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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!
In the cage fight between capitalism and socialism that is gripping America today, there's this illogical concept that a landlord is overly compensated for what they do. The liberal left would like you to believe that it's evil, that it's wrong to make money, that owning property is bad, that landlords are to be shunned, but we all know that's total insanity. Without landlords, people would have no place to live. Half of America can't buy something, perhaps because they do not have or have amassed the capital or the credit to actually get a bank to approve to give them a loan. And regardless of whether someone is renting or owning, there needs to be respect for landlords for all that they do for society. But for a landlord to buy a property, it does have to be compelling. Because when you buy something, you have to put up your capital for the down payment. You have to go out and obtain a loan, which means you may have to have personal recourse risk from that loan. And then you have all the effort and stress of turning the mobile home park around and operating it. And for all those different steps, you obviously have to be handsomely compensated or you're not gonna do it. This is Frank Rolfe with the Mobile Home Park Mastery Podcast. We're gonna explore this concept of how much is enough, how much a landlord needs to see as far as profit from a mobile home park deal to go forward with it. And let me say on the front end, we've looked at thousands of mobile home parks over the last 30 years, and not on any single deal that we've ever bought or turned down has how much money we'd make not been a part of the equation.
Mobile home park owners are not nonprofits. We're not government agencies. We're not the post office, which loses, what, $70 billion a year in operations. No, we're on our own. It's sink or swim. The park that we buy has to make enough money to cover the loan and have a handsome profit after that. So what are some of the reasonable benchmarks most buyers should focus on to decide whether or not a mobile home park is right for them? Well, the first thing that most mobile home park buyers are looking for revolves around the number 20, 20%. And I don't care if it's 20% cash on cash or 20% IRR. Your more institutional style buyer is more focused on the number of IRR as opposed to cash on cash. But everything I've ever seen in our industry in the last 30 years always revolves around the number 20. And what that means is you want to have a 20% return on the money that you put into the business. So let's look at this on paper. Let's assume you had $200,000 for a down payment. If you bought a CD with that $200,000 at 4%, it would make you $8,000 a year. If, however, you put that $200,000 down on a successful mobile home park, it would get you $40,000 a year. That's the difference between 20% and what you can make in a CD or Treasury. And you know that ties back to someone famous, Warren Buffett. Warren Buffett's lifetime batting average as a stock investor was 19.8%. So every time a mobile home park owner buys a mobile home park and hits a 20% benchmark, all they're really doing is becoming another miniature version of Warren Buffett. And 20% is a great return level because what it means is after tax, let's assume 20% is knocked down after tax down to 15, and then after inflation, which right now is running about 4%, you still have 10 or 11% left over of growth of your capital.
That's great investing. That is very professional level investing. So a 20% cash on cash or 20% IRR is kind of the gold standard of our industry. Now, not everyone demands returns that high. I know people who are very, very happy on 10%. Others would be very happy at 15%. But how do you hit 10% or 15 or even 20%? Well, with a mobile home park deal, what you need is you need a spread between the interest rate on your loan and the cap rate. A one-point spread, in other words, let's say the interest rate on the loan was 6% and the cap rate on the deal was 7%, that'll get you a 10% cash on cash return annually. Or if you can get to a two-point spread, so 7% on the loan, 9% on the cap rate, that takes you to about a 15% cash on cash return. But if you want to hit 20%, you need a three-point spread. So if the financing rate was on the deal was 7%, you'd have to have a 10% cap rate to hit that. And that spread is what dictates your cash on cash return. And a three-point spread gets you 20%. Now, is that attainable in our industry? Very. We're the only industry out there you can do it. Now, you can't always do it on the front end when you buy the mobile home park, but within the near term, within several years, you should be able to pull it up to that with your typical mobile home park turnaround. What you're gonna do is you're gonna fill vacant lots and vacant homes. You're gonna push the rents to market levels. You're gonna often change the trajectory of utility costs from your domain over to the tenants to foster conservation and eliminate wasteful spending.
So 20% cash on cash or 20% IRR is the gold standard. And yes, it is attainable. But now there are some other things that most people are looking for in a typical mobile home park. One of them is they'd like to see a cash flow of $100,000 a year. Now, how do you hit $100,000 cash flow from one single mobile home park? Here's how. Let's assume you went out and bought an 80-space mobile home park, but the lot rent is low based on market standards. And let's assume it's $100 below market, which is very, very common. So the lot rent's at 300, but the market is at 400. If you take that lot rent and you raise it up $50 in year one and another 50 in year two, now you've created a $100 increase per lot, which times 80 is 8,000, times 12, $96,000 of free cash flow. You might say, well, I can't afford to buy an 80-space park. What about on a 40-space? Same exercise, but it will take you four years instead of two at those rent adjustments to get there. Now for those listening to this saying, "Oh my gosh, that's a completely unethical business model," well, no, it's not. We see that in every industry every day. I don't care what sector of real estate, I don't care what business you're in, people are gonna raise the cost of their good or service up to what market levels are. It's called the free market system. And it just so happens that most of your moms and pops in America have rents that are ridiculously low because they deliberately made them that way. Case in point, the average lot rent in America in the 1960s in a mobile home park was about $50 a month. And $50 in the 1960s, inflation adjusted today, would be about $500 a month. Yet many, many mobile home parks are far less than that. We call this mom and pop quantitative easing. It was rampant through the industry for so very long. But now in a modern world, new buyers are looking over these ridiculously low rents and saying, "No, what are we doing? We can't continue on with this."
Now, I go to Costco frequently and sure, they've got the $1.50 hot dog and soda, but that's a loss leader. Costco does that to bring you in the door. They actually lose money on every hot dog and soda they sell. But our business is not a loss leader. Our lot rent, in fact, is our only form of income. And as a result, that number needs to be accurate. It shouldn't be abusive, it couldn't be exorbitant. But in many mobile home parks, what you have, when you look at all the other housing options from single-family to apartment, they're often multiples of lot rent. Three times, five times is not uncommon. So as you bring those rents back into market perspective, you should be able to attain pretty good rates of additional cash flow. That does not even include filling vacant lots and vacant homes, which has never been easier than today. Because today there are financing programs through PEP, 21st Mortgage, and others that allow you to let a real bank do the financing on the homes. And all you do is pick the homes, bring them in, and get them sold.
But $100,000 is very attainable in our business. Another item that many, many buyers are looking for is the ability to push NOI by 50%. Why is 50% important? Well, 50% is key because to do a cash-out refinancing, which is one thing that many, many park owners are trying to do, it allows you to buy a mobile home park at a certain net income, raise that net income by 50%, and then do a cash-out refinancing, which basically means you're able to pay off the existing loan and get all your money back, yet you still own the property. You can repeat that over and over again. It gives you the ability, going back to the $200,000 for down payment model, that you could buy an infinite number of parks with that same $200,000 using the technique of buying the park, raising the NOI by 50%, and then doing that refinancing.
Now, there are some other items in any mobile home park you look at that you still need to pass muster whether you want to buy it or not. One of my favorites is best case, worst case, realistic case. That's where you model the numbers on the mobile home park. If the best case is thrilling and you can survive the worst case without going broke, and the realistic case, which kind of is the middle between the two, is still a very good deal for you, then that's important. Then you have Sam Zell's risk-reward mandate. Zell, also known as the Grave Dancer, moved briskly in and out of many asset types, always able to sell at the top but never get in trouble at the bottom because he was very pessimistic by nature. Now, his favorite axiom was if a deal has high risk, low reward, never buy it. High reward, low risk, always buy it. And the only ones worthy of consideration were high reward versus high risk.
But the bottom line on any mobile home park is it's a very, very personal decision whether or not you want to buy it because everyone's goals are different. Your return goals are different, your appetite for risk is different, the amount of time and money you want to spend in the turnaround and operations of the property are all different. But it's okay to make money. Do not let the media try and dissuade you from the concept that here in America, we truly are about the free market system and we are about making smart investments. Our country was founded on the principle of people in pursuit of capitalism. That's what created all of the wonderful things we enjoy today: beautiful buildings, going to the mall, having a hospital. All these things that make America unique and all of its prosperous nature, those were all derived by people who are out there simply trying to make money with their investments. And that's one of the most natural processes in America. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.