Mobile Home Park Fund vs. Syndication
Mobile home parks are no longer the scapegoat of residential real estate. The industry is fragmented but consolidating quickly. Every week there are more & more investors and operators jumping into manufactured housing. For all you newbies - welcome!
Some MHP owners start by investing their own money. Others find a deal and ‘pass around the hat’, max out credit lines or beg, borrow and steal to fund that first purchase.
Regardless, most operators quickly find they need more cash to fuel their growth. Real estate is great, but hot damn does it eat massive amounts of capital.
Therefore, fundraising is critical aspect of most real estate operations. But taking outside investor capital is a BIG deal. It should not to be taken lightly.
It’s equally important to be thoughtful on the investor side. Investment decisions using your hard earned capital deserves careful analysis that factors in the risk vs. reward of the property, sponsor and structure.
The two most common fundraising structures for mobile home parks are syndications and funds. A syndication might be a portfolio, but typically it is a single asset. The target is defined and the investors know exactly where their money is going.
A blind pool fund is the opposite. The LPs (limited partners) are making a bet on the sponsor and the strategy. They don’t a have the foggiest idea of what parks they’ll co-own when all is said and done. It’s a leap of faith built on trust.
Since our readers are both ambitious MHP operators and interested passive investors we’ll cover the pros and cons from both angles (switching perspectives back and forth all willy nilly - why? Because it was easier that way, sue us).
Individual Syndication
Single park deals are built for speed, which is nice if you like that sort of thing. This is not to say you can’t hold one-off deals indefinitely. It’s just easier to return capital fast via a refinance or sale of one property vs. a portfolio. Plus, typically the Sponsors promote will be heavily weighted to the last few deals. This is fine if they are an established firm, but can be frustrating for new players.
Here are some other items to keep in mind.
Syndications carry higher risk. Concentrated capital cuts both ways: your returns will have higher ceilings and lower floors. Black swan (weather, infrastructure problems, local economy crashes), can wipe out any hope of profit or a promote.
Because of this, syndication deals require a higher quality bar: you can’t offset operational mistakes with other assets as you can with a fund.
They require less back office work vs. Funds. You can probably keep a full time job while syndicating a deal or two a year. Some of the largest operators got their start this way. You don’t need a large team, just great vendors: CPA, bookkeeper, lawyer, light-weigh property management software (but frankly, you can get away with Excel too).
It’s far easier for new MHP sponsors to raise money this way. The only person likely to invest in a brand new operator’s blind pool fund is their mother. Dad says “come back to me when you have some actual experience”.
Funds
Anyone who has run a few successful mobile home park deals will hear the siren song of Fund management. But - like syndications - funds aren’t magical pots of golds that solve all problems.
There are no absolutes, but here’s what we’ve learned.
Funds have tighter return dispersion, which is fancy way of saying you’re more likely to get a respectable return (lower return ceiling, higher return floor). A large, diversified pool of existing assets makes it harder to hit home run return targets. The more deals in a fund, the more likely one will be a dud. There is just more surface area to get unlucky. Real estate isn’t venture capital, there are no exponential outcomes over the short term. One deal rarely makes a fund, but one zero (complete loss) can drag down overall returns.
Funds require more back of house work. Raising and managing funds is its own separate business. Just because you’re great at park operations, doesn’t mean you’ll be great at fund management. Although, it’s far easier for a great operator to become a great fund manager than it is for a great fundraiser to become a great operator. Give a new fund manager some grace, they aren’t BlackRock, customer service won’t be unreal day one.
Investors want to see their capital deployed quickly - you’ll feel pressure to pull the trigger on “ok” deals. Not everything on the market’s a slam dunk but make sure you’re getting at least singles & doubles.
Drowning in K1s - Funds typically invest in multiple states. That means LPs will be getting chunky tax returns. This is a factor for LPs to consider. This is why it typically doesn’t make sense to only invest $10K in a MHP fund. The extra state K1 tax prep fees might be more than the yearly distributions.
Conclusion
Okay, but just tell me the answer, fund or syndication?
Operator (General Partner) Viewpoint: If you’re trying to maximize, long-term enterprise value of your firm, go the fund route. It will make acquisition easier and help you build a team as you have more recurring income (fee revenue) for payroll.
If you’re trying to fast-track wealth and optimize per unit of time / effort, stick with syndications.
Investor (Limited Partner) Viewpoint: If you want the best odds of a solid return without losing money, go with the Fund.
If you like analyzing markets, placing bets and try to optimize returns, syndications are for you.
Or, what the hell, just do both. We like to invest in MHPs as LPs too and we love doing both syndications and funds. Each exposes us to new relationships and markets. We typically invest in Funds for our lower risk capital meant to generate income. We then use syndications to try and “juice” our total returns by making larger bets when we see fat pitches (great deals).
Whether you’re an aspiring GP or LP, hopefully some of this useful. The idea isn’t to steer you in one direction, it’s to give you a framework for making business + MHP investment decisions.
By the way, if anyone’s trying to take that step from single deals to a fund, let us know what you’re struggling with or what problems you need solved. You can reply to this email (info@mhpweekly.com) and we’ll try to be helpful.
Happy Trails,
MHP Weekly