Recent years have proven that the more unconventional real estate investments can bring in as much, if not more cash flow than their conventional counterparts. Lance Pederson’s recent interview with Brett Bowman and Ryan Hill of Suncrest Capital proved as much by diving into the mobile home community industry. Suncrest Capital, an investment company that has recently joined Verivest, relies on gathering resources from passive real estate investors and injecting these funds into the acquisition and repositioning of mobile home communities. Has their journey been easy? Could commercial real estate be the future of higher ROIs in the real estate industry?
Brett and Ryan’s Debut into Real Estate
Everyone working in the real estate industry has a story of how they stumbled into this sector. Some were born into the industry, while others sought it based on peer or professional advice. So, what was the case for Brett and Ryan?
Ryan is not new to the real estate industry, having worked as a residential real estate agent in the state of Washington for about thirteen years. When his family moved to Idaho, he did not want to rebuild a single-family realtor company. He studied mobile home communities for about four years and figured that this fresh start was the best time to invest in manufactured homes. Armed with this knowledge, he bought a mobile home community south of Kansas City with twenty spaces, two years ago. He later partnered with Brett a year later, and together, they bought another off-market mobile home community in the same area. Today, he has ten communities in his portfolio and hopes to close on more communities currently under contract as the company scales up.
Brett, unlike Ryan, has a background in tech. Before investing in mobile home communities, he followed the real estate growth strategies known to most people. He’d already invested in single-family homes and hoped to scale to apartment complexes. He, however, reveals that these growth strategies were often encumbered with high costs, which necessitated loans. Moreover, it took a lot of work to set up the investments, and the cash flow was unsatisfactory. He started looking into commercial real estate as an alternative and realized it was a much better option. The opportunities for fractional ownership enabled him to diversify risk while enjoying a good return on his investment. Additionally, he got into multifamily and industrial syndications before partnering with Ryan, who introduced him to mobile home communities.
How Do They Settle on Mobile Home Parks?
Is there any criteria used in settling on a mobile home community? If so, what factors have these investors considered in their search, and how has this paid off?
When Ryan first started looking for a mobile home community, he had at least four years of research to back his search. Moreover, he had networked with a few mentors who showed him the ropes. He scoured through regional sites, hoping to find a good deal. Research reveals that he must have looked at about 150-200 properties before finding a good one. One mobile home community on Loopnet caught his attention. It had been on the site for three years and met all his requirements, except that bank financing was not feasible. He worked out an owner financing deal, and having put down $80,000 on the community, he was the proud owner of the mobile home community. He’s currently refinancing the deal.
So, what did he look for? Or rather, what does Suncrest Capital look at when settling on a mobile home community? Ryan states that when sourcing mobile home communities in and around the metro areas, they consider population (100k+), the median income ($40k+), and median home prices ($100k+). These are all factors essential to a successful mobile home community, and the results show in how fast he’s scaled up in the last few years. He now has property managers managing his communities in Missouri, Kansas, Iowa. He shares that the more deals you close on, the more trust you gain within your networks. Thus, it becomes much easier for brokers to contact you with off-market deals, drawing you closer to better quality communities with high cash flow potential.
Brett divulges that even with the key criteria (population, median income, and median housing prices), they conduct investor analyses on all potential investments. The demand for mobile home communities has grown ever since COVID. As people scale down on expenses and downsize, they have been buying mobile homes left, right, and center. These and other statistics have proven useful in the investor analyses because they shed light on whether Suncrest Capital should invest in newer or used homes. He also adds that they must factor in the cost of moving mobile homes to infill community spaces. Moving one home from one community to another across town can cost as much as $3,000. Brett asserts that they have now focused on a centralized strategy to account for and capitalize on these changes in demand. They are more likely to buy communities closer to the ones they already own as this eases the operational side of things. Moreover, they now want to invest in moving homes to eliminate the added moving costs that are on the much higher side.
Does Experience in The Manufactured Home Industry Come with Any Perks?
Why, yes! Besides getting more access to off-market deals, their growth in the manufactured home industry has also pushed them closer to more investor capital. Their successes in previous mobile home communities has catalyzed more growth because more passive investors want to invest in mobile home communities. Furthermore, it has also fueled the finding and infilling of newer communities. While they could have passed on communities with heavy infill needs in the past, they can now invest in them because they have the resources to stabilize these communities. They can comfortably say that the numbers game now favors them and opens them up to much better opportunities.
Is it always easy to infill a community? Not at all. While they have gotten better at it, Brett and Ryan agree that it takes a while to fill up a mobile home community and generate enough lot rent to achieve a suitable cash flow. They also add that having a higher number of renter-owned homes is better than community-owned homes. They always incentivize the renters to purchase the homes to enable them to focus on maintaining and managing the communities instead of the homes.
Lance adds that from what he gathers, mobile home community owners must excel on the operational side of things. It takes a lot of work to market the communities to mobile home community owners and convince them to take up space in the lots. Mobile community owners must also figure out how to infill the homes, stabilize the communities, and increase the value of the communities by adding infrastructure. However, they can all agree that once the communities stabilize, they gain more value and attract more investors. To add to this, Ryan states that each home infill can generate as much as $50k to $60k more in the property's value based on the lot rent.
The Aspect of Depreciation
Do mobile home community owners enjoy the same depreciation benefits as conventional real estate investment owners? Not quite. Brett concurs that many people assume that the depreciation benefits in mobile home communities would be less than those in conventional homes. After all, there is an apparent lack of structure. However, that is hardly the case when you get down to it. Rather than taking 27.5 years to depreciate, mobile home communities are on a fifteen-year schedule. Thus, when doing the cost segregation study in mobile home communities, the focus will be on anything above the ground. That includes all improvements, counting the infrastructure, concrete, homes owned by the community owners, etc. These are put on different depreciation schedules of five or fifteen years. It is possible to do a bonus depreciation within the first year of ownership, enabling investors to recoup their money much faster. He gives an example of their Iowa portfolio, which they purchased for $6.4 million, with an estimated bonus appreciation of almost $5 million.
Risks in Mobile Home Parks: How Far Do They Stretch?
Underwriting is essential when embarking on real estate investments as it mitigates most of the project-related risks. It thus follows that Suncrest Capital would follow suit to protect its investments. Brett discloses that they always plan for the best-case scenarios for natural disasters and losses. Even so, when calculating their operational costs, they rely on actual figures sought from professionals in the field and couple these with higher cap rates. However, Ryan states that their underwriting is more conservative and mainly covers risks related to repairs, maintenance, and vacancies. Seeing as their mobile home communities are in Iowa, Missouri, and Idaho, there is a relatively low risk of hurricanes. They add that getting tornado insurance for mobile home communities is easy and is included by default in most insurance policies.
How Do They Retain Existing Tenants in Mobile Home Parks?
Mobile home communities are homes to groups of people who have lived around each other for a long time and bonded. Unlike conventional housing, where people might barely interact, these communities share information and connect. Moreover, the cost of moving these homes is high, and once someone settles in a mobile home community, they will most likely stay for good. Even so, Lance states that the news of changes in mobile home community ownership can make the existing tenants uneasy about the future. You may wonder, how does Suncrest Capital ensure that it does not spook the tenants?
Ryan clarifies that given the dynamics in mobile home communities, they follow a strategy to win the tenants over by convincing them that the change is for good. They send letters to the tenants to assure them that no major changes will occur. They also point out that they are not there to hike the rent rates, but rather improve the communities and make them better for each tenant. Moreover, they upgrade the communities to make them more improved, creating the sense that they can enhance the community. Common changes include the addition of speed bumps, installing security cameras, paving the paths, etc. They state that these changes often push the tenants to work on their homes to match the façade. They start clearing their yards, washing their exteriors, and even painting their homes.
To help them achieve the desired aesthetic, Suncrest Capital adopted a paint program to introduce the tenants to contractors and help them select color palettes. They even pay for the paintwork and bill it back to the tenants. When the logistics part is no longer in play, tenants have an easier time updating their homes, making the communities more attractive to them and other tenants. By doing this, they lean to the sense of community, which grounds the tenants.
Do They Have Access to Financing?
Brett shares that they have not bought mobile home communities on a cash basis yet. Instead, they have worked with local community banks familiar with mobile home parks and communities. They focus on banks that believe in a vision and are willing to invest in potential. He uses the example of their Missouri acquisition, where they purchased four communities from three sellers within six weeks. While one of the communities was in good condition, the other three needed upgrades. Thus, they could gain as much as twice or three times the value within a year or two after the improvements. They were lucky to get a bank that offered them an 80% LTV coupled with a 4.2% interest rate. He adds that this is much cheaper than with national banks, where the LTV would average 50%-60%.
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About Suncrest Capital
Founded in Boise, Idaho in 2020, Suncrest Capital is passionate about building generational wealth for investors and their families. Suncrest focuses on mobile home communities to enhance the lives of residents by improving the quality of the communities, adding additional homes, and technology. Through these strategies, Suncrest can dramatically increase the value of the community without impacting the cash flow of current residents. Suncrest currently owns and operates 13 communities, located primarily in Idaho and the Midwest.
Want to learn more about Suncrest Capital’s open partnership opportunities? For inquiries contact: email@example.com