Why I Stopped Chasing Hot Markets and Started Printing Checks: MHC Investment Strategy

Ali: ...with infill, as we call it, where you're buying homes and filling vacancies. That's typically one of the most common strategies to buy a park that's maybe at half price, so to speak. To keep it simple, if it's half full, it's at half value, and when you fill it up, it's at full value. The demand's there, but there are barriers to entry that keep a resident from moving in, and barriers for investors to pull this off without the experience and understanding of the logistics. But once you get vertically integrated, Darren, and set all these things up, not just asset management and property management, in our asset class you want a dealer arm where you're buying these homes wholesale and selling them retail, where it's legal and permissible. Do your own due diligence, but you may want to consider offering financing in some cases for your home buyer.

Darren: Welcome to CRPN Radio, for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast. Whether you're an investor, broker, lender, property manager, attorney or accountant, we're here to learn from the experts. Welcome to Commercial Real Estate Pro Network's CRPN Radio. Thanks for joining us. My name is J. Darren Gross. This is a podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who share their experience and insight to help you grow your real estate portfolio.

Darren: Today's interview is sponsored by Building Insurance and Risk. When you invest in real estate, it pays to work with a real estate investor protection specialist to protect yourself and your investment from catastrophic loss. The experts at Building Insurance and Risk focus on real estate investor protection. They provide you with multiple insurance coverage offers and a side-by-side coverage comparison. To learn more, go to buildinginsurance.com.

Darren: Today, my guest is Ali Nasir. Ali is the managing partner of Rise 360 Ventures and a multi-generational expert in manufactured housing communities. Raised in the business, Ali brings decades of lived experience in operations, valuations and community transformation. In just a minute, we're going to speak with Ali about why I stopped chasing hot markets and started printing checks instead. But first, a quick reminder: if you like CRPN Radio, you can like, share and subscribe, and we encourage you to leave a comment. We love to hear from our listeners. You can also find us on YouTube at Commercial Real Estate Pro Network. With that, I want to welcome my guest, Ali Nasir. Welcome to CRPN Radio.

Ali: Darren, thank you very much. I'm so excited to be with you today.

Darren: I'm delighted you're here and I'm looking forward to our conversation. Before we get started, could you take a minute and share with the listeners a little about your background?

Ali: Sure. I'm blessed to be eight generations in commercial real estate that I can trace, going back to India in the bartering days, and second generation in manufactured housing. I had the blessing of being a sponge around a serial entrepreneur as a father, so I had a great mentor early on and all my life. It's been a life of watching and operating in the business world, the entrepreneurial world. That's my story and I'm sticking with it. It's been quite a ride, Darren.

Darren: That's awesome. You mentioned your dad was entrepreneurial. Were there other asset classes he invested in, or have you invested in other real estate classes?

Ali: Absolutely. He did the run-of-the-mill and all kinds of other things before getting into manufactured housing. In my adult life I've independently done parking lots, strip centers, shopping centers and other asset classes. But this has been the true line all the way through since 1981. I haven't done other asset classes in probably over 10 years, while always being involved in operating in this space.

Ali: I have to say, Darren, the last Iran war crisis was the catalyst that got us into this space back in the late '70s, early '80s. We were in Orange County with over 120 single-family homes under private ownership. I was a young kid, of course. You could only get gas every other day depending on your license plate, with miles-long lines, and mortgage rates went over 18 and sometimes 20 and a half percent. Things were crazy in the real estate world.

Ali: We lost those 120 homes like a house of cards. It all came crashing down and we started over. I went from living in a McMansion in Orange County to living in a trailer at a trailer park. It was quite the experience to go into that park, build it up, operate it, and spend 10 years head down and focused. That's the message we're trying to get across to your audience today: sometimes that's what it takes. Forget about Orange County or chasing the hot markets, and go where you can get stabilized and get real cash flow.

Darren: I appreciate you sharing your lived experience, going from the high to the low and building back up. As far as your current strategy, you invest in manufactured housing parks exclusively, correct?

Ali: That is correct. We're exclusive. I've been in this game the whole time, and the other asset classes I dabbled in were just on occasion. This is the space we live in, and it's exclusively all we're doing at Rise 360.

Darren: Got it. In your current portfolio, how many parks do you have?

Ali: Rise 360 Ventures is relatively new. We've officially got our first one in. I've been operating as a family office for 45 years and have that portfolio. Even there, we didn't always hold on to assets. We bought a lot of distressed, or if not distressed, just above that, undervalued, where there's a value play. We'd stabilize and then roll into the next one with a 1031 exchange, and we kept doing that over the years.

Ali: To answer your question, on average we hold about 2,500 pads, spread over about seven communities right now. But 2,500 pads in California, privately owned, is quite different from 2,500 units in Alabama at $5,000 a pad. In some of our markets here, you're talking about $150,000 to $175,000 a pad in valuation, just the dirt. It's a different ballgame. At Rise 360 we've got our first one in, and we're working on a pretty large acquisition deal for before the end of the year. So things are getting hot.

Darren: So first, let's talk about what you've come to appreciate about manufactured housing communities as an investment asset.

Ali: Oh my gosh, Darren, I could go all day, but let me give you a couple. For anyone hearing about this space for the first time, imagine having all the upside of being in commercial real estate as an investor without all the typical landlord headaches. That's where we live. You're essentially renting dirt. Sure, you have your amenities and clubhouse, and maybe I'm exaggerating to make the point, but in a three-bedroom you've got two or three toilets. Multiply that by 300 units and all of a sudden you've got a thousand toilets, plus walls and electrical. We don't have any of that, because in the typical business model we don't own the homes.

Darren: That just makes me excited right there. It's not just the toilets, it's the stoves, the air conditioners, the roof, all the things that need constant maintenance. So that's great. Tell me a little about the deal you've got. Did you just close one, and are you getting ready to close a second?

Ali: We've already closed one. It's a distressed deal in a small town, and it's going to be quite the turnaround, but we've done this a few times. It won't be our first rodeo. It's in a tertiary market, where typically I do more in secondary markets or just below. What's interesting with this play, and maybe something the audience doesn't hear often, is our exit strategy. We buy, sell and place homes under a separate arm as part of the business model, but in this case we're also considering ultimately selling the actual community to the residents, as opposed to an institutional buyer.

Ali: It's essentially a cooperative, if you're able to do that. Everyone would have shares, they'd form an HOA, and they'd own not just the home in a community but the underlying dirt. That's one of the exit strategies we have in mind, so it'll be interesting to see how this plays out.

Darren: The dream of home ownership is still alive, however people are able to get into it, and that's a nice additional exit strategy to have as opposed to just a wholesale sale. Let's talk about the topic we introduced, focusing on the markets you're in as opposed to chasing the hot markets. Do you have any experience chasing a hot market you don't know?

Ali: Sure. Just like anything else, something may look glamorous. Use our asset class as an example: we're not glamorous, we're boring. But I don't care. We have to look at the spreadsheet, the insurance cost, the bottom line. Do your personal emotions or preferences about what you think is an appropriate place to live even matter? You may not have the same criteria or concerns as the residents who would be delighted to experience the American dream living in one of these communities. So take yourself out of the equation and look at the numbers and what makes sense.

Ali: In our experience, we had so much success over the years on the Highway 99 and I-5 corridors up and down California, from small towns to midsize towns. A town like Orosi may not be heavily populated, but people can commute 45 minutes to Fresno or Visalia. I'm not saying don't look at employment and the other typical things, but you've got to think outside the box. If you looked only at employment or those typical value measures in a small town, or even the county, you'd probably never invest. You have to look at what's practical and where the source of income really is. It isn't always employment, as crazy as that sounds.

Darren: What you point out about the commute matters, because manufactured housing is essentially affordable housing. If people can't afford something close to where they work, they start looking further out, and historically the further out you get, the less expensive the housing gets. It's supply and demand. If there's no affordable housing close to where you work, you go where there is supply.

Darren: So when you do an analysis like that, you're aware of jobs, but it's not a fundamental criterion. Is there a distance to a metro area that's part of your KPIs when you decide whether an area is a good opportunity?

Ali: You nailed it. Let me answer the latter first. The sweet spot seems to be about 40 to 50 minutes of commute time to employment. If you can get to a job in an MSA within 45 minutes or so, I think enough people would accept that to make it viable. But I also want to emphasize that jobs aren't always the most important driver we're looking at, which is counterintuitive and sounds a little nuts.

Ali: Sometimes it's retired folks. We have a lot of senior parks where you have to be 55 and older to apply, and many residents are baby boomers much older than 55 who aren't working at all, but their rent's on time and they hardly bother you. We may also do a community where people use it as a second home. For example, with the deal we just did up north, people might live in the Bay Area and just want a nice little spot near Mount Chester, where this community is located. So employment isn't always the driver.

Darren: Given that employment isn't the driver, does there need to be something that attracts people? I assume you wouldn't put one under the power lines next to an auto dismantling yard. If someone's retired, I'm assuming there's an affordability factor, but also something peaceful and clean, the things you can control as opposed to things you can't.

Ali: You're absolutely right. There should be essentials around. I don't want to go into a town that doesn't have the big box stores, the banks or the hospitals. You've got to have infrastructure and amenities for the people around. That's part of our due diligence early on: are there resources for the residents?

Darren: Let's talk about the economic opportunity compared with chasing the hot market. For a long time Austin, Texas, and the Sun Belt, Florida and Texas, were the markets everybody raced to, at least during COVID, because they were open for business. The markets you're talking about haven't been designated hot by the internet yet. What have you found about the opportunity to generate cash flow? Is it significantly better than chasing a hot market?

Ali: I don't know why this analogy comes to mind, Darren, and it's going to be politically incorrect, but think of a dance floor and chasing the hot girl or the hot guy. That's all you're focused on, and then you realize they may not have personality or a sense of humor or share your values. You've got the great looks, but what about everything else you really want long term in a relationship?

Ali: So we learned early on, and I've warned your audience, go ugly early. That was the motto back in high school. My point is, just like your grandma taught you, don't go just by looks. Look at the soul, the personality, the character. Same with your assets. Are you dazzled by zip codes, or are you looking at the numbers, the upside and the value at play? That's where your head should be and where your investment should be.

Darren: One of the challenges in the affordable space, which most investors have experienced through economic cycles, is that workforce housing can be more subject to market swings based on employment. If gas and groceries go up or people lose jobs, you can end up with negative cash flow or evictions. In your experience, does that track in manufactured housing, or are these investments more stable and better able to keep up with the rent?

Ali: We've found the latter. There always seems to be demand for affordable housing, and it's only getting more true in these uncertain times. Across the board, I haven't seen a community in any market, tertiary, secondary, anywhere we've been involved directly or indirectly, that hasn't had the potential to reach stability, because the demand is out there. It's a matter of positioning the community correctly.

Darren: Another benefit, last I checked, is that they're not building a bunch of new manufactured housing parks. You're not exposed to a new park down the street with shiny new homes offering three months of free rent. In multifamily, in boom and bust cycles, everybody builds because there's so much demand, but by the time the product reaches the market it's overbuilt and they're giving away free months. I'd think you'd be somewhat insulated from that.

Ali: 100%. I didn't even hear about any development until the last few years. Otherwise it was just too cost prohibitive. Not only do you not have development, there's attrition, because you're losing space count as some of these communities are redeveloped for a higher and better use. So your point's spot on.

Darren: This may be more about your family portfolio, but are you vertically integrated, with your own management team, or do you outsource management? How do you operate?

Ali: All of this, even at Rise 360 Ventures, and for anyone listening, I'd suggest you be set up vertically integrated if you're executing a value-add play, particularly with infill, where you're buying homes and filling vacancies. That's one of the most common strategies to buy a park at maybe half price, so to speak. If it's half full, it's at half value, and when you fill it up, it's at full value. The demand's there, but there are barriers that keep residents from moving in and barriers for investors without the experience and understanding of the logistics.

Ali: Once you get vertically integrated, you set up not just asset management and property management, but in our asset class you want a dealer arm where you're buying homes wholesale and selling them retail, where it's legal and permissible. Do your own due diligence, but consider offering financing in some cases for your home buyer. You're setting up an inverted funnel to go from 50% occupancy to 100% occupancy relatively quickly, and by relatively I mean probably three to five years on average. You're eliminating dependencies on outside parties so it's turnkey for residents who really want it but can't deal with all the challenges of getting a home there in the first place.

Darren: Do you find that staying in a community that isn't considered hot brings other benefits? Are you identified as a potential buyer for other opportunities?

Ali: Absolutely. Once you're in an area, it's 'he's the guy for the Central Valley, call Ali, he knows mobile home parks out there.' Once you do a couple, word of mouth gets out, and that's been a big driver for us. It's a good way to get true private or pocket listings. I think that term is overused, but it's a perfect way to actually get some of those.

Darren: Especially with value-add, there's the owner who thinks their asset is top shelf, and the one who realizes it's probably not worth a lot and doesn't want to get beat up in the marketplace trying to sell. As a known entity, I'd think those owners come to you. So to summarize, value-add is the strategy you predominantly employ, finding a park with high vacancy that you can fill?

Ali: That's the primary strategy, but not the only one. At the risk of sounding arrogant, I think we built out this playbook and were some of the pioneers in it. I'm sure it was done before us, but infill wasn't done as commonly in the '80s and '90s as it is today. My point is, if you're following someone else's playbook, when the music stops, will you be ready to adjust, and will you know how? It's still probably the best strategy for our asset class, but it's not the only one, and the game could change.

Ali: For example, in some instances in California we try to leverage the rent control ordinance in the landlord's favor, as bizarre as that sounds. Sometimes the play is in the numbers. Insurance is getting so crazy that sometimes whether it's a deal or not comes down to the policy. I don't want to limit creativity. We like to think of all kinds of value-add strategies, some tangible and some intangible.

Darren: One of the early lessons I learned in real estate is that there's conventional and non-conventional. Conventional is the typical listing where the broker represents both sides. Non-conventional is where someone's hunting for you or people come to you outside that channel, and then it comes down to what the buyer and seller agree. If you don't ask, you won't know. If a deal doesn't work for you as presented, make an offer based on what works for you, not what's being asked.

Darren: Ali, I'd like to shift gears. By day I'm an insurance broker, and I work with clients to assess risk. There are three strategies we typically consider: first, can we avoid the risk; if not, can we minimize it; and if we can neither avoid nor minimize it, can we transfer it. I ask my guests to look at their own situation, whether clients, tenants, markets, political or economic pressures, and name what they consider the biggest risk. It doesn't need to be insurance related. So, Ali, what is the biggest risk?

Ali: Thank you for asking, Darren. The biggest risk in investing in manufactured housing communities, and I'm going to coin a term here that sounds insurance related but isn't, comes down to one word: overwriting. Not in the insurance sense, and I don't think it's a proper use of the word, but I'm using it anyway. By overwriting I mean the opposite of underwriting. Are you paying too much? If you've overwritten, you may not be paying the right price, and you may not be raising enough capital, so you're underfunded.

Ali: All of these things come from overwriting. You've overpaid, you're underfunded, and you're under the gun to get the property stabilized. You pay for that for years, if not much longer than you anticipated on the deal. I bring it up because it's all about buying, as I've heard you say many times on your other podcasts. So the biggest risk is not performing the due diligence correctly, which leads to this. If I had to give it one word: overwriting.

Darren: I like it. Ali, where can listeners go to learn more or connect with you?

Ali: Rise360ventures.com is a good place to get the complimentary detailed report we offer about the asset class if you want to learn more about the space. You can also find us under the same handle, Rise 360 Ventures, on LinkedIn, YouTube and just about anywhere.

Darren: Awesome. Ali, I can't thank you enough for taking the time to talk today. I've thoroughly enjoyed it, learned a lot, and look forward to doing it again soon.

Ali: Sounds good, Darren. Thank you for the time. Take care.

Darren: To our listeners, if you like this episode, don't forget to like, share and subscribe. Remember, the more you know, the more you grow. That's all we've got this week. Until next time, thanks for listening to Commercial Real Estate Pro Network's CRPN Radio.