Are you sitting on the sidelines in this market? Many investors are. There’s a lot of fear and caution. But we’re not. And you don’t need to be, either.
Of course, I recommend staying in cash if you can’t find the right investment opportunity. But we are finding them on behalf of our investors, and they’re the beneficiaries. I’ll tell you about one here.
The Power of Relationship Building
Our operating partner, Steve (not his real name), and his team acquired a mom-and-pop mobile home park north of Detroit in 2021. This was a very profitable acquisition, and our investors in a previous fund have benefited from its cash flow and may enjoy capital gains upon sale.
A lot of syndicators who buy undervalued assets from mom-and-pops never speak to the sellers again. You can imagine why. Some buyers stretched the truth to get the deal done, renegotiated terms in the eleventh hour, or made swift changes at the property that threatened the seller’s legacy.
Steve is a man of integrity, so he was able to take a different approach. Steve stayed in touch with the sellers. They lived near the park, so every time Steve was in the area, he invited them to dinner or for coffee. He sent holiday gift baskets and made occasional calls.
Sound cheesy? The sellers didn’t think so. In fact, when the sellers recently decided to sell a second park, they called Steve—and no one else.
This gave Steve the chance to pay a fair price for the park. He didn’t have to compete with other ambitious buyers. And there was no brokerage commission, which meant savings for both sides.
Transaction volume in mobile home parks is down over 80% from 2022 levels, so buying a value-add park at all is a win.
Some details on the acquisition
This was a classic 137-lot mom-and-pop-managed park, which provides significant upside for investors. Here are some details:
- The park was purchased at $36,500 per lot, which is far below replacement cost (if construction could be approved, which is quite unlikely).
- Rents were far below market, and Steve raised them by 16%, from $365 to $425. This created over $100,000 in net operating income. At a 6% cap rate, this created over $1.6 million in additional value (think margin of safety and potential capital gain).
- The acquisition price was established based on only 127 currently rented lots. The seller filled four of them before closing, and our operating partner is in the process of filling four more. This creates an almost immediate income of $40,800, which translates to an additional value of about $680,000 at a 6% cap rate.
- Most tenants have been there for over 20 years and will likely continue to rent there for a long time.
Our fund is the largest investor in this asset. You and I couldn’t pull an investment like this off on our own. But by partnering with experts like Steve, we can acquire opportunities like this that generate predictable cash flow and appreciation—in a weak market, a strong market, or any market.
And by assembling a diversified portfolio of assets like these and many more, from a variety of skilled operators in various geographies, we believe we are providing a safer investment for you and us.
A cherry on the sundae
One thing we love about this deal is that Steve acquired it with all cash. Once they finish stabilizing it, they expect to add agency (Fannie or Freddie) debt based on the new appraisal. This will allow them to redeploy our capital into other acquisitions, which should compound investor returns.
Final Thoughts
You may think this is a one-time opportunity, but it’s not. This is the same type of acquisition and upgrade strategy this operator has followed with dozens of other assets since we’ve been partnering with him.
His median IRR on 12 full-cycle deals, in which our funds were the largest investor, was over 50%. I recognize that past performance does not guarantee future results, but we look forward to continuing to partner with him. And I believe his strategy will continue to perform in good economies and bad.
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Mr. Moore is a partner of Wellings Capital Management, LLC, the investment advisor of the Wellings Real Estate Income Fund (WREIF), which is available to accredited investors. Investors should consider the investment objectives, risks, charges, and expenses before investing. For a Private Placement Memorandum (“PPM”) with this and other information about the Wellings Real Estate Income Fund, please call 800-844-2188, visit wellingscapital.com, or email [email protected]. Read the PPM carefully before investing. Past performance is no guarantee of future results. The information contained in this communication is for information purposes, does not constitute a recommendation, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. All investing involves the risk of loss, including a loss of principal. We do not provide tax, accounting, or legal advice, and all investors are advised to consult with their tax, accounting, or legal advisors before investing.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
