How Manufactured Housing Creates Cash Flow for Real Estate Investors

Ali: They were lemons because it was hard to even get somebody, a dealer, a retailer, a flipper, anybody, to put a home in and pay you rent while you're waiting. But once you set up this system and you're vertically integrated, those lemons become lemonade. Now we're profiting from the home sale, we're profiting from the financing, and we're charging the management fees, and all that's built in. So these all become profit centers, and they're all feeding up in kind of an inverted funnel to your main goal, which is the real estate income and the asset value.

Gary: Welcome back to the Massive Passive Cashflow Podcast. I'm Gary Wilson, your host. I'm so glad you're listening to the show or watching it in video mode. We have a great guest today, Nasir Ali. We all call him Ali, so just call him Ali and he'll know you're speaking about him. Think Prince, Madonna. He's a one-name, magical person. What we're going to talk about today has to do with manufactured housing, and this is one you want to take notes on. Remember, we've got a housing shortage in this country of conservatively 4 million units and as much as 7 million units. You can only convert so many old schools and churches. At some point somebody's got to build something, and that's where this comes in. If you're a real estate agent, definitely pay attention. Ali, thank you so much for joining us. I know you're busy. I've read about what you're doing and I'm really excited to have you on the show today.

Ali: I'm so glad to be here, Gary. Thank you for having me. This is exciting.

Gary: Absolutely, I'm glad to do it. Like most of us in real estate, we weren't growing up thinking we were going to be in real estate. We wanted to be a doctor or a fireman. I wanted to be an astronaut. But life takes its twists and turns. Take us back to where you were transitioning from what you were doing into something related to real estate. Is there a pivotal moment you can recall, and what were you doing before that?

Ali: Thanks for asking, Gary. My story is probably a little different. I've had the privilege of listening to some of your other guests, and I think mine's different in that I'm the eighth generation in commercial real estate investments in my family. We have a long history going back to the bartering days in India, where my ancestry is from. That's not to say there were eight generations of wealth transfer in capital or assets along the way, because life happens. There were wars and partitions and migrations. My father had to start over himself, and he is one of those one-in-a-billion serial entrepreneurs and real estate investors.

Ali: So I got to be a sponge growing up around someone like that, and I just have not known life any different. I think I'm unemployable, and I've always been in real estate. Culturally, as a family you always work on the family farm, so to speak. But as you become an adult, you're still responsible to go independently and create your own income stream. So it's almost like having two jobs, though neither one is really a job. It's one family business and essentially a startup at the same time. That's the journey I've had.

Ali: The wealth transfer that did occur is, I think, very important for your audience. When we talk about wealth transfer and generational wealth, the immediate thought for many people is actual assets and capital and money. I like to argue that's the least compelling component of wealth transfer. What's more important is knowledge, drive, ambition, and a culture designed so that you're going to fight and work hard. That tenacity is what survives wars and partitions and pandemics. I've heard you say on your podcast, being given fish versus being taught how to fish, and that resonates with me. My father said that all through my growing up: I'm not going to give you fish, I'm going to teach you how to fish. And he did.

Gary: Far more important. I was having this discussion earlier with someone in our family. Our mother's side was more likely to be employees, planning on living off a pension and Social Security. On my father's side there were some teachers, but a lot more business owners and entrepreneurs, charting their own path and creating their own financial independence. Nobody was given millions of dollars. What you were given was the knowledge and the encouragement, and people you can rely on to help you navigate building a business. Owning real estate is a business just like any other. Your tenants are your clients. They decide to pay you every month. Your properties are your inventory. I just happened to choose the path to real estate.

Gary: Occasionally I will give someone a fish, but it's very strategic. It's for a defined period of time, designed to put them in a position where they'll relax so that they're willing and able to learn and implement what I'm teaching them. Then the subsidy ends and you're off and running. It's a hybrid approach, but it's rooted in teaching people how to fish, because that's what my family did for me. I've had ups and downs. We all do. For everybody listening: when you make a lot of money, your problems are not going to go away. Chances are you're going to have bigger problems, but you're going to be more equipped to handle them. You learn to be a good custodian of money when you learn how money works.

Gary: My own saying is that the degree to which the universe gives you more is directly related to the degree to which you're responsible for what you already have. But they didn't come here to listen to me. Tell us about what you're doing now, what the product is, how you came across it, some of the pros and cons, and how people might be able to participate.

Ali: Happy to. Before I move on, it's so refreshing to hear you reiterate, with your personal story, the principles my family has taught me. Just hearing that from you, Gary, is bonding. Thank you for sharing that.

Gary: Definitely similar energy and background. I can feel it, and I'm grateful for both of our families, because that is generational wealth. It's not the money or the silver. It's the ability to chart your own path and build your own way.

Ali: That's a great segue into your next question. When I started off, I was learning the street smarts of commercial real estate investing at home, and I wanted to complement that. So I did a number of different things. I invested in distressed deals, because that's what I saw growing up, and not just in real estate. I was buying Main Street going concerns in distress, stabilizing and flipping them. Distress was a common theme, whether it was a business or real estate. I would run into a fire when everybody else was running out, including the owner, and try to stabilize it and flip it. And to your point earlier, sometimes it was a blood bath.

Ali: They didn't all work out. I've had some home runs and some grand slams, but probably fewer of those than the blood baths. I don't want to sit here and only talk about the success. I think it's good to share the path, the journey. If you're not failing at some point, you probably haven't tried hard enough. I saw my father fail four times in his life, though it depends on how you define failure. He wasn't really failing. He didn't want to settle for an unacceptable lifestyle. He wanted a certain level of security, stability and income to feed a family of five kids, and really the extended family too.

Ali: When you know you need a certain amount of income or stability or assets, you keep taking risks to get there. And sometimes when you climb higher, you fall. That's what I saw him doing until he reached a level of stability where he didn't have to take as much risk to deliver the quality of life he wanted. Then he reduced his risk and hasn't had those ups and downs since. Growing up, I learned that it's okay to fail and to keep pushing.

Ali: So my journey has included a number of high-risk efforts, when I was single or younger and could afford that kind of risk. People bring up recent events like the pandemic or the 2008 Great Recession, but you and I are old enough to go back through at least nine or ten different events. I remember the original Iran crisis. I wasn't old enough to be doing business, but I remember we only got gas every other day of the week, and mortgage interest rates went to about 20%. It was a tough time.

Ali: So when people talk about resilience in an asset class, or recession proof, I'm in the mobile home park business, exclusively today, and have been for 45 years as a family, both as a family and then me independently. Through all of these events, and the wars and partitions and migrations my family saw before that, we've seen the resilience of mobile home parks. And like you mentioned, the housing shortage numbers are right. The 4 million is the floor, and it could easily be double that. Manufactured housing communities is the politically correct term, and I'll try to use it more than mobile home parks, though I'll use them interchangeably. You were right to use manufactured housing right out of the gate.

Ali: I hear self storage called recession proof. I can't think of anything more recession proof than an asset class that is an essential, which is shelter, and the most affordable form of shelter when it comes to owning your own home. In a good economy, our business is good. In a bad economy, our business is great. As people come down a notch in their lifestyle, we're sort of the last stop. If you want that backyard, no adjoining walls, a pet of your choice, and to do what you want with your home, we still deliver the American dream in markets where others can't. That's the space I'm in. It's been since July 9th, 1981, and we haven't looked back.

Gary: That's actually the year I graduated high school and went off to university. I remember those days very clearly, people waiting in line for hours to get gas. In the 70s I was just a kid on my skateboard or my bike, thinking, glad I don't have to buy gas.

Ali: I think I was 12 or 13 when that happened. That's when we lost our portfolio at the time, which was 120 single-family homes in Orange County, California. People couldn't pay rent. We couldn't borrow, we couldn't sell. Everything was frozen, and those houses came down like a house of cards, overnight. My father was able to salvage enough equity to buy his first park. And as you can imagine, in a typical immigrant family, we grew up running the business together. It wasn't about proms or football. It was about running the business, and that was a real eye opener for me and a great place to learn.

Gary: What's interesting too is the manufacturing standards today and the technology available. These homes are far better than the ones built in the 60s and 70s. There are communities now where you almost can't tell it's a manufactured home community. People are planting gardens, there are flowering trees, there's space for kids to play. Certainly there are areas of greater concern, like what they call tornado alley. But there are a lot of places in the Carolinas, Georgia, Alabama, Mississippi, Tennessee, Arkansas, and Florida too. One of the biggest housing communities in the country is a manufactured home community right in the middle of Florida, north of Orlando. I know people there personally, and you should see the prices now. It's not $125,000 anymore.

Ali: I remember the days when the home was far less than that, maybe $25,000. We have a community today in San Diego County where the mobile homes, without any land underneath, are selling for half a million dollars. For your audience's sake, without the land we're just talking about a home, which is considered personal property, much like your car, and theoretically should depreciate. That's because of the proximity to the coast and the water and the weather, and of course it's a five-star community, a trophy asset.

Ali: Having been in the business all these decades, about 15 years ago I went to one of the factories, and this is fun to share. I always think of the Pepsi and Coke taste test. They put a stick-built and a factory-built home side by side and had all of us, operators, owners, mortgage lenders, appraisers, walk through and determine which was which. The majority of us got it wrong, including me. There's a reason they were originally trailer parks, then mobile home parks, and now manufactured housing communities. The quality they've been built to since the HUD code standards were implemented in 1976 has redefined these homes. For example, the studs are typically 2x6 versus the 2x4s you'd see in a regular stick-built home. That alone is an example of the integrity of the structure.

Ali: When people talk about tornado alley, I get a little defensive about my business. I'm in California, so we're in the earthquake zone. I always want to say, try taking your stick-built home down the freeway at 60 miles an hour and see how it holds up. These homes hold up on the road. We have a stigma, and I think the news channels get their clickbait, but I don't think it's an accurate reflection. Sure, some homes have flown up, but in a terrible tornado I think the stick-built home does just as badly.

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Gary: I love that analogy, by the way. I hadn't thought about that. I have friends who invest in mobile home parks from Texas to South Carolina, across what we call the smile, the southern coastal states, and they always say every home is at risk. If a tornado makes a direct hit, it doesn't matter. Let me unravel the how, as much as you're able to share. Take an example or case study of a property. Did you buy raw land and put in the utilities, or buy with utilities already there? Did you buy with the homes already there, and how often do you get involved with the homes themselves? There are so many ways to do this, and I want people to hear your model and see themselves in that role too.

Ali: Thanks for asking. The great news so far has been that we didn't even have to get into development. There are about 50,000 communities nationwide, I think about half a million pads across the country, and about 10% of that is here in California. Texas, Florida and California, as your audience would probably guess, are the three largest states for manufactured housing communities and for population in general. Historically, most of these communities haven't been fully occupied, despite the huge demand for affordable housing.

Ali: So rather than developing, for the last 45 years, and I think for some time to come, you could buy existing communities where you already have a proof of concept. You already have income, and you already know people want to live there and are paying the rent. I never developed an appetite for the longer cycle of real estate development. I may consider it down the road, and I'm starting to hear rumblings about it in states like Texas and Florida, maybe eventually California. But generally, Gary, it's been cost prohibitive to build when you can buy an existing community for a lower price per unit than you would build it for.

Ali: I'll get to a case study, but generally we go into the value-add play, and the most common strategy in our asset class is what we call infill: filling those vacancies. I'll buy a community that's half full. The reason it's only half full is not a lack of demand. It's the upfront costs and challenges for a prospective resident to get a home in there. They can finance the home, but they may not be able to finance the installation or the transportation. Then there's picking out colors, sizes and shapes. These are all barriers that make it very difficult.

Ali: We solve that by being vertically integrated, keeping everything separate and operating at arm's length. We have a dealer arm that buys homes wholesale and sells them retail in our communities. And where it's permitted, and I'd caution your audience to get their own legal and financial advice and confirm, you offer retail financing to the home buyer with the appropriate licensing. Asset management and property management are also done internally, for reasons most of your audience as investors already understand.

Ali: This vertically integrated system allows us to go from 50% occupancy to, dare I say, 95 or 100%, because that demand has always been there. We've just removed the barriers. When we put a three-bedroom, two-bath, cookie-cutter home already in place, people aren't worried about colors or sizes. There's no delay, and financing is relatively easy to get now. For people not operating this way, these were lemons, because it was hard to get a dealer, retailer or flipper to put a home in and pay you rent while you wait. Once you're vertically integrated, those lemons become lemonade. We profit from the home sale and the financing, we charge the management fees, and these profit centers all feed up in an inverted funnel to the main goal: the real estate income and the asset value.

Ali: We first started with an RV park and quickly realized it was a seasonal business because of its hospitality, transient nature, and we wanted to eat in the winter too. So originally we bought trailers and put them in for long-term rental. This was back in the 80s, long before ADUs and tiny homes became popular after the pandemic. And it worked, Gary. We were in the Central Valley of California, and we had factory workers, retirees, single folks, nearby farm labor, all kinds of people who wanted a long-term stay in a small space and wanted that affordability. We expanded that original park to do that, and quickly learned we didn't want to be in the RV park business. We needed to be in the mobile home park business.

Ali: I love debating this with others, and even with ChatGPT and other AI platforms. My marketing team did a survey that analyzed all of the CRE asset classes and looked at things like tenant retention. When we have a tenant, they're typically tenants for life, because the cost to move a home is prohibitive. That home is never going to leave. If somebody has a $100,000 house, they're not going to default over $1,000 a month in lot rent and give up the home. Life happens, so there may be a death or divorce and a resident may leave, but the home typically never does. So we're always collecting rent, and in the very few cases of default, you have the home as collateral, essentially. I lost my train of thought, but I think you asked me for a case study.

Gary: Yes, an example of one of your holdings, how you got it, what you own and what you lease. What you described was great. Are your holdings primarily in California, or do you own in other states as well?

Ali: Currently I'm all in California. I'm very bullish on California, unlike most people anymore. I'd suggest to anybody in this asset class: pick a state, maybe two or three, but don't try to be everywhere. The regulations vary state by state for our asset class, and you're not going to master 50. And like you've experienced in other asset classes, you get economies of scale, efficiencies and a network. There are a number of reasons it makes sense to specialize in certain markets: having our Rolodex, understanding the regulatory systems here.

Ali: And frankly, you can't rule out California. When we were growing up it was the third largest economy in the world, it went down to around fifth, and now it's working its way back. As many reasons as people have to dislike California, there's a lot of resilience, and the geography itself speaks to the value here. I also like the absolute numbers. If I can get $1,000 rent per pad versus $300 somewhere in the Southeast, I can get a greater return with fewer units. When people talk about 5,000 units under management, I applaud that, but 5,000 units in the Southeast at maybe $5,000 or $10,000 a pad is very different from 500 units at $150,000 a pad in California.

Ali: California has been good to us, and with so many Californians wanting to invest out of state and so many non-Californians afraid to come in, I feel there's more opportunity for those of us who are here and willing to play. I want to share an older deal, because it gives insight into different strategies you could apply. I have many creative deals I could share, but the one top of mind is one we did in Orosi, California. It was 100-plus pads, probably in the 90s, it's hard for me to remember exactly. It's a real example of how to get creative.

Ali: Certainly it was a value-add play. There were vacancies, some park-owned or dilapidated homes, and an opportunity to do the infill model I described. That alone would have been reason enough, because the value-add was there and the numbers made sense. But the reason we did that deal is how we structured it: as a lease with an option to purchase. We didn't acquire it initially. We paid a much lower amount up front, a down payment so to speak, which was really a deposit and included the option fee.

Ali: Then we had a lease payment instead of a mortgage payment. And we locked in a price, which sounded a bit scary and ridiculous at the time. The seller threw out his ridiculous price, and it was a 10-year option. It was essentially a triple net lease, so we were fully responsible for the taxes, the liability, the insurance, everything on the property. We were essentially like owners, but with a lower payment, because it was a lease structure instead of debt service.

Ali: Bottom line, 10 years later, with rents increasing every year and the asset value increasing, the seller wanted to get out of the deal. He was a nice guy. It was more the family trying to squirm out of it, because they realized what it had become. But there wasn't any room, because we had locked in that option and it was recorded with the county. To give a random example, something originally signed for a million dollars might now be worth five or ten million. It was worth at least 5x, maybe 10x, in those 10 years. Income properties are valued on income, and some of that increase was earned through the value-add strategy and other things, and some came by default with standard rent increases.

Ali: By the time the 10 years were up, we exercised our option and essentially bought it at a steal. This is something that can still be done. I don't think we hear about creative deals as much, but I love wraparounds, all-inclusive trust deeds, seller financing, master lease structures, 99-year leases and triple net structures. I think of real estate as an open white canvas. If you can think of a creative way to structure things that are mutually beneficial and that all parties sign and agree to, even if you don't yet know how to execute it or whether it's legal, I'd challenge you to first come up with the idea.

Ali: Look at a deal and come up with a creative structure for how to monetize it or increase the asset value. Then you can go to the experts to figure out how to make it work, and how to do it legally. It starts with an open canvas and an open mind about how to be creative and increase asset value.

Gary: I agree, and I really appreciate you sharing that. I knew we were going to run out of time fast on this one. Everybody listening, I hope you were taking notes. If you were driving, don't worry. You can replay the audio and video on YouTube, Facebook and LinkedIn, and we put show notes in when we publish. Ali, if somebody wants to reach out to you, learn more or participate with you, do you have a website or newsletter we can share?

Ali: Sure. My team and I created Rise 360 Ventures. It's a platform for passive or semi-passive investors who want to get into the manufactured housing community space but don't necessarily want to relive the 45 years I did. They can join us and invest. You can go to our website, rise360ventures.com. If you're interested in the asset class, whether you do anything with us or not, we have an 80-page report on the industry and current market conditions, and it's free to anybody who goes on the site. You can also find me on LinkedIn: Nasir, N-A-S-I-R, Ali, A-L-I.

Gary: Well, I really appreciate this. Everybody listening, you don't have to write this down if you're driving: rise360ventures.com is where you can learn more and possibly participate in a more passive way. There's also an 80-page report on the manufactured housing industry. You can never learn too much, so at least get the report and reach out to Ali. Remember, anybody who comes on the podcast has gone through a vetting process, and I was reading up on Ali before we started. This is a great way to be involved in real estate. And I'm a big believer in California. I have family and friends out there. Where else can you swim or surf on the coast in the morning and drive up to Big Bear or Mammoth Mountain to ski in the evening?

Gary: People talk about the taxes there, but we used to call it the sunshine tax. You're going to live in paradise, so does everybody else, and you've got to pay for the roads, schools and hospitals. You can live in Detroit and pay for a big beach vacation every year, or live in California and be at the beach every day. I stopped watching the news 11 years ago. They call it programming for a reason. You've all got minds of your own, so do your research on California, the good and the bad, look up Nasir Ali, go to rise360ventures.com, get that 80-page report, and take it one step at a time. Thank you for listening, and thank you, Ali, for being here. Take care of yourselves, God bless you and all your loved ones, and we'll see you on the next Massive Passive Cashflow Podcast.

Gary: Thanks for listening to this episode of Massive Passive Cashflow. Be sure to go to realestatewithgarywilson.com to join our community and start building wealth today.