say, some abandoned houses or buying and bringing in additional homes and getting those fixed up for families, we can get the cash on cash well into the 20% something rate of return. We’ve spent a lot of time, frankly, fundraising.
A lot of people turn their nose up at this business. It’s not a sexy business. It’s not the sort of thing that most investors hear about either at REIA meeting or just chat about over cocktails. There’s plenty of chit-chat about people buying apartment buildings and that we’re going to buy a class B apartment building and reposition it and sell it as a class A building. There’s nothing wrong with that but this is not a niche where very many people invests, and therefore, there’s just not a lot of talk about it, so there isn’t a lot of herd mentality.
The smart money is not going after this niche, so we do have to go through quite an educational process with our investors but we think that smart ones get it and we love it when they invest with us. We’ve seen other folks that have purchased parks directly themselves once they get it as to why this is such a good business. That’s really it. It’s been a little more of an effort than I would’ve thought to raise the capital.
Chris: So the fundraising part, yeah, which makes sense. I was excited to have you on the show because I get this phase and I'm a big fan of overlooked markets. And if we just kind of recap all the benefits, so you’ve got a market that doesn’t have massively expanding supply, it’s got increasing demand. The demand for affordable housing is always going to be there and it’s overlooked by other investors and it’s secure. On my checklist of things that I look at with an investment, it has all of that.
Jefferson: It’s got it all.
Chris: Let’s talk about how you got into this and maybe how, if somebody is looking at this going, “I'm new to real estate. I don’t have a lot of capital to invest. I’d love to invest with you and get that kind of return but I like the idea of mobile homes.” How could somebody get started in this business?
Jefferson: There are a couple of different ways. You’ve already mentioned John Fedro and he got started just buying individual houses, fixing them up, and putting them out. I believe he was doing rent-to-own agreements. He might have regular rent it. I know another guy who did that as well. He ran up to about 50 individual mobile homes that he invested in. Each of them were cash flowing a couple of hundred bucks for him but he got started with his first home with very little down. I think it was $1000 bucks or something, so if you find the right park owner who maybe just doesn’t have time to fix up a house, they might just give you the house for free or let you pay it out over a year or two. You put some sweat equity and do it. Get the house fixed up and then rent it out or rent-to-own it. Now, we think the real value is in owning the land.
Again, my other friend who got up to about 50 homes then switched over to buying mobile home parks and he now owns five. Anyway, so that’s a good way to get started. Folks can also do what we can do land at home deals. There are deals out there to be had where you can create one on your own where you take, say, a quarter of an acre or half acre of land, you improve it, put in a driveway, well septic, and then you bring on a mobile home and put it on that quarter acre or half acre piece of land. That would be a mobile home park of one and you could sell the whole thing or you could, again, just rent-to-own the house and continue to own a land or buy a slightly plot of land. You could probably get, depending on zoning, but you could probably get four or five houses on, say, half an acre of land. If you can get the zoning, again, that’s the trick in this business, is to go from one house on a piece of land to multiple, two or more is obviously a mobile home park but if you can get the zoning or buy a park that’s already undermanaged but small in that way, it wouldn’t be inconceivable to get a 5-space park for $100,000 and maybe you put down $10,000, you find the right motivated seller who carries back $90,000.
Again, you're now in the business for $10,000. If you already got some experience managing and turning around houses, that’s usually where a lot of the heavy lifting is, so buy a deal with some hair on it, you fix some of the houses up and pretty soon you’ve got a really nice little 10-space park that’s worth a couple hundred thousand and maybe you only put down $10,000 and again bought it for $100,000.
Chris: My business partner is actually doing something pretty interesting. He just bought a lot, it was a single family house and I think it got 15 acres that came with it and he was talking to, I can't remember the name of the company, but I think it’s the company that Warren Buffett founded or invested in—
Jefferson: Probably Clayton Homes.
Chris: Clayton. Yeah, they talked to him about doing something where he would basically subdivide out several lots and they would put homes there for him. Do you know what that whole thing is about?
Jefferson: Yeah, Clayton, through their subsidiary, 21st Mortgage, has a new program called CASH and it enables park owners to get houses, obviously, brand new ones brought in and they put down. The program’s changing a bit but basically they put down maybe 25% and so you can then get, again, a brand new house brought in. They will actually carry the paper. They are licensed mortgage originators so you don’t have to be, so they go through all the hoops, all the paperwork to get a mortgage written properly and you help subsidize that person buying the house. But again, you as the park owner, you get a pad filled for a lot less money than if you were to buy the house outright yourself. We participate in that program right now in our Kansas City Park, I believe also in Indiana. We’re getting signed up for the Illinois Park. That’s a good one to participate in.
Chris: Nice, nice. Thanks for that. it seems like a great way just to help fill spaces, right?
Jefferson: Yes because that’s kind of the Achilles heel. Frankly, even if you were able to build a park, you would have an improved vacant field. You wouldn’t have houses on it yet, so that’s something a lot of people overlook. They don’t understand that, again, even if you were able to build one, really solving that house financing issue, it can be quite a conundrum. When I got started, that program didn’t exist, so I was spending hundreds of thousands of dollars on mobile homes just paying cash, buying them out of bankruptcies, foreclosures from banks, and bringing them into my park. Usually, they were abandoned in the middle of somebody else’s land and I would bring them in and fix them up and again pay for all the fix-up myself, so it is easier to bring in a brand new house right off the factory floor and if you can get financing on it, you can infill your community fast.
Chris: Absolutely, awesome. Well Jefferson, now it’s time for five to thrive. These are five questions that can help our listeners through your expertise to learn how to create more income or build more wealth. Are you ready?
Jefferson: I'm ready.
Chris: Alright. Well, I think we answered the first one but I just want to hit this again. What’s piece of advice that you’d give to somebody who wants to follow in your footsteps and get into mobile homes? Again, say, they're brand new, would you suggest going deal by deal and just learn the business or would you say maybe go straight for parks.
Jefferson: I would say go straight for a park. First, get educated. We’ve actually launched our podcast called Mobile Home Park Investors. It’s the world’s first podcast just dedicated to the mobile home park business, so we’re going to be doing a lot of education there and there are other books and seminars and things to go to. Get educated and try and buy the land along with, perhaps, some homes. So if you can start small, again, there are 5-spaced parks out there, then are 10-spaced parks. They tend not to be listed with brokers, small parks tend to go on Craiglist and ebay. For anybody who’s wanting to start small, I would look those couple of places and look to buy a 5 or 10-spaced park but yeah try and own the land and fix up houses as needed, get them sold off so you can get to down to just owning a parking lot.
Chris: Beautiful. I love it. Are you in the camp that says you should focus all your attention on one thing and master it and build one source of income or are you in the other camp that you need to diversify and have multiple sources of income?
Jefferson: No. I'm more of a focused guy. This is the only form of real estate that I invest in and I've got well over half of my net worth probably closer to 80% in mobile home parks. I do a very little bit of value investing in the public markets, but again, the overwhelming majority of my wealth and 100% of my time is focused on mobile home parks. I'm a big fan of focus, whatever it is.
Chris: Find what works and then—
Jefferson: Whatever you're focusing on, focus, focus, focus.
Chris: Nice. Is there a book that you would say as required reading for real estate investors or maybe for mobile park investors specifically?
Jefferson: Yeah. An industry consultant guy named George Allen has done a book called How to Find, Buy, and Manage a Mobile Home Park, so that’s good. For real estate generally, I really like reading Robert Kiyosaki’s Rich Dad, Poor Dad so I’d recommend that. I’d also recommend a book called The Millionaire Next Door which covers broadly how folks have made wealth and budgeted and lived within their means and generally focused, and again, how somebody who looks like they live in a rather modest house next door might be a multimillionaire. Those couple of books, I very much enjoyed reading. So I recommend really all three of those.
Chris: Nice. Do you have a favorite quote or a mantra that you live your life by?
Jefferson: Not so much on the business side of things. I'm named after Thomas Jefferson, so I love a lot of his quotes. He said that “The only truth in newspapers is to be found in the advertising” He’s talked about, if I can get it right, “The blood of patriots must be refreshed,” I'm bumbling that one but basically I like a lot of Thomas Jefferson quotes and things that are patriotic.
Chris: Nice. Final question, what does true wealth mean to you?
Jefferson: It’s probably more about time and flexibility than any particular net worth. I'm blessed to be happily married with a couple of great young kids and doing what I do in real estate. It’s a very different time requirement. It’s just much more flexible than when I was working for some of those startups or even before that when I was working for some larger companies. For me, it’s just being able to work wherever I am, wherever my cell phone gets reception and that gives me the flexibility, again, to spend some time with my family, work when it’s good for me and not have to punch a clock, in and out, 9-5.
Chris: Beautiful. Well Jefferson, thank you so much for being on the show. I'm sure people got a ton of value from this and we’ll link up your podcast, we’ll link up your website. If anybody’s interested in investing in Jefferson’s fund or just learning more about mobile home park investing and that’s just something that I think is really cool because, again, it’s an overlooked market, it’s secured by real estate, and all the economics just make sense. Jefferson, any final words of wisdom or any kind of parting thoughts?
Jefferson: We’d love to have folks connect with us either through parkstreetpartners.net or our mobilehomeparkinvestors.net websites that will be helpful for folks.
Chris: Thanks for being on the show.
Jefferson: Thank you Chris.