Mastering Manufactured Home Investing With Jefferson Lilly, Real Finds Podcast #31 Transcript
Gordon Lamphere: Hi, I’m Gordon Lamphere with the Real Finds Podcast, a podcast series where we interview key entrepreneurs, scientists, and activists who are shaping real estate and, as a result, our world. On today’s podcast, we interview Jefferson Lilly. Jefferson is a master in the manufactured home space. On the podcast, we discuss the ins and outs of investing in manufactured homes, efficiently structuring affordable housing deals, and the future of low-cost housing. Jefferson, thank you so much for hopping on the podcast today.
Jefferson Lilly: Thanks for having me, Gordon. Looking forward to our time today.
From Silicon Valley to Trailer Parks
Gordon Lamphere: Why real estate? Your background isn’t traditional real estate. How did you get into the business?
Jefferson Lilly: My niche is mobile home parks, and as I like to say, when I woke up from the concussion, it just seemed like a good idea to buy a mobile home park. More seriously, I’d been working almost ten years in high tech in San Francisco and Silicon Valley, and I went through the dot-com boom and bust. I saw my stock options go up and right back down. A lot of companies went out of business. Ours got bought and I kept my job, but a lot of my peers, equally bright and no less deserving, found themselves out of work in early 2000 when the bubble burst. So I wanted some stable side income. Initially my goal wasn’t to leave high tech, just to add income. I was attracted to apartment buildings, because, while I’m not in Warren Buffett’s league, I try to be, and he always says stay within your circle of competence. I’d lived in apartment buildings, so I figured that must be my circle of competence. I started looking on LoopNet, filtering for multifamily, not in the Bay Area, where prices were already high, but in Lubbock, Texas, Peoria, Illinois, and Madison, Wisconsin. I’d see ninety-nine apartment buildings at an eight cap, this is about 2005 pricing, and then a mobile home park at a ten cap. I thought, that’s absurd, I’m not buying a trailer park. I’d delete the result and search again. I kept getting hit over the head five or ten times with these quirky properties, and finally I said, I guess mobile home parks are multifamily, and they seem to be priced better, so why don’t I look into it? It clicked pretty quickly, just doing online research, what makes mobile home parks a compelling investment.
How to Evaluate a Park
Gordon Lamphere: Your Silicon Valley background is all about finding value and doing the new thing. Manufactured housing isn’t new, but there are new ways people are investing in it. What’s your method when you look at a park? It’s not like a tech company where you write a new algorithm.
Jefferson Lilly: Right. This is not desk work. It’s not programming or spreadsheets. It’s boots on the ground: get bids, get the street repaved, get house number four completely redone with new kitchen cabinets, uppers and lowers, and an all-metal roof. Invest real money. There are two things to consider. First, the economy the park is in. We can’t fix the economy. Nobody can. So the first thing we do is screen out parks in weak economies, which typically means metro areas where the average house price is under a hundred thousand dollars. In the old-school core of Detroit, for instance, average houses are around sixty thousand, which indicates great economic distress. The brand-new mobile homes we bring in have gone up dramatically in price since COVID and the supply chain disruptions, from roughly thirty-five thousand to about fifty at the factory. By the time we transport a home, skirt it, and put a deck on it, we’re selling a brand-new home for sixty-five to seventy-five thousand. If we’re competing with site-built homes at sixty thousand, we can’t compete. But if the average house price is a hundred thousand and up, and in some of our markets it’s around two hundred thousand, then bringing in new homes at sixty-five to seventy-five thousand is a compelling value proposition. We also rehab used mobile homes that come with the park, which go for anywhere from five to thirty thousand.
So we weed out parks in weak economies, though very little of America has that weak an economy. Probably seventy or eighty percent of metros have house prices above a hundred thousand. You don’t have to buy the park next to Apple’s new headquarters in Silicon Valley. Somebody else, Blackstone I think, already did. As long as the economy is decent, your time and money will be rewarded. Then we look at things like how many pads have abandoned mobile homes on them. Most parks are owned by mom-and-pops. Granddad may have built the park after the war, the mortgage got paid off in the seventies or eighties, and the current owners have been cash flowing nicely for decades. Good for them. But most mom-and-pops make enough money, clearing ten or twenty grand a month with no mortgage, which in Ames, Iowa, or Lubbock is very good income, that there’s little motivation to reinvest in the park. It’s sad, but it is what it is. So we count the abandoned homes we can renovate and how much we’ll invest, usually three to fifteen thousand each, and add that to the capex budget. Then we look at the roads. Often mom-and-pop hasn’t repaved since the park was built in 1962. Sixty-some years, no pothole or crack repair. We fix things like that. We look at water and sewer. We’re looking at a park right now where the trees haven’t been trimmed in upwards of fifty years, and a branch has broken off and is lying on the roof of a tenant’s home. We don’t run our parks that way. The trees are the landlord’s responsibility. Tree work runs fifteen hundred to two thousand dollars a tree. Those are the things we add up when deciding whether to buy, along with the tenant base, the size of the park, and average prices.
Gordon Lamphere: You mentioned deferred maintenance, like the previous owner not taking care of trees. Is that something you consistently see? We hear it across the affordable housing space. And does it contribute to the drastically rising insurance and liability rates?
Jefferson Lilly: My sense is that what’s driving insurance is especially weather, hurricanes in Florida and anywhere along the Gulf Coast, which isn’t related to mom-and-pop. And with the supply chain tighter, it’s just more expensive to buy shingles and two-by-fours to repair a mobile home or a clubhouse damaged in a storm or, heaven forbid, a fire. So it’s weather issues unique to the Gulf Coast and supply chain issues everywhere that are driving up insurance rates.
Misconceptions About the Business
Gordon Lamphere: There are a lot of misconceptions about very profitable asset classes, self-storage, flex, contractor garages, and I think that’s very much the case for manufactured housing. Can you talk about perceptions of the industry versus what’s actually occurring?
Jefferson Lilly: A couple of things. A lot of people unfamiliar with the business think, it’s a mobile home park, nothing but guns, drugs, and prostitutes. That’s not the case. I’m not saying there aren’t bad parks, but there’s no greater percentage of really bad mobile home parks than really bad apartment complexes. Mobile home parks tend to have the same level of criminal activity as the site-built neighborhood they’re in. That’s been proven. If it’s a park in a really bad neighborhood, it’ll be bad, but the whole neighborhood is bad. In a more upscale neighborhood, the park will be fine. The park statistically mirrors its surroundings. So if you want a good park, buy in a better community.
Second, as people get excited and consider investing, they say, this is exactly what I’ll do, I’ll buy ten parks this year and scale to a hundred next year. The fact is, the space is getting far more popular, there aren’t that many good deals, and it’s probably one percent of the total multifamily universe. For every hundred apartment buildings, there’s maybe one mobile home park. It’s a quirky, small niche. There are deals to be found if you put in the time, make phone calls, send letters, and put out a lot of offers that get rejected. You only need one to go through. But it’s not as easy as deploying a large amount of capital.
Another misconception is that it’s just a parking lot with nothing to do, and you sit back and cash flow. The repair and maintenance workload is less than apartments, but make no mistake, this is not a totally passive business. Homes get abandoned and you have to put money into fixing them up. Trees need trimming. Sewers need unstopping. There’s the occasional fire, and then you have what’s left of a mobile home in the middle of your park, with a tenant who’s fine but a home that isn’t, and of course the tenant has no insurance and no debris removal coverage. Now it’s a three-thousand-dollar expense that month to have it cut up and hauled out, because it’s not roadworthy. Those things happen, fortunately not often. It’s not set-it-and-forget-it. You need to be involved, and you need capital reserves. All that said, it’s a good business, even though I have to go to work to make money. That’s a fair trade. But it’s not sitting back collecting checks with a martini. It’s an active management business.
The Path to Homeownership
Gordon Lamphere: I saw you on BiggerPockets talking about ways to reduce the activity involved. One thing I hear consistently in the manufactured home space is rent-to-own versus owning, and leasing lots rather than leasing homes. Can you talk about your model?
Jefferson Lilly: We want to help folks become homeowners. It’s a real win-win. A lot of people come to us from an apartment building where, in most of our markets, a three-bedroom is twelve to fourteen hundred a month. We can put them on a path to owning a brand-new home in ten years, maybe fifteen, for around a thousand or eleven hundred a month. So they pay less to become an owner than to remain a renter, and they start saving month one. They do have to come up with a down payment and show they’re financially stable. On a seventy-thousand-dollar house, we look for ten percent down, not the twenty percent of site-built homes. If a tenant is financially responsible enough to come up with seven thousand dollars for a brand-new house, great. A used house might be one, two, or three thousand down. Used homes, five years down the road they’re a homeowner. New homes, ten to fifteen. Then they just pay lot rent, which across our portfolio is currently under four hundred dollars. That’s a huge win: save a couple hundred a month from day one, and five to fifteen years later, save more like a thousand a month, paying four hundred in lot rent versus fourteen hundred for an apartment. Inflation adjusted, I’m convinced the spread stays about the same. Most of our families make thirty-five to forty thousand a year, about three thousand to thirty-five hundred a month. Saving a thousand a month is a third of your income given back to you.
It’s also a big win for us. When folks come up with that kind of down payment, they have an owner’s mentality rather than a renter’s mentality, and they take better care of the house. We don’t have to maintain the proverbial leaky toilets and roofs. The tenants do, because they’re buying the house. That greatly reduces our expenses. If the toilet flapper leaks, the tenant can spend twelve bucks at Home Depot and install it. For me to call a plumber is a hundred-and-twenty-dollar service call. Big win for us, big win for the tenant. We help people become homeowners and get out of paying rent forever.
Gordon Lamphere: Others in affordable housing say facilities that work well have a sense of community. Does transitioning folks to ownership improve that sense of community, and does it make parks easier to manage?
Jefferson Lilly: It sure does. Renters turn over on average every two years, so they have less chance to get to know their neighbor. In mobile home parks, we estimate folks stay in their house upwards of ten years, so they have a much greater chance to build community. We try to help: barbecue pits, swing sets and jungle gyms, funding Fourth of July barbecues and Easter egg hunts. It’s a win for tenants and for us, because it attracts new buyers if the community feels like a fun place where your neighbor has your back and will watch your house when you’re on vacation. It’s funny, when I go into my communities, not everybody knows who I am, and I often get stopped by my own tenants: hi, may I help you? They want to know who the stranger is. That rarely happens in apartments, but it’s common in mobile home parks.
Gordon Lamphere: Is the rent-to-own or ownership model common in the mobile home space, or is it as diverse as other industries?
Jefferson Lilly: I think it’s the preferred model. I’m aware of a couple of operators who prefer to keep owning the homes and rent them. Those tend to be owners from a repair and maintenance background who live on site or nearby. On a per-pad basis, if you’re the handyman willing to put in new kitchen cabinets and vinyl plank flooring, you can make more money keeping the units as rentals. We call that a horizontal apartment building. You’ve bought yourself a real job, but you can make more out of an individual park. For me, it was like two businesses sandwiched on top of each other: the money from the mobile homes and the money from the lot rent. Rather than integrate vertically and own the homes, I’d rather go horizontal and buy a second park, and have two land businesses rather than a land business and a home business. That’s my worldview, and a lot of people share it, but not everybody.
Raising Capital and Getting Deals Done
Gordon Lamphere: It seems like a competitive space, and parks cost more than a dollar. How do people put deals together? What’s been your strategy for syndicating and structuring deals?
Jefferson Lilly: I’ll tell you my history. I bought my own first mobile home park in 2007, no syndication, just my own net worth, for a little under half a million. I still had my day job. At no point did I say, mobile home parks are so awesome, I’m giving up these sexy stock options. It was a progression. I kept my day job about a year after that first park, so I had 1099 and W-2 income. Then I went full time and took on a couple of consulting clients after a year or two, having cut my teeth on my own property. I bought a second park, again with my own capital. It was another five years or so before I started syndicating. At that point I had a business partner, and we did three deal-by-deals, raising money from people we met online and on a road show, maybe fifteen people in aggregate. The first of those was about eight hundred thousand. Building on that track record, we raised our first fund, then a second. My previous partner is no longer in the business, and I’ve kept the fund model, raising two more funds on my own. That’s the model I prefer, because I have dry powder in the bank, can close properties all cash quickly, and know whether I’m looking for small, medium, or large deals. It’s been an evolution from a day job to a couple of deals with my own capital to establish a track record, and then outside capital.
Gordon Lamphere: All cash is a great incentive for a seller. But in a highly desirable asset class where supply is shrinking, what are the pain points in getting in the door?
Jefferson Lilly: It varies. Sometimes it’s that we have all cash. We might not offer quite the price the seller wants, but we’re offering no financing contingencies. Closing speed depends as much on how fast the seller can get us diligence. If they’re Johnny-on-the-spot after we sign the contract with P&Ls, rent roll, utility bills, a capex list, and photos of the homes that transfer with the park, we can close in thirty days. I just need a Phase I to make sure there’s no toxic waste, and I’ve got a guy who does those in two weeks. That’s a lot quicker than an appraisal or lining up bank or CMBS debt. Other folks we need a longer conversation with, getting to know them over time. Maybe it’s not the right time now, but there’s a health issue. A lot of mom-and-pops are in their sixties or seventies, and often the park is first or second generation but the kids want nothing to do with it. One of our better deals was from a second-generation owner whose kids had gone off and gotten real jobs, like a leading veterinarian. A health issue and no next generation to take over is good motivation. They’re not desperate, but it’s clearly time. So we have conversations, get to know them, and convince them we’re the ones to sell to. We’ll treat their tenants right, repair the homes, take care of the clubhouse and roads. Often we treat tenants better than the mom-and-pops did, simply by doing repairs rather than letting the potholes slide another year. We invest five to six figures physically improving the park: trim the trees, fix the water and sewer. There’s always something to improve, even in the best-run park.
Gordon Lamphere: Last question before the Final Four, one investors are particularly interested in: what happens with evictions? It’s different from traditional multifamily. Is it particularly challenging, or a pretty ordinary process?
Jefferson Lilly: Somewhere in between. If the tenant owns their home and isn’t paying lot rent, that’s relatively rare. If they’ve shown they’re financially stable enough to buy the home, they’re a step above the typical apartment renter. It’s rare that those folks can’t pay four hundred dollars in lot rent, but it happens. Then we go through eviction, which is state by state, sometimes with an extra thirty days. Often, if they owe us a couple thousand dollars, that’s about what the house is worth, and we’ll say, move out, sign the house over to us, and we’ll put five or ten thousand into fixing it up and rent-to-own it to help someone else become a homeowner. If a tenant is in one of the homes we’re renting to own and hasn’t gone through with the purchase, they’re still a renter, and it’s a more standard apartment-style eviction. Nobody likes doing it, but that’s how it works.
The Final Four
Gordon Lamphere: We’re getting to the end, but we have our Final Four. I’ve learned a lot today about the manufactured home space, affordable housing, and a real stopgap in American housing. First: where do you see trends in the manufactured home space going?
Jefferson Lilly: In the near term, with some people having gotten in over the last two or three years with short-term debt on parks they may have overpaid for, I think we’ll see distressed buying opportunities. The underlying business remains good, but a number of relative newbies thought they could pay a four cap on a park without much upside. So I expect some distress selling in the next couple of years. I remain very sanguine, very bullish on the business. There will always be lower-income folks in need of affordable housing, and manufactured housing will continue to be a cheaper alternative to renting that delivers title to the occupants. People will continue to become owners, and that’s a good thing. As more folks like us get into the business, people with a bank account who can afford to invest, the supply of affordable housing will increase. More abandoned used homes get fixed up, and we keep buying new homes from the factory and infilling vacant pads. It’ll continue to be a good, stable business.
Gordon Lamphere: Stability in affordable housing seems likely, and you’re right that some folks shouldn’t have bought three and four caps. If you could look back and give young Jefferson advice, what would it be?
Jefferson Lilly: I think I was fine in high school. I’d give different advice to twenty-nine-year-old Jefferson coming out of business school. That’s where my career went off the rails, going into high tech and continuing to work for the man. There’s value in working for others, and I did that through my twenties and thirties. I bought my first park at thirty-nine. I’ve generally been on the right path. I’d just encourage myself to do it faster: step on the gas, get into the business sooner, raise outside capital sooner. I’ve been moving in the right direction, just too slowly. I’m speeding up now. I probably wouldn’t have worked at any of those high-tech companies, or maybe just the first one. I’d have gotten into this business sooner.
Gordon Lamphere: One focus of the podcast is educating ourselves, and we get great book recommendations from a wide spectrum of real estate professions. Is there a book we should be reading?
Jefferson Lilly: For something specific to the mobile home park business, Sam Zell’s Am I Being Too Subtle? It covers his whole life, and he did far more than mobile home parks, but you’ll learn about the park business and, more generally, what motivated him and how he assessed risk. I’m also a big fan of The Snowball, which I think is the best-written biography of Warren Buffett. Buffett bought Clayton Homes, the largest manufacturer of mobile homes in America. You won’t learn much about the park business, but you’ll learn how Buffett assesses risk, how he does business, and, frankly, what that cost him personally. He perhaps wasn’t the best dad or husband. He’s an amazing businessman, and that’s where he focused. You get a balanced look at Buffett, at business, and at the trade-offs between work and personal life.
Gordon Lamphere: Great recommendations. One final recommendation, and the whole point of the podcast: who should we bring on next? People in the industry tend to know who else we should be talking to.
Jefferson Lilly: I’d try to get somebody from Equity LifeStyle Properties, Sam Zell’s company. They’re the big dogs, the biggest owner of mobile home parks in America. The name of the woman who’s CEO escapes me, but I’d try to get her or somebody from ELS and ask how involved Sam Zell was in growing that business, how hands-on or hands-off he was, his management philosophy, and how they grew to be the biggest owner of mobile home parks. Sam passed away recently, so you won’t get him on the podcast, but that would be my suggestion.
Gordon Lamphere: A fantastic recommendation. One final question: what’s the best way to get in contact with you, for somebody who wants to learn more or invest?
Jefferson Lilly: One of two places. First, our website, parkavenuepartners.com. There’s an intake form at the bottom of the homepage and a join-our-mailing-list button at the top. We only send six or seven emails a year, I’m not a spammer, and you can unsubscribe any time. That’s for folks interested in investing. For folks considering getting into the business, I started the industry’s first podcast, called Mobile Home Park Investors, on Apple Podcasts, Stitcher, Google Play, all the usual places. The website, mobilehomeparkinvestors.com, links to the podcast and to our LinkedIn group, the biggest such group on LinkedIn with almost seven thousand members. You can connect with me on LinkedIn as well.
Gordon Lamphere: Jefferson, thank you so much for hopping on the podcast today, and we’ll have to have you on in the future.
Jefferson Lilly: Would love to. Thank you, Gordon.
Gordon Lamphere: Thanks again to Jefferson. If you enjoyed the podcast, please give us a like, a follow, and a review. Your interactions and subscriptions truly matter and help us provide quality guests. You can find us on YouTube, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere with the Real Finds Podcast. Thank you for listening.
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