October 2015 Newsletter

It is October! Happy Halloween!

Recent deals examples

  • Hilton Head Island, SC
  • Purchase price $239,000
  • Rehab $25,000
  • After repair value $380,000
  • Loan Amount $260,000
  • Funded September 3, 2015

  • Grand Haven, MI
  • Purchase Price $55,000
  • Rehab $32,000
  • After repair value $115,000
  • Loan Amount $85,000
  • Funded September 18, 2015

Commonly Asked Question:

The Halloween might be scary, but US Stock market volatility should not.2 months ago we were facing very high volatility and a lot of economic uncertainty.However, market nervousness have significantly subsided since.Another good news is that we are observing an amusing political circus.We should have a very entertaining next Republican debates right before the Halloween.Why is this a good news?Typically, election campaigns spending boosts the economy and puts people in better spirits, especially when boring debates turn into entertainment J.I have to say that weather you love or hate Donald Trump, you have to acknowledge that he has made this political season into a Hollywood affair.

Now let us chat about Real Estate.

Recently, I have been asked to research investing in Mobile Home Park(s) (MHP).The main question was “can you make 30% returns in MHP investing passively?”I started my initial research and have found out a few things about the space:

  • MHP trade at CAP rates 8-10% on average, which is a bit better than multi-family properties;
  • MHP financing at 65-70% LTV is available at rates similar to commercial loans;
  • CASH on CASH with about 2:1 leverage should enable returns in 12-15% rate;
  • MHP have accelerated depreciation tax benefits vs. multi-family residential or commercial properties;
  • MHP have lower maintenance cost vs. multi-family buildings because MHP rent spaces to Mobile Home Owners, and are responsible for Roads and Utilities, but not for Homes;
  • Well managed parks can provide another 10%+ in equity based return per year;
  • MHP investments are usually long term projects unless there is a good plan to rapidly improve the asset(s) and then refinance or sell;
  • It would appear that MHP are less sensitive to economic ups and downs.

My plan is to attend an educational event or two in the space to learn a bit more about the business and investment opportunities.I think it is an interesting space, and educated investors can make stable double-digit cash-flow returns, with some appreciation upside.

How would I compare investing in MHP vs. Turn-Key SFRs vs. Investing in Loans (promissory notes/mortgages)?

  • MHP is a larger capital investment commitment for sure – it is similar to buying a multi-family complex;
  • Turn-Key SFRs should provide similar returns to MHP, both cash-flow and appreciation potential;
  • Turn-Key SFRs are much easier to sell than MHP – liquidity should be better;
  • Book-keeping and accounting of owning many SFR takes more effort than MHP investment – it is many vs. one asset, per say;
  • Investment in Loans (promissory notes) is ideal for Self-Directed IRA investors as Interest received on Loans is ideal for IRAs;
  • IRA Ownership of MHP or turn-key properties with Mortgage debt-leverage is subject to UDFI (Unrelated Debt Finance Income) tax – account and tax reporting might become complicated too;
  • Taxable funds investment in MHP or multiple SFRs benefits from Accelerated or Standard Depreciation;
  • Another interesting twist in Notes investing is Shared Appreciation Mortgages;
  • Loans that pay interest plus share an upside in the property.

There is no right or wrong way to invest here.It is a diversification play at the end of the day if you are working with the significant capital.You should definitely look at tax-efficiency of each investment class.

If your capital is limited, you may have to choose your battles carefully, picking the right initial area of focus.

Ask yourself a question:“Are you learning to invest, and investing to Learn?”

Most investors deploy capital to get a good return.That goes without saying.You are always evaluating likely Risk-Adjusted ROI.However, as you are exploring the new investment opportunities, you are faced with the challenge that you don’t know enough about the new sector to make the perfect investment decisions.Perfection is often unattainable anyway.So, you should be prepared to “Invest to learn” the new business, its inner dynamics, networking with good players in the space.This is the approach to put some capital and learn on the way.

If you choose to go “Learn to invest” route, you’ll wind up spending a lot of time first, before putting any money to work.And this is absolutely fine if you can afford the time J.

I hope you enjoyed this short read.

Have an awesome Halloween!

Mike Zlotnik

Managing Director / Co-Manager

TF Management Group LLC

Inspire Capital Management Group LLC

Tempo Funding LLC