How to Structure a Mobile Home Park Partnership
One of the initial building blocks to investing in a mobile home park is to decide on the structure of the investment. There are many different options. But one of the blessings of mobile home park investing – unlike most other real estate asset types – is that the yields on mobile home parks are high enough to allow for solid returns for everyone involved.
Active verus Passive
One of your first decisions is whether or not you want to be an active investor. An active investor is hand-on involved in buying and operating the mobile home park. Do you have the time and desire to locate, negotiate, perform due diligence, obtain financing, turn-around, and manage a mobile home park? Or would you rather invest in the affordable housing industry, but not be involved in daily operations? If so, you should seek opportunities to be a passive investor in the mobile home park business. There are many different Funds that allow for this opportunity. One such fund is the Affordable Housing Community Fund, which pays out a 10% preferred return and 50% of all profits over that threshold. These type of Funds are normally approved for self-directed IRA investment, as well.
Do You Have The Cash To Go It Alone
To invest in mobile home parks, it requires capital. Do you have sufficient cash to do so? Mobile home parks come in all shapes and sizes, but the most common is in the deal size range of $300,000 to $1,000,000. That equates to cash needs (assuming 70% loan to value) of $100,000 to $300,000 in down-payment alone, not counting any capital costs to renovate the property. Do you have this much money to invest? If not, then you are going to need partners – and there are many partnership structures to consider.
The Old-Fashioned Partnership Approach
When we think of partnerships, we think of the traditional format of several individuals pooling their resources and coming up with a structure to compensate each partner based on role and capital contribution. There is certainly nothing wrong with this approach, which has launched many giant, successful businesses over the years, including most of the U.S. REITs (Real Estate Investment Trusts).
Under this type of structure, you typically have a capital partner (the person or persons with the bulk of the money) and an operating partner (who brings sweat equity to the table). The duties of the operating partner are often to locate, negotiate, perform due diligence, turn-around and operate the mobile home park, while the capital partner may have no further role than contributing the money and providing opinions and feedback on the operations. While everything is negotiable, the normal financial structure is that the capital partner receives a “preferred return” on their capital [a base interest rate on their capital] that is paid out before any “split” of profits with the operating partner. For example, if a mobile home park cost $1,000,000, and required a $300,000 down-payment and $100,000 in renovation, then the amount put in by the capital partner would be $400,000. If the mobile home park was sold for $1,500,000 five years later, then the capital partner would receive 1) their $400,000 back 2) 10% interest per annum as their “preferred return” on the $400,000 = $200,000 and 3) a split of the $300,000 in additional profits. How much is the split? It can range from 50/50 to 80/20, depending on the expertise of the operator.
The biggest drawback with this type of partnership is the pairing of two or more individuals who may have significantly different goals and life experiences. Just as the outcome of many marriages is divorce, many partnerships can end in unhappiness and litigation. Since the capital partners have so much riding on the deal, they are often prone to “back-seat driving” the operator’s performance. Additionally, sometimes the capital partners have a personal set-back and need their cash back sooner than anticipated. In any event, traditional partnerships structures can often be jeopardized by forces beyond the scope of the mobile home park, and there is always that element of risk that has to be addressed.
The Modern Partnership Model
A new partnership format is gaining popularity for the purchase of mobile home parks. These are often called the “504″, “505″ and “506″ – a reference to the SEC’s exemptions under reg. D for raising capital. These allow for a much larger grouping of capital partners. What is great about this type of structure is that, since no one person has a huge amount in the deal, the catalyst for partnership woes is greatly reduced or eliminated. In addition, there is much greater diversity of risk by having many more people invested. And these type of partnerships often allow for self-directed IRA contributions, which is a growing segment of available investment capital. As they are much more complicated than traditional partnerships you should definitely seek legal counsel.
The structure of these type of vehicles is the same as covered earlier. There is traditionally a preferred return, and then a split of profits after the return threshold has been met. This is completely negotiable and should be based on the experience and track record of the operating partner.
Conclusion
There are many different structures for investing in mobile home parks. Decide on the one that meets your needs and put your plan into action. But hurry. There has never been a better time to buy mobile home parks and that window of opportunity will not last forever.
Frank Rolf is regarded as one of the leading Manufactured Housing Industry experts. Frank is involved with leading websites on Mobile Home Parks and Mobile Homes for Sale.