How to Build Passive Income Through Manufactured Home Parks

Glenn: Welcome to A Canadian Investing in the USA, a podcast and YouTube channel about Canadians buying real estate, with host Glenn Sutherland. Welcome to a new episode. This week my guest is Ali Nasir. Ali, do you want to start by introducing yourself?

Ali: First of all, thank you so much for having me. It's a pleasure to be with you. People ask me where I'm from and what I do, and those are fundamental questions I have a hard time answering anymore. My ancestry is Indian, and I like to mention that because I'm eighth generation in commercial real estate investing, going back in India to the bartering days. I'm proud of that heritage. I've grown up in the US nearly all my life. We moved here from London when I was almost five.

Ali: So I've been in the States since kindergarten, and in California since 1977. I'm proud to say I'm second generation in the mobile home park business, or as we call it, manufactured housing communities. We've been in that business since 1981. Since then I've seen at least nine downturns, recessions, bubbles and bursts, and found this asset class to be incredibly resilient. So that's where we live. This is our domain.

Glenn: That's awesome. I've heard the same thing about it being very resilient, because it's affordable housing. Whether things are booming or in a tougher spot, people need a place to live that they can afford.

Glenn: So you're second generation, which I did not realize. Did you follow your parents into the business? And when you answer, maybe tell us what you do. Are you brokering these deals, buying them, syndicating them? What do the deals look like, and how did you get into this?

Ali: I was 12 years old when we bought our first park. Your audience can probably relate to this: before that we were in the single-family home business, as investors and flippers. My father had about 120 homes in Orange County, California. Those would probably be worth a couple million dollars each now. But those homes were built like a house of cards. They were highly leveraged.

Ali: When the original Iran war happened, like we're going through now, in the late '70s, inflation was crazy and mortgage rates went to 20% or so in the States. Those 120 homes came crashing down overnight. People couldn't pay us rent, people couldn't buy homes from us, we couldn't sell anything. It was a freeze.

Ali: My father salvaged what he could. A little side note, Glenn: when we moved from New York to California, we took a three-month summer trip across the country in our RV and stayed at KOA campgrounds. That's where he got an insight into the business. When the single-family market crashed in '80 and '81, he was able to salvage enough equity and liquidity to put a down payment on our first park.

Ali: I was 12 or 13 years old, and like a typical immigrant family, you run the business together. So I wasn't in football and all the other things. I was KOA Joe. The first park was a campground, a KOA. We quickly learned that business is seasonal. You have the swings of overnighters, transient revenue and hospitality, and we didn't care much for that.

Ali: So even in that first park we bought trailers, expanded and leased them out long term. Long before tiny homes, ADUs and hybrid work became a thing, we were doing that in the early '80s, for construction crews, local factory workers, single retired seniors, anybody who needed a small space. It worked out really well, and that's where we discovered we needed to transition into mobile home parks and manufactured housing communities.

Ali: I can give your audience a dozen reasons why later, but it's an essential, and it's the most affordable essential. Unlike the RV park business, it's not really a going concern or a Main Street business with a retail component. It's a semi-passive, recurring, steady income stream. Sometimes the cash-on-cash return may be lower, but the trade-off is that it's far less management intensive.

Ali: To answer the second part of your question, after that first park we kept expanding through 1031 exchanges, rolling into more parks. We used private funds and a lot of debt. We weren't over-leveraged like we were with the homes, but we used mostly debt rather than equity partners. Over the decades the portfolio grew into a family office that's now on autopilot and stabilized, and the family will decide together what to do with it.

Ali: But at 56, with three teenagers, I know I'm not done. I enjoy the space and I enjoy working with others. So I've created a fund. Through the fund we bring in investors and equity to acquire more communities and scale. It passes on 45 years of knowledge to people who don't have the time to reinvent the wheel.

Glenn: So what do the parks you're buying now look like? Do you have a checklist of what's a no-go and what's a go when you look at them?

Ali: I'll look at anything and everything. I don't want to be limited to a certain buy box, and I shy away from that term, but I somehow end up back with it. Ideally I'm looking for at least 100 units in two- to three-star communities. One star is the least appealing in curb appeal, and often the highest cash flow, by the way. Five star is the most stabilized, with the curb appeal. I like to be in the middle.

Ali: In asset value, I'd say $5 to $25 million, and often more specifically $3 to $15 million. The point is to be above Main Street buyers and below the REITs, institutions and private equity groups, and carve out my niche there. For anybody in your audience getting into it, at least 50 units is still enough for someone relatively new. Below that you don't really have the economies of scale.

Glenn: With those purchase prices, I'm guessing you're buying properties with actual homes on them. I know there are different strategies in manufactured home investing, where some owners just rent the pad and people put their own homes on it.

Ali: That is the conventional model, and it's what lenders, appraisers and the whole industry love: keeping everything at arm's length. I agree with that too, as a former mobile home park appraiser. The reason is that income from real property should be kept separate from income from personal property. Those homes are considered personal property, much like your car, because the homeowner doesn't own the land underneath. You do.

Ali: So in most cases the home should depreciate. There are exceptions, like California where I am, where even those homes appreciate for different reasons. But you should keep those income streams and values separate. Our community real property is owned under one entity. Part of our strategy is what this industry calls infill: buying a distressed community, or at least a half-full one, maybe 50 or 60% occupied.

Ali: Those pads aren't vacant because of a lack of demand for affordable housing, Glenn. They're vacant because of the upfront costs. A resident may want to live there and can afford the lot rent, but can't afford the upfront costs and doesn't know how to handle transportation, installation and the other things that home financing doesn't cover. That's the barrier we solve.

Ali: We have a dealer arm, a separate arm's-length entity, that buys homes wholesale and places them in our own communities. Where it's permitted, and I'd caution everybody to get their own legal advice, we also have a financing arm that offers easier financing to those buyers. At the end of the day the goal is to increase the income in the asset and increase our asset value.

Ali: If we can solve the problem for residents who want to live in that community by providing these services, it's like an inverted funnel going up toward the community. I wouldn't be in the business of flipping mobile homes just for the sake of it, or in financing for its own sake. I'm in those businesses to serve our primary business: increasing income and asset value at the community.

Glenn: And having those different parts helps your community. If tenants can't figure out the financing or find a home, you handle it. From interviewing others about manufactured housing, I know you don't own all these homes, so you don't have all that maintenance. That's on them. Appraisers are happier because it's easier to appraise what's basically a balance sheet. You're looking at the septic or city water and the hookups, cutting grass, maybe removing snow, though probably not in California, except maybe Northern California.

Glenn: I like the idea of handling all the pieces around it, because then you control the process. My next question: if you buy a community where the homes are owned by the park, do you start a lease option program, sell the homes to residents, or keep running it the way it is?

Ali: Thank you for asking. For the most part I would absolutely transition from park-owned to tenant-owned homes. In some markets you can do a lease-to-own or rent-to-own model, but in my case the ideal structure is to provide seller financing as much as possible and get out of owning the homes as quickly as possible.

Ali: To your point earlier, what better scenario is there? You have all the upside of real estate: the cash flow, the tax benefits, the opportunity to trade up through a 1031 exchange. But with our model you have hardly any of the typical landlord headaches. So that's what we stick with, and it's a process.

Ali: To go a little deeper: many investors shy away from buying a community with mostly park-owned homes. I'll do it if everything else checks out. But here's a nugget for the audience. Be very careful with a community like that, because most of the time brokers or sellers include the income from those homes in their cap rates and metrics. A lot of newbies fall into that trap.

Ali: If you do that, you're valuing it incorrectly. You can't value income from personal property the way you value income from real property. They need to be separated. I'm not saying the homes have no value. They have some, but it needs to be carved out and valued separately. You have to look at the land value based on the income from that land.

Glenn: And you have to look at what the park will be in the future, because what you're buying isn't what you're turning it into, so it still has to make sense. When you buy a park with park-owned homes and use seller financing, does the park finance the homes, or does your financing company?

Ali: The financing company. I used the term seller financing loosely. In California you'd be required to have a CFL license, a consumer finance lenders license, so it would be under that arm. For anybody thinking about this strategy, I like to keep everything separate. Residents don't make their house payment at the community office. These are completely separate companies, and residents talk to a different person, so things don't get muddied.

Glenn: When a resident finances a home purchase, how long is the loan? Home prices are a lot lower, so I assume they're not doing 30-year loans.

Ali: No. Typically they're 15, 20, maybe 25-year loans. They're amortized over that period but typically due within five to seven years. Even my loans are due in five to seven years. That's enough time for someone to refinance once the loan has seasoned, and maybe even get a better rate.

Glenn: If they refinance, is it like going to the bank for a car loan or a line of credit, or can they get conventional or FHA financing? They don't own the land, so it might be more complicated.

Ali: It was very complicated before. We set up our own financing because at first financing was impossible, and not just for the homes. There wasn't really conventional financing even for mobile home parks. Only in the last 10 to 15 years, Glenn, have institutional money, agency loans and larger players come in, so now there's financing for both the communities and the homes. There are about half a dozen national lenders who specialize in mobile homes, plus many regional lenders, and credit unions do it too. So financing is available now.

Glenn: This is a little hard to wrap my head around. With a house, if someone stops making payments, there's a foreclosure. If someone doesn't make payments on a manufactured home, do you take the home out of the park, evict the owner or foreclose? What does that look like?

Ali: It's rare, because most people aren't going to give up. Just as an example, most people don't want to lose a $100,000 mobile home, their primary shelter, by defaulting on $1,000 in lot rent or a $500 home payment. So we don't have a high default rate, but it happens. As you suspect, the process is that you put a lien on the home.

Ali: As a community owner, the books may show 3 to 5% bad debt where you see defaults, but my collections are at 100%, because I can place a lien on the home. In theory someone could pull the home out, but that's usually too expensive.

Glenn: Probably 5 or 10 grand to pull it out.

Ali: Per section, and sometimes more in our market. In California it could be $10,000 to $15,000 per section, so a double-wide could cost $30,000 to move. If it's worth $100,000, you're not going to spend $30,000 to move it. So the home usually never leaves. It gets renovated. Even in communities with mostly retirees and seniors, people pass on and move on, but the home doesn't.

Glenn: On liens and underwriting: finding a lien on a house is fairly easy. When you buy a manufactured home park, do you check for liens on the homes, or does it not affect you as long as they pay the lot rent?

Ali: It's typically not part of the initial underwriting. You bring up a fair point, and it's not a bad idea to know, but it's typically not a driving factor in the deal. Fundamentally, what you're renting out is dirt. As long as you can show there's demand for those lots at that rent, that's the core issue most investors look at.

Glenn: It's really interesting. It's almost like running an HOA. You still maintain the amenities, but you don't deal with the homes. So if you buy a property with park-owned homes and someone stops paying, are the eviction laws the same as for a house?

Ali: It's very similar, essentially the same, but there are two separate processes: one for the lot rent and one for the home. The home is much easier. It's much like defaulting on a car. On the lot rent, in California particularly, tenants have all the typical protections, just like in an apartment or a house.

Glenn: So if you kept the homes as rentals, which I know isn't your model, you might still compare landlord-friendly and tenant-friendly states.

Ali: It's still an important issue. Most people won't invest in California or a lot of blue states because of rent control ordinances, vacancy control, the eviction process, the time and the cost. California isn't for everybody. It and New York are probably the most difficult. But I turn that into a positive. Most Californians are investing out of state, and most out-of-state investors don't want to invest in California. For someone like me who has been around for 45 years, has a Rolodex and understands the market here, that leaves more opportunities.

Glenn: Is there a specific location you like to buy in, or do you buy in different states? Is it mainly California?

Ali: Right now we're only in California. I've done business out of state, and as I said earlier, I don't want to rule out a good deal where it makes sense. But Glenn, you probably fly down to the States a lot, though you could drive to some of your investments. I don't mind flying to Houston, but if I can drive four hours to Bakersfield instead, I'd rather drive. We've seen crazy things in recent years, like the pandemic, and having that option makes me feel better.

Ali: So proximity is great, and the low-hanging fruit is great. If I run out of low-hanging fruit here, I'll go out of state. The other thing I love about here is the absolute dollar size. In percentages, things may look great in the Southeast or the Midwest, but if I'm not seeing a sizable return in absolute dollars to justify my time, I'd rather boil the eggs here, where I can boil more eggs at the same time.

Glenn: You talked about economies of scale with 100-unit properties. In one area you may already work with property managers and other companies, and you're not moving homes across the country, just a four-hour drive at most. When I first started investing in the US, I told someone I'd bought in Huntsville, in Missouri and elsewhere. He said you need to be a big player somewhere, not scattered everywhere, or you'll be no one to everybody. It's true. You get better property management rates and better everything.

Glenn: One more question popped into my head while you were talking, about changing the lot rent. Do you have to justify it, and are there rules? And are utilities included in the lot rent, or separate?

Ali: Let's start with the second part. Many communities have private water and sewer, meaning septic tanks and wells. We shy away from those now. You don't know what you're getting underneath, and it can become a real nightmare. I won't rule them out, but they're not my preference. If a community has city or municipal services, great. Residents are billed directly, so it's off your plate. Where you have to submeter, you can get pass-through income, and some people like that. I'd rather not have that income or that headache.

Ali: On the rent, California is well known for rent control, and some cities even have vacancy control and vacancy decontrol rules, so it can get complicated. I'd argue, and I wrote an article about this not long ago with a contrarian view, that even in markets without rent control, community owners should be mindful and strategic about how they scale rent increases.

Ali: That avoids backlash and challenges, and it's doing what's right all around: for residents, for us and for our investors, thinking long term rather than about short-term gains. I'm concerned about bad actors who charge large amounts or push big increases in a short time. It makes things difficult for the rest of us who are trying to be reasonable.

Ali: To give you specifics, here in California we typically see a couple of points above CPI. If CPI is around three, annual increases of 4.5 to 6% wouldn't be unreasonable, and I think that's still fair. It's not as good as it used to be, when we saw around 10%. And it certainly isn't the 15 to 20% I see some people charging in certain markets, which I disagree with. You're setting yourself up for a lot of backlash and trouble.

Glenn: Think about the residents who live in the homes. They want predictable payments every year, and if the rent jumps a lot, it affects their livelihood. So it makes a lot of sense to keep it predictable. Before I let you go, is there anything I should have asked about mobile home parks, or that listeners really need to know?

Ali: This has been really enjoyable. I'm very biased toward my space, so forgive me if I offend anybody. We asked ChatGPT and other AI models to compare all the CRE asset classes on tenant retention, operating expenses, ROI and more. My team built our own scoring system from that, and anybody can get the report from me. Mobile home parks outshine every other asset class by far on those metrics.

Ali: I get passionate, Glenn, but let me give a few examples. I can spread my risk over 50 residents instead of maybe five tenants in industrial or single family. If my down payment could buy either five single-family homes or 50 lots in a community, I'm going with the 50 lots. My risk is spread over many more people, so I can at least cover the debt service and expenses.

Ali: And on buying and selling homes, I won't call it a monopoly, but as you alluded to earlier, it's like having a farm. You have a relationship and essentially inside knowledge. You almost have a right of first refusal to buy a home from someone who's leaving, or to place a home on a vacant lot. That almost monopoly-like structure is very compelling to me. And we already talked about it being an essential, the most affordable essential if you want the American dream.

Ali: The only thing we didn't talk about, maybe for another time, is what's happening at the macroeconomic and geopolitical level and how it affects all of us as CRE investors. It's not a political conversation. It's math. For example, how the bond yield affects how much small and regional banks lend to CRE investors, and what happens in a major crisis when the herd gets sidelined and there's all this opportunity. How do you do deals then? I could keep going.

Glenn: We'll have to schedule another one in six months or so on that, because it sounds really interesting. Before I let you go, if people like what you're doing, how do they find your company and work with you?

Ali: You can join us as a JV partner, as a passive investor, or for education or consulting. Or you can call us and say, I'm going to do this on my own, I just want to chat and get some advice. We have a whole team at Rise 360 Ventures. The best way to reach us is rise360ventures.com. You can also find me on LinkedIn, and we recently started a YouTube channel where a lot of my podcasts will be, hopefully including this one once you give us permission.

Glenn: Awesome. I'll send it over. Ali, thank you so much for coming on the show. I really appreciate your time. You can tell from my questions that I'm always looking to learn more.

Ali: Absolutely, and thank you very much, Glenn. I've watched several of your videos and learned from them, and I look forward to speaking with you again.