The Real Estate Niche Big Funds Refuse to Touch

Host: The biggest real estate funds in the country won't touch a 50-unit mobile home park, and that gap is exactly where today's guest has built a business. In this episode, you'll learn how to find deals institutional money is too big to bother with, why selling the land under the homes, not just the homes themselves, can be a smarter exit than selling to a REIT, and the one rule this operator follows for the first 90 days after every acquisition that most investors ignore. That's Ali, an eighth-generation commercial real estate operator who's run mobile home parks and manufactured housing communities for over 45 years. Stick around. And if you want to build systems for your own investing business, check out realdealcrew.com. Let's get started.

Host: Ali joins me here today, and you can learn what his team can help you with by heading over to rise360ventures.com. I'll have that as an easy clickable link in the show notes. I really appreciate your time here tonight, Ali. This is going to be really fun.

Ali: Thank you for having me, Jack. It's an honor to be with you. I know you've had hundreds of operators and other people on your show, so thank you for hosting me.

Host: This is going to be interesting, because I don't know if you've looked into me much on the back end, but I'm in operations myself to a certain extent, just not in the fund space. You're in a unique situation where you started in operations and then grew into the funds. Can you talk a little bit about that? What caused you to move in that direction?

Ali: Sure. I think it gives us so much strength to come from fundamentals in operations and really understand the business. That's on the heels of being eighth generation in commercial real estate and being in this asset class of mobile home parks and manufactured housing communities for 45 years now as an operator, since July 9th, 1981. For most of that time, I shied away from passive investors coming in, even at the risk of not being able to scale as much or staying small, just to have full control and keep my risk to myself, or ourselves as a family office. We rolled up through 1031 exchanges over the years, largely with debt versus investor funds. What changed that, to answer your question: I'm into cigars, and one of my cigar buddies, after years of asking, insisted on participating as an LP on one of my projects. I caved and let him in. Then he said, "You just have to meet one of my best friends. You're going to love him." So the best friend comes to me and says, "We're frat brothers. We're like-minded, you and I, and you've got to give me a chance. I'm Kenny's brother, and now I'm your brother," discovering we're in the same fraternity. "You've got to give me a chance to join you as well." So we went to two investors. And as you well know, once you have two investors, you might as well have thousands, because the process of setting up all the infrastructure required of a syndication or fund doesn't change with how many you have beyond that. So here we are now with a proper fund. The family has essentially retired, and I'm taking the 45 years of experience we had as a family operation and bringing it to passive investors through the fund.

Host: That's an interesting analogy regarding the number of investors. I've heard from quite a few people moving into multifamily and commercial properties that they wish they had gone into that space sooner, because in the end, working through deals for multiple doors was just as difficult as doing a single-family home in some cases. They wish they had scaled quicker.

Ali: That's such a great point. I feel like people think they have to graduate from residential to commercial, and even within residential, maybe they have to graduate after a few deals. I'm fortunate to have the background I did with my family being in the business, but from the beginning I was never of the mindset that you have to start with residential before you get to commercial. And in this particular asset class, I feel like I have the best of both, because technically anything over four units is commercial, and yet I'm still in housing. I'm still in essential shelter, and in the most affordable form of housing. So we get the best of both. It's about boiling more eggs at the same time, because the time it takes to get a hundred units is the same as for ten units or a few. For the same investment that might get me five industrial units or 20 apartments, I can get a hundred pads in a park, which lets me not only diversify my risk but also scale.

Host: What do you think causes people to have that belief? It sounds like a myth you'd like to bust here today. Is it just a mindset? Are we conditioned to believe we need to start with a single-family house?

Ali: Don't get me too deep on that, but I'll say that as a society, and globally, I think we're conditioned in many ways. Even the school system trains us from the start to follow a certain path: when we wake up, who we listen to, what we say, from the Pledge of Allegiance to how we handle every subject, to report to an authority, and then to keep doing that through further education, get the job and so on. When you apply that to real estate, the teachings have been that you start as an agent or in sales, maybe as an appraiser, then you graduate to being an investor, and you go from residential and graduate to commercial. All the education platforms and the industry seem to lend themselves to that. But as we understand from leaders in any investment space, it's the disruptors, the people who don't follow the herd and build their own path, who seem to be the most successful. Early on, with many blessings and largely to the credit of my father, a serial entrepreneur and real estate investor, I knew the traditional path was not for me. And I say this even for people who don't have a lot of resources or capital to get started: you can still get started in commercial. You may have to go into sales or be an agent or broker for some time to build some capital, but you can go right into commercial. You don't have to go through residential.

Host: One of the things I saw about you: you mention that you build wealth where big funds won't bother to look. What does that mean in practice? Is that associated with the mobile home parks and manufactured housing?

Ali: Yes, it is, and thank you for asking. It's not that they don't want to look there or don't understand the business model, of course, but there are some restrictions they face where we, as a smaller group, have some flexibility. Specifically, we're vertically integrated in our business model. We have the real estate asset under one entity, and in the manufactured housing community space we have a dealer arm under a separate entity that's arm's length from the real property ownership. We buy homes wholesale and sell them retail. For a real estate owner, vacancies and the challenge of getting homes in are really just lemons. We turn that into lemonade, because we're licensed as a dealer, buying homes wholesale, often distressed, and selling them retail. We monetize that, and it helps increase occupancy, because we're placing those homes in our own communities. And we add another layer where it's legal and possible. This is not legal advice, of course, but where you can, we provide retail financing so residents can purchase not just the home but, more importantly, cover the other costs, like transportation and installation. Jack, that's usually the barrier. We all know there's huge demand for affordable housing, so why do many of these communities sit half full? It's not lack of demand. It's the upfront barriers for a resident who can't afford all the costs that aren't financed. We cracked those barriers by making it turnkey: a three-bed, two-bath already on site and readily available, bought under our separate affiliated entity, with financing available. That allows us to scale from 50% or 60% occupancy to 90% or 95% relatively quickly. Some of the larger groups have started structuring things this way, but it's not as easy for them, going back to your original question, because it's generally frowned upon to mix income from real property, the land and lot rent, with personal property, which is the home. That's one of the reasons we keep everything separated. A home typically depreciates like your car and doesn't last as long, so its income and asset value are measured differently from the real estate. When investors mix the two, you essentially become unbankable, and it's often hard even to sell an asset with mixed and skewed income, because now you've skewed the value. That's one of the reasons institutional players historically shied away from this, but being lean, smaller and flexible, and coming from the industry, we were able to adapt.

Host: I really like what you said about removing a lot of friction. I was involved in a trailer park at one point, and one of the biggest problems we had was that nobody would voluntarily move a trailer or manufactured home in themselves. You'd almost have to find a way to finance and get newer product on the pads for people to even consider it. If you weren't doing it, the residents sure weren't.

Ali: That's right. And not only would you have to do all that, but you'd have to be at least 10% to 15% below the total cost of what it would cost that resident to live in a rental outside, whether an apartment or a home. You'd have to provide all that and still be very competitive. Then it becomes a no-brainer.

Host: You mentioned you're vertically aligned. I'm guessing you've got a property management arm, the financing, the retail sales. When you were getting into this product class, what was the first thing you added as you scaled?

Ali: It was the dealer arm. I actually started in the RV park business, Jack. RV parks were seasonal, and we quickly learned we didn't like the seasonality or the hospitality nature of it, which is management intensive. Although the rewards were higher and the income was probably more lucrative, there was risk and cash flow volatility. So even in that first RV park, we started buying trailers, putting them in and leasing them out long term. To answer your question, that's the first component we added: we understood we needed to buy homes. This was in the '80s, before tiny homes and ADUs became popular, but it worked even back then.

Host: That's probably different from what a lot of people would have done. I typically hear that the first thing added is property management.

Ali: For us, that doesn't come to mind right away, because it was a given. We had property management and asset management. I don't even think of those as optional, Jack. As we know in this industry, it's too costly and too management intensive to outsource. In most asset classes within CRE, you end up spending a lot of time anyway, and typically a lot more money than you want to, when you outsource it. Especially as a family operation, that never came into question. So let me correct myself: property management and asset management were already baked in. But in terms of external profit centers, adding homes was the big one, a significant revenue generator.

Host: We just talked about how you build wealth where big funds won't bother to look. Is it because you're in that middle ground, where a hundred pads isn't something the big funds are even interested in? Are you finding a sweet spot in that middle space?

Ali: Yes, absolutely, and I'm so glad you brought that up. That's the other aspect. Before, the big players wanted $100 million deals. Then they came down to $50 million deals, and now they're playing even in the $25 million range. Maybe they're still doing a $100 million deal, but it's four assets of $25 million, because they're having to get more competitive and come down. Then you have your mom-and-pops, or Main Street operators, going up to maybe $5 million. So we try to be in our sweet spot, below the big players and above the Main Street players: $5 million to $15 million, maybe $5 million to $25 million, ideally at least 100 units, but we'll go as low as 50 units. We won't be in primary markets, because we don't want to compete with the REITs and larger groups. We'll be in some secondary markets, but our sweet spot is between tertiary and secondary. Then on the one-to-five-star scale, one being the least compelling in terms of curb appeal and desirability, although probably the most lucrative, and five being the best, as your previous guests have talked about, we like to be in the middle there too. So just below secondary markets, 50-plus units, two to three stars. We have less competition there.

Host: Just to remind everybody, we're talking to Ali, and you can learn more by heading over to rise360ventures.com. I'll have that as a clickable link in the show notes. If you've found some value in what we're chatting about so far, do us a favor and share this with one of your friends. If you're watching on YouTube, give us a like and subscribe.

Host: Let's build on your buy box, Ali, if you wouldn't mind. You gave everybody a pretty good rundown, but are you primarily in certain parts of the country at the moment?

Ali: Yes. Historically we've been mostly active in California, and right now we're only in California. I have done deals elsewhere, like Texas and upstate New York. But I grew up in California, Jack, so this is home. We have assets as far south as the San Diego market and as far north as Mount Shasta. I've lived, so to speak, on I-5 and Highway 99, two of the main arteries running up and down the state, doing deals along them. That's our breadbasket, because that's where we've built our network of brokers, lenders, appraisers, professional advisors and owners, our Rolodex, so to speak, which serves us well. On top of that, the reason we thrive here is that so many people are afraid of blue states and regulation, rightfully so, I might add. Most Californians don't even want to invest in California anymore, it seems, let alone out-of-state folks coming in. That leaves more opportunity for those of us who've been around and really understand the landscape here.

Host: You beat me to the punch on that. I was going to say that makes you unique yet again, doing this and making it profitable in California. On the East and West Coasts, a lot of people seem to avoid it any way possible. I consistently get investors on the show who find very unique ways to make it work.

Ali: Just a quick example: people are afraid of rent control, as they should be. But the notion of extracting any value out of an existing rent control ordinance that would favor a landlord, that there may be language that actually favors you, isn't even considered a possibility. The terms explicitly stated in a particular ordinance are assumed to be gospel that can't be challenged. That's an example of where we might explore and see where the opportunity lies to leverage a rent control ordinance in our favor, as crazy as that sounds.

Host: I understand what you mean. We've got some properties in Minnesota, and there are rent control situations there as well. There are levers you can pull that actually make it a little easier to increase the profits on the place because of them.

Ali: Absolutely.

Host: I was hoping you could spend a little time on a recent acquisition. What was the mispricing, what was the plan, and what created the return?

Ali: We did a small acquisition relatively recently in Northern California, small by our typical buy box standards: only 30 units. On paper we got a great price, and it is a good price: $1.1 million on 30 units in Northern California. We also got seller financing on most of that as debt, with a six-month runway of no payments and an interest-only structure. All of that made a lot of sense, and it was a highly distressed situation. We bought it because, to your earlier comments about different profit centers and ideas, we're exploring a strategy that's frowned upon by most industry players at every level. Our exit strategy there, Jack, which we're still fine-tuning, is to sell not just the homes we put in place but also the lots underneath to the residents. Some of these are loosely called ROCs, or resident-owned communities, in the industry. That's not very common, and it's not something we've done before, which is one of the reasons we bought a small park in this capacity to test it out. We still have our existing model that we're going to execute: fill the vacancies with infill, sell homes and provide financing if we can. We'll do all of those things, and we'll also look at this as a supplemental exit option. We're not dependent on it, but we're excited about the possibility. For those interested in that, or even just the basic fundamental play on a smaller scale, this would be an exciting one to join us on and see how it works out.

Host: That's interesting. It's like a version of a condo, breaking up the lots. It makes a lot of sense, because I'd imagine there would be longer-term returns as well if you're able to provide the necessary financing on the land and the house.

Ali: I'm so glad you said that. That's exactly right; it's part of our strategy there. It's easy to exit by selling to an institutional player. But the idea of giving back to the community that's living there, working with them in a positive way so they can realize the dream of owning not only the home but also the land underneath, what a great story. We're not a nonprofit by any means; this is a for-profit venture. So if I can get a one-and-a-half-X or maybe even a two-X check by exiting to the community, and make it attractive and affordable for each resident, that's beautiful.

Host: Going back to being in California, you're probably talking about a price point that makes home ownership achievable for a lot of people.

Ali: That's exactly right. That's a tertiary market, but to put a number to it, we're looking at a range of $150,000 to $200,000 for a home and pad. That may be high in some parts of the country, but it's a very affordable range in California, even in a tertiary market. And being able to do that with financing available is a big plus as well.

Host: On your site, you mention a repeatable system focused on cash flow over hype. What are the four or five steps in that system?

Ali: Thank you. The main steps, if you're looking at increasing your income, start with the real estate. The community is the fundamental and primary asset; it's the most important asset here. We can increase income there through rent increases and by reducing expenses the previous operator maybe wasn't handling efficiently. As your previous guests and others in the industry would know, there's passing through utility expenses and similar costs. Then there are additional profit centers, like revenue from personal property insurance marketed in the community, or cable service. Maybe additional parking. If you can't expand the property for additional lots, maybe you can expand it the way we recently did at another community. We couldn't add more homes because the city and state wouldn't permit it, but we were allowed to add a parking lot, so there's additional revenue from parking for residents and others who want it. Storage may be another option. On top of that, you're layering income through the other entity: the profit from selling the home, as we talked about, and then the financing. Those are at least half a dozen different profit centers, and they work like an inverted funnel, Jack. The financing facilitates the sale of the homes, and the homes facilitate the rental income on the lot, which is really the main goal: getting from 50% or 60% occupancy and value to full. I'm a former real estate appraiser who specialized mostly in mobile home parks. Certainly not for the money, which wasn't great doing valuations, but I wanted to make sure I understood the fundamentals of the business. In simple terms, for easy math, 50% occupancy roughly translates to 50% of potential asset value. If I'm 100% full and I've increased my income and bottom line, now I'm at 100% stabilized asset value. Having these different profit centers lets me, for lack of a better word, manipulate or control the outcome. I'm not dependent, like you would be in residential real estate, on what's happening in the neighbor's yard. I can control my destiny to some degree by building this income stream one home at a time, one brick at a time, getting to full occupancy and a stabilized income stream, and then exit if I wish.

Host: When you're taking over a property, could you lay out the operational priorities at the 30-, 60- and 90-day marks? What are you typically focused on after acquisition?

Ali: Thank you. Rule number one, which I learned from my father, Jack, and which I suspect most people wouldn't agree with, or don't follow even if they agree: you don't change anything for 90 days, maybe six months. Even when you witness the deficiencies, see the shortcomings of your existing team and all the opportunities to change things up, you don't go in and start changing things overnight. You soak it in. You learn, study and examine how the changes would play out, and gradually phase them in. That's rule number one. Then there are a couple of more immediate steps. I don't remember exactly how many you asked for, but another key step is immediately looking at what capex improvements and renovations can be done to improve overall curb appeal, so you're ultimately delivering value to your residents and can justify rent increases, and people feel better about it. So capex would be second. Once we've addressed capex and rent increases are set, we start looking at the other profit centers and ways to increase income.

Host: You've probably evaluated a number of these now, whether as a property inspector or through acquisitions. What are the top couple of mistakes you've seen operators make repeatedly?

Ali: Number one, they don't do what I call the smell test. We should do all the research, analysis and due diligence we do sitting behind a desk, but one of the first things you should do, and I think many people never do it, is physically walk the property. I just did it last week. I was visiting one of our existing assets, and along the way I had my acquisitions team tell me which deals we're looking at, and I walked those properties while I was passing through. That smell test means understanding the layout of the lot, any environmental concerns you might discover, the capex that could be done, and the neighborhood and adjacent lots. You can look at Google Earth and get all the information, but walking the lot and maybe meeting a resident or two, a flipper working on a home, the gardener, the pool man, the office manager or a neighbor from an adjacent property really feeds in. Even more so in a tertiary market, where you can get more information from locals at the supermarket or the bank, as bizarre and simple as that sounds. That smell test is important and, I think, overlooked. The other major mistake is that everybody gets caught up in the sexy metrics and pro formas that underwriting might produce. Selling is easier if you get there, but you've got to buy it right in the first place. And to buy it right, you'd better truly have a fundamental understanding of the cost of improvements, the timeline of improvements, how you can scale your rent increases, and how that ties back, in real time and in net present value, to what you really should pay. Take even a single-family home, like the shows you see on TV. More often than not, the biggest problem is that people overpay, because they don't understand that the time it takes to renovate is usually three times longer than they forecast, and the expense might be three times or more. That's not built in when they think they bought at a low price, and suddenly they're breaking even or losing money by the time they reach the finish line. That's not a good feeling. So buying right is 90% of it. We can talk more about techniques on that in another session if you invite me back, or anybody can reach out. I don't want to take the whole show. But that's probably the second biggest mistake after the smell test. You've got to smell it out first, and then you've got to understand the fundamentals to buy it right.

Host: Let's change direction slightly and talk about what it's like as an investor working with your team. Let's set the stage: what would they expect, who are you looking for, what's your avatar, and how do you make sure it's a good fit?

Ali: We are accepting investors, and we welcome that. I don't mean to sound snooty, but we're selective to some degree, Jack, just as selective as investors are, and as they should be. It's not just about capital or investment for us. This asset class went from being called trailer trash to becoming the darling asset class everybody seems to want to get into. There's a frenzy, and a lot of people want to invest, so we're fortunate to have that mutual exchange where, just as an investor vets us, we like to vet an investor. Number one for us, and I think it should be for an investor, is the know, like and trust factor: a like-minded philosophy and being comfortable with each other on business strategy. Number two, even though you're passive, you may have expertise, a skill set, a network, some value you can bring beyond being a passive investor without having to get involved, because you may have a day job or a passion you're tied up with, and that's why you've come to us, which is fine. But we like to leverage that network, knowledge base and expertise if somebody has it. As for what they could expect, the goal has been to take my 45 years of experience and bring it to the avatar: somebody who doesn't want to reinvent the wheel and spend 45 years learning this business and asset class, who wants to stay engaged in their full-time effort and be passive. Ideally, although not in year one or two because it's a heavy lift up front, we're looking for a 12% cash-on-cash return or better. I used to say 12% to 18%; we used to be able to get as much as 18% decades ago. I'm reluctant to say 18% cash on cash now, but we still like to get well over the 12% mark if we can. Overall, for the fund and its passive investors, with distributions and the exit, including appreciation, we're looking for deals to land at 20% to 22%, and that's what they should expect. Sometimes we can exceed that, sometimes we may be a little below, but if we can't buy it right to get there, we're probably going to pass on the deal.

Host: I appreciate you sharing that insight. It's always good to paint that picture of how you work. And I think you're right about being selective, and not only regarding the asset class. Sometimes things just aren't a good fit, and it's good to work with people who are honest about that.

Host: Ali, we're going to dive into the rapid fire and start closing out this episode. But before we do, is there anything else we should have hit on?

Ali: I'll jump into something that isn't just about real estate or this asset class, but let me use real estate as an analogy. I think people don't take advantage of the real estate they already own outright, with no debt, as much as they should: real estate where they could run a value-add strategy and realize gains relatively quickly without any further investment, other than stopping, pausing and understanding that the most valuable real estate is what's in here, in your mind, and that nobody controls it other than you. If that's the real estate you own outright, how can you control it and invest in it with a value-add strategy, so that you can then go out and execute in the external world? That's one aspect I'd love to expand on some time: the real estate that's owned and controlled only by you. Second, I'd say geopolitics and macroeconomics, especially in the current environment, and how they impact CRE and our asset class. There's a lot going on. I don't know when this is going to air, but right now we're in the midst of this crisis with Iran. We had a crisis back in the late '70s too, when it pushed mortgage rates to 20% and made conventional lending sources really difficult. There weren't any conventional lenders in my asset class then, but any lending source became really difficult when interest rates went to something like 20% in 1980 or '81. We may see trying times like that again. What we didn't cover today is that many operators, sponsors and funds follow the playbook established by someone else, and in this asset class, by people like my father. What do you do tomorrow when that playbook doesn't work? Are you with an operator who can really come up with a new playbook? People need to think about that, especially in times like these. When it comes time to rewrite the playbook, are you prepared? That's where I'd like to leave it.

Host: Great. If you're ready, we'll dive into the rapid fire and close out this episode. Just to remind everybody one more time: rise360ventures.com. That'll be a clickable link in the show notes. Are you ready, Ali?

Ali: Let's go. I love the whole rapid fire session.

Host: What lie do real estate investors often tell themselves?

Ali: Wow. I just said I love this, and you've already thrown me a challenge on the first one, Jack. I think the lie is coming up with, and falling in love with, pro formas. At the end of the day, that's exactly what it is: a pro forma, a projection. We can fool ourselves into anything looking at numbers that seem to make sense, because we want to believe them. That's one of the biggest lies, as opposed to what I said earlier about really buying right and adjusting those numbers downward.

Host: If you could go back in time and give your younger self a piece of advice, what would it be?

Ali: Listen to that gut instinct; listen to yourself. I had a number of ideas, thinking creatively about finance and real estate and outside the box. I did some of those things, and I also held back on a lot of them because I was told, "That isn't the way. That's not right. What are you thinking?" Twenty, 30, 40 years later, I'm seeing those things become mainstream techniques and strategies. If I had followed my gut the whole way through, I think I would have been much better off.

Host: What currently keeps you up at night?

Ali: The global environment. If anyone had told the British less than 100 years ago that the sun would set on the empire and that the pound could be dethroned as the global reserve currency, I think no one there would have believed it. I'm not saying we're in trouble, and this isn't a sky-is-falling, doom-and-gloom outlook. It may even be deliberate on our part as a nation, as a federal government, to see the dollar decline, which is a whole other debate. But we need to understand: are you prepared for what's happening globally, and even domestically with the changes at the Fed? What does the landscape you'll be operating in look like a few years from now, and are you preparing for it and following it? People talk about thinking outside the box all the time. I say this a lot: you can't think outside the box if you don't understand the box. If you don't understand what happened on Jekyll Island in 1910, how and why the Federal Reserve was formed and the regional banks that participated, the Basel I, II and III Accords, the Bretton Woods Accords, and I could keep going, from early on to now, or what happened to previous empires, it's hard to prepare. That history helps you prepare for what might be coming next. I probably went farther from the question than I should have, but that's what keeps me up at night: trying to encompass all of this in a simple way, as a layman, so I can understand it and prepare accordingly. It doesn't keep me up in a stressful way, by the way. I thrive on it and enjoy it. That's when I have my cigars at night. I geek out on this stuff and try to incorporate it into our philosophy and strategies.

Host: Finally, what single tool or process have you implemented that has had the biggest time-saving impact?

Ali: It's still technology related. Back in the day, it was basic things like Quicken, then QuickBooks, then POS systems. That technology saved us a lot of time with boots on the ground and processes at the communities. Today it's Claude. I don't mean to market a particular AI platform, but we've migrated to Claude recently as a team, and we try to embrace it. Rather than fearing that any of our team members could be replaced by AI, we have them use it to its fullest capacity, so it frees up their time and creativity to be visionaries and part of the vision and mission objectives the executive team is trying to implement. So AI is what's saving us a lot of time today.

Host: I really appreciate your time, Ali. This was fantastic. Next time I'm in California, you might have to educate me on the cigar thing. I'm not sure I quite understand it yet, which usually just means I don't know enough, so maybe you can teach me some time. Again, it's rise360ventures.com, clickable link in the show notes. I hope you'll consider coming back again real soon. This was awesome.

Ali: Thank you so much, Jack. I'd love to have you become a brother of the leaf in the cigar world, so look me up anytime.