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Welcome to the Mobile Home Park Mastery Podcast where you will learn how to identify, evaluate, negotiate, perform due diligence on, finance, turn-around and operate mobile home parks! Your host is Frank Rolfe, the 5th largest mobile home park owner in the United State with his partner Dave Reynolds. Together, they also own and operate Mobile Home University, the leading educational website for both new and experienced mobile home park investors!
As long as I've been in the mobile home park business for the last three decades, there's been an ongoing debate on what is the optimal park size. Is it large? Is it small? And what's the science behind making that decision? This is Frank Rolfe, with the Mobile Home Park Mastery Podcast. We're gonna go ahead and explore what makes for the optimal number of lots in a mobile home park that you're looking to buy. Let's first start off with where do you find the best deals? Historically, I think it's been fairly well proven and is definitely, based on science, kind of obvious that if you look in areas where fewer people are looking, you'll get deals that have higher rates of return. Just because we live in a supply and demand society, wherever people are looking the hardest for parks based on park size, then through supply and demand, those will offer weaker numbers than the things that people are not seeking. And if that is the case, the number one most sought-after park size is about 100 to 150 lots and larger because right now in the cycle of our industry, where we've had so many new entrants from the private equity arena and other larger players, they like that size.
I know many people operate under a mandate or a mantra that for them to look at a park, it has to be 100 lots in size or more. So what's it tell you? Often to find deals with superior economics, you need to buy parks smaller than 100 lots. How small? Well, we've done great on deals that were 50 lots and 40 lots and 60 lots and 70 and 80 because there really isn't any hallmark deficiency in deals. Nothing that sets the 100-space deal apart as being superior to the 99-spacer. In fact, the whole idea of being phobic on 100 lots in and of itself is very odd. It's kind of like the speed limit. How did we end up with a 55-mile-an-hour speed limit? What's the science behind that? Why not 52? But why not 58? Why are senior properties designated for those in their 50s when, in fact, the minimum retirement age is in the 60s? Once again, I can't explain it. I'm sure there's a bureaucrat or a bureaucrat committee out there that came to this conclusion, but there's no science behind it.
And similarly, when it comes to those people who only look at deals that are 100 lots and more, I don't know where they're getting that information from. So from an economics perspective, if our question is which is better, the bigger parks or the smaller parks, you're probably gonna get better deals with higher cash-on-cash returns and higher IRR from deals that are below 100 lots. But what about the other issue that many park owners look at? I would sum this up as a debate between diversity and efficiency. Let's assume you had two options. You could buy one 100-space mobile home park or two 50-space mobile home parks. Which is better? Well, let's look at that for a minute. Which is better? Now, the 100-spacer means you'll have in one investment, in one property, 100 lots. That will be much more efficient from a management perspective. You only need one manager, but if you had two 50-space parks, you'd have to have two managers. On top of that, you have to stay on top of your one manager, which is much easier than staying on top of your two property managers in the other example. So clearly from a management perspective, yes, the 100-space park is much more efficient. But then you have the issue of diversity. If I have two 50-space parks and there's a big flood and 10 lots get damaged in one of those 250-space parks, I still have my other park with no damage at all. So my issues are much more minimized. If I have a 100-space mobile home park and the flood hits, well, then I'll have flooding in my park. And just like in the stock portfolio, do you want diversity or you want to put all your money in one stock?
Now, we live in a strange America today. There's all kinds of things that happen. Not only are there weather events, there's political issues, there's rent control, all kinds of things that can befall you. Is this really the best time to have all your eggs in one basket? Or is this a better time to have diversity? Now, I can't answer that question for you. Everyone has their own tolerance for risk. But I would say that today, I would prefer diversity over efficiency in most cases. Because I don't think that the efficiency on the management, which in most mobile home parks today, let's be honest, the manager's role has never been more slight. You got ACH on your collections, all kinds of technology that almost puts you in the field. Many people are using their own sales departments off-property and call centers. But that's the big issue. Do you like diversity or efficiency?
Another thing we need to look at if we're going to debate park size or optimal park size is what the impact is on park size and financing. Now, this one may tend to get you back more towards larger parks because most people today, when they're getting a loan, they definitely favor Fannie and Freddie debt or at a minimum conduit because they love the non-recourse nature in the longer term. So that's very appealing to people. And to get that kind of debt, you have to have a larger property. But yet, not always. There's minimum thresholds of deal size. You probably can't get a Fannie and Freddie loan on something that's under $5 million. But at the same time, in some parts of America, Colorado, for example, a 50-space park can be a $5 million deal. And if it can't hit Fannie Freddie, it probably can, in fact, hit conduit just by the nature of the fact that prices and values have risen so much.
But when it comes to financing, yes, it's much easier to get financing on a single 100-space deal than on two 50-space deals. It's also easier from an underwriting perspective on your loan. You only have to have third-party reports on one property as opposed to two. So that part definitely makes it more easy. And then you have the exit strategy. When you go to exit, will you get a better price on the 100-space park or on the two 50s? Well, if you're going to be selling to a larger group, private equity group, or other larger player, then definitely the 100-spacer will draw the better price than those two 50s. Unless, instead of selling them to one buyer, you sold the two 50s off to two different buyers who cherished and really were aggressive in buying that 50-space park because they liked that location.
Now, most people tend, if you look at their portfolio, you'll see they kind of cast in stone their decision on this already based on their portfolio construction. Our portfolio, for example, averages very, very near to 100 lots. I think our average right now is running about 102 lots per park. So we found that size in many ways to be optimal. But if you look at our portfolio, we have some smaller parks, 40 and 50-space parks, which are then offset by larger, let's say, 150-space parks. But there are people out there in our industry who have massive parks on average. There's players out there where their average park size is 500 or 600 lots per park. To me, that's just way, way too lacking in diversity. I would find that terrifying.
But the big item at the end is it all really revolves around would you rather have one great 100-space deal or two phenomenal 50-space deals? I'd rather have the two phenomenal ones because I know in this business that the end performance, how you ultimately fare at the end, is often determined by what you buy on the front end. And if you buy a really great deal, regardless of size, it's always a winner. And if you buy just an average deal, it never will make you fully happy. When you're out there looking at parks, ponder these different ideas. Ponder efficiency, diversity, exit strategy, ending, superiority of rates of return. And that will help shape your opinion. But we'll never actually have a final answer to this question. Maybe when we look back 10 or 20 or 30 years into the future on where we're at today, maybe there will be more statistical evidence as far as what size really was the best. But for right now, the key is buy what's strongest. Buy what is most attractive. That is the best way to determine size. This is Frank Rolfe, with the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.