Investing In Mobile Home Communities, With Saratoga Group

Sam Hales was a presenting partner at Alts Expo May 2023, a one-day virtual event hosted by WealthChannel. In this webinar, Sam Hales presents the latest offering from his firm.

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Click here to visit the Saratoga Group website.

Webinar Presenters

Webinar Highlights

  • Background on the investment thesis for mobile home parks and the Kansas City MSA.
  • How vertical integration has enabled Saratoga Group to maximize growth and returns.
  • Summary of deal specifics, including occupancy, cap rate, and IRR.
  • Breakdown of capital sources and uses for the project.
  • Summary of return projections, including cash flow and refinance timeline.
  • Summary of investment fee structure and minimums.
  • Live Q&A with webinar attendees.

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Webinar Transcript

Sam: Saratoga Group. I established the company about 12 years ago. Let’s see if we get this to work here. So, about 12 years ago, initially we were doing single family homes, and did that for about five years, and really was looking for something that would do well in a downturn, would offer kind of more efficiency and more scale. And it took me a little while to figure it out, but we bought our first mobile home park about six years ago, and since then have been uber-focused on buying, renovating, and filling up mobile home communities. So, we now have over 101 communities. We’re in 17 different states, about 6,300 pads, and a portfolio value of about 360 million.

I’ll add that we’re a fully integrated operator. So, this is a little different than maybe your standard multi-family where there are lots of good third-party property management companies. That’s not so true in the mobile home park space. And we recognized that early on. So, we are really committed to building our own team, managing all of our properties ourselves, and including kind of other vertical integrations. So, for example, we have two construction teams that are part of our company now. They have RVs. They travel to, you know, if we have a big infrastructure project or we… Recently, they did an expansion at a park we have in Atlanta, Georgia, stayed in the RVs for a couple months and now they’re headed to Nebraska, gonna do a 50-site expansion there for us. These are not things that I envision would necessarily be part of being an operator in the mobile home park business, but something that we realized we needed to do to really be successful.

Another thing that we’ve done in terms of the integration is there aren’t a ton of mature software platforms that are really designed for this space. I mean, there’s some, and we use those, and some of them we kind of modify to our use. But we’ve also built some of our own software to kind of automate things like leases and some of the important KPIs that we’re looking at and using. So, there’s kind of been a lot that’s gone into the background of Saratoga Group as a manager.

Lemme tell you a little bit about the team and then we’ll get into the opportunity. Steve Sacher, COO. So, he joined us from another MH operator, large operator out of Sacramento, California. I not only convinced him to join us, but to move with me to Tennessee from California.

We both did that about a couple years ago. He actually moved before I did. My brother, Luke, is our CTO. He has an engineering background like I do, and he manages the construction teams that I mentioned, and really all of our capital projects he oversees as well. Shawn Felkley joined us from Dominion Group, which is a large developer and operator of different types of real estate here in Knoxville, Tennessee, where we’re headquartered. And she joined us about a year and a half ago. Kaitlin is our CFO. She’s actually located in California, and then myself here in Knoxville, Tennessee as well. So, that’s a little bit about the team. Let me tell you about the deal.

And I’ll start by saying up until about six months ago, we were raising funds. And so, you know, we’ve raised about 110 million from almost exclusively high net worth investors. And we were doing that in a fund format. About six months ago, we decided we were gonna pivot to individual deals or portfolios simply because there was a lot of uncertainty in the capital market specifically. And so, that’s what we’re doing now. So, we’ve since then closed… Actually, we’re closing another one today, but we’ve closed three separate transactions and we’re now in escrow for this portfolio in Kansas City, Missouri. I love Kansas City. We were out there last week. It’s a very stable market kind of steadily increasing, very diverse employment opportunities. So, a diverse economy. So, these six parks are in the suburbs of Belton, Excelsior Springs, Lansing, Ottawa, and Warrensburg, currently occupied at about 78% with significantly under market rents.

So, to give you an idea, market rent’s kind of a tricky thing in the MH space because there’s really this large question of what is the market. Often, we’ll go into a market in the market rent, meaning what Uncle Joe is charging down the street is $250 a month. But actually, when you look at three-bedroom rents or other kind of alternatives to manufactured housing, it should be significantly more than that. And we believe that’s the case in Kansas City as well. Most of these submarkets I’ve told you about that these parks are in, the average three-bedroom rent is 1500 to 1750. And currently, the rents on these lots are a little under $350 on average. So, they really, when we look at kind of all the metrics we typically look at, they should be more like 450 a month.

So, there’s definitely some room in the rents. So, we’re buying between these six communities, 420 lots for 12 and a half million after you net out kind of shell value of some of the park owned homes that come with the purchase. We’re looking at about $28,000 per pad. That’s good for an initial cap rate of 6.6%. And we’re projecting an investor IRR of around 15.7%. That’s assuming a couple things that may turn out better than our assumptions. For example, our initial expense ratio we’re projecting is around 50%. We already owned two communities in Kansas City. And so, when we combine those 2 at 150 pads plus this portfolio, you know, we’ll have close to 600 pads. And that’s kind of the point where we start really seeing some efficiency in our scale, in our team. We have another market where we have about 1100, almost 1200 pads, and we’ll probably hit below 30% expense ratio this year on that portfolio.

Second thing is we’re assuming an 8% mortgage rate, which probably sounds high. It is high, sounds high to me. We’re probably gonna come in less than that. We’re getting the loan kind of nailed down right now, but we’re thinking it’ll be closer to seven based on the quotes that we’re getting at this point. So, again, $12.5 million dollar purchase. We’re raising… I’m sorry, the loan will be about 8.8 million. We’re raising, well, together with our contribution, it’ll be about eight and a half million. And that’s a lot of equity relative to the debt, which is relatively standard for this kind of deal. The reason for that is there’s a lot of deferred cap, or I’m sorry, deferred maintenance that needs to be capitalized. So, we’re talking, you know, new roads that need to be paved. Some of the communities don’t have driveways installed, so people are just kind of parking on the dirt. And so, there’s a lot of money that’s gonna go into those things. That’s gonna help as we, you know, bring rents to market that we’re now offering a much better experience for the residents.

The other thing is it’s very expensive to bring in these new homes. The loan that we’re gonna have will have money for buying the homes, but we’ll still need to set up the homes. That includes, you know, bringing the home in, hooking it up to utilities, putting skirting around it, setting up or installing like a porch or a deck. So, this is just some of the things that kind of go into that part of it. This is just kinda the high-level return projections, but it follows our standard model, which is we’re going to increase cash flow through kind of three different levers that we like to pull. One of them is infill. That’s probably the hard, it is, it’s the hardest one. There’s a lot of operational efficiencies that we can usually find. Easy example of that is submetering utilities and billing those back to the residents. And then finally, bringing rents to market. So, you can kind of see it plays out in the yield there to the investor, but as we implement those things, you’re gonna see the cash flow increase, and then we’re looking at a refinance in year 5 that will return. In this case, it was a $100,000 investment in a return. That capital, you’ll continue to be a shareholder in the ongoing interest of the fund. And then tenure, that’s assuming that there’s a sale at 10 years. We’re asking for a 10-year commitment.

So, that’s really the information I wanted to share regarding this opportunity. If you scan the QR code here, it’ll take you to basically a form that you’re gonna fill out. And that way, we will keep you apprised. We’re actually not quite ready to raise money here. It’ll probably be ready in about two or three weeks. And I’ll at this point, open up to any questions, Jimmy?

Jimmy: Yeah, I got a couple questions here. We got a couple more minutes before we have to move on to our panel, which will be income investing strategies for high-net-worth investors. Andy Haggins is waiting in the wings with the panelists. They’ll be out here momentarily. But a couple questions. Standard question here from Murty [SP], what are your minimums, and what’s the fee structure?

Sam: So, the minimum is 50,000. Fee structure, well, I’ll go through it really quickly. So, we charge a property management fee, seven and a half percent. There’s a one and a half percent acquisition fee, and then a 1% disposition or refinance fee. And then there’s also a 1% asset management fee. So, you know, typically, that property management fee will be paid a third party. But like I said, we manage all of ours ourselves.

Jimmy: Good. And question just came in from Brett here. Can you accept 1031 funds?

Sam: Yeah. Great. Great question, Brett. I heard one of the other sponsors kind of respond to that earlier. We have done that five times now and we are set up to be able to do that in this case. We go into details there, but real simply what’ll happen, you’ll go on title to a specific asset because that’s what you’re rolling out of is ownership and a specific asset, and then that will convert to shares over at a certain point in time based on tax law. So, yes, we can.

Jimmy Atkinson
Jimmy Atkinson

Jimmy is co-founder and co-CEO at WealthChannel.