Mastering Mobile Home Park Investing with Ferd Niemann – EP 193

Justin Donald: What's up, Ferd? Good to have you on the show.

Ferd Niemann: Hey, Justin. Thanks for having me. Excited to do it.

Justin Donald: Well, this is fun. You and I have become friends here over the last number of years. We've gotten a chance to get to know each other. We've done some work together. I've had you do a ton of legal work on my behalf and we're both mobile home park owners, so there's a ton in common. And I thought it'd be really fun to have you on the show so that we could geek out a little bit on mobile home parks. And even just what I think is kind of a really cool path that you've taken where you're an attorney by trade but you're a mobile home park investor and that side gig has become really massive. So, I'd love to talk about it.

Ferd Niemann: Yeah. No, it sounds great. I appreciate it. I've been a big fan of your group and read your book and then good to follow your career, and then been great to work together some stuff too.

Justin Donald: Yeah. We've had a lot of fun. And obviously, you know your stuff. I'm pretty particular about who I use and they need to know the space but I love when they know the space so well because they're actually in it. They do what I do. And so, I'm curious, when on earth did you ever decide you were going to get into the mobile home park space?

Ferd Niemann: Well, I was a financial analyst at Jackson County government, which is here in Kansas City, Missouri, and I was working on commercial real estate projects, tax incentives in particular. So, TIF, tax abatement, lots of power centers, retail, mixed-use. And I was doing single-family homes on the side, buy and hold, and flips, and I was making good money as a percentage returns. Like, I'd have 10,000. I turn it into 15,000 like, "Wow, 50% return,” but that wasn't a big number from scale so I thought, "Let me look at something bigger.” While I was looking at all these complex real estate deals at my day job and those guys they were dealing with 10 million, but they were turning ten into like 11. I was like, "Well, that's pretty competitive.” It was a competitive atmosphere but not a huge return.

So, I thought, "Well, I really can't compete on retail or on multifamily apartments because they’re so sophisticated, so many players.” So, I started looking at alternative assets. I looked at storage and then I looked at MHP and I decided, "Man, MHP, lower expense ratio, which means higher NOI ratio.” And it wasn't sexy, it wasn't glamorous, it wasn't as competitive. So, most of the guys in my space it's gotten different in the last seven years. It's definitely more professionalized now and you got your reads in your private equity groups and so on. But it's still not compared to most asset classes. At the time, it was like I was coming from like real estate development law, like down to trailer parks, which we don't want to call that, manufactured housing communities. But the competition, a lot of them were guys that were just flipping single family, like coming up.

So, from a competitiveness of sophistication, I felt like I had a good advantage versus as you go into the major power centers like everybody is well capitalized, everybody is highly sophisticated. So, I kind of thought I had a niche. So, I started pursuing it on the side. I still had a job. I was county appraiser, and then I was doing law school part-time, became an attorney, did development, and then went in-house and did retail development. I was still doing MH on the side. And then when I got out of retail, decided to switch business partners. And so, that meant in my region, switched industries too and decided to get into MH and been doing it ever since.

Justin Donald: So, how long has it been now?

Ferd Niemann: So, full-time, I mean, I started doing MH in the fall of 2018 so it’s May of ‘24 so almost six years. I stopped practicing law there for a couple of years because I was busy on MH. And then when COVID hit, everybody got scared for a minute but then we kind of realized COVID taught us we don't really need restaurants, we don't really need office, we don't really need retail, we don't really need hospitality or hotels or entertainment theaters, at least for a period of time. So, what do we need? We need medical, we need industrial buildings to hold stuff that Amazon is going to ship, and we need housing, especially affordable housing. So, the price went through the roof on these parks. So, I was like, "Man, now I can't buy anything, but I have this niche knowledge of operational IQ and law. What am I going to do?”

So, I thought, "Well, let me reopen my law firm.” This time, my own law firm, instead of at a bigger firm. I was a solo guy and now we've grown to six lawyers and decided let me sell my services for a wage. And then I realized that helped me raise money, that helped me get on national platforms for speaking engagements, that helped me get leads. So, then I ended up, well, I thought I wasn't going to buy anything for a while. I ended up buying more, and we ended up having the law firm. So, they kind of dovetail well together.

Justin Donald: Yeah. No kidding. That seems like a nice win-win. And you had mentioned earlier the expense ratio is less in MHP. So, if you think about like traditional multifamily, would you say the expense ratio is probably closer to 50% or so? In some cases, maybe even more.

Ferd Niemann: Yeah. I mean, I would say often even more. I mean, depends on obviously new construction. You don't have a lot of deferred maintenance in the next five years versus Class B product from 1970s, you probably have more deferred maintenance. So, whether you capitalize or expense it, your total costs are going to be typically 50% or higher. I've seen somewhere there 60%, you know.

Justin Donald: Yeah.

Ferd Niemann: For MH, you're probably going to be on I had a park that we were at 22 that was extremely low. Very good variables like direct bill, water, sewer, trash, high dollar lot rent, no parking homes, full occupancy, 22% expense ratio. The norm is probably more in the 35 to 40 range.

Justin Donald: That's right. That's what I've seen.

Ferd Niemann: Yeah. I mean, it's sometimes a little higher. Like, I have a park that has a well water and a lagoon. Well, we have to operate the well in the lagoon so we have more expenses there and it's not like our revenue just goes up by rule. So, in that park, we're going to be higher than 40%. It's not realistic to get to the 30s on that park so it's going to be 45 and during value-add or infill stage you could be in the 50s before stabilization. But the thing I like about MH is once you fill up the parks, it costs the same amount of money to push the snow or mow the grass, whether it's half full or full. So, I might as well fill it up. Actually, you save money because now you're not mowing the vacant grass and then you obviously get more top-line revenue. So, the ratio of course your expenses goes down.

I'm not preaching the choir on the economics of MH, but that's one thing. That's sort of what originally attracted me was an alternative asset and picked one that had a lower expense ratio, thus higher profitability. So, I decided to start chasing them.

Justin Donald: Yeah, I love it. I think that's awesome. I actually have in front of me right now, the newest report, the newest PDF from UBS on their family office. And they have a global report, they have the United States specific report. So, a lot of people don't realize that the wealthiest people in the world, and specifically in the United States, have the majority of their wealth in alternative investments. And so, you just mentioned this, and I love it because I was literally just reading this report. It came out two days ago. And 59% of the highest net worth individuals in the United States, 59% of their net worth is in alternative investments for the 2023 asset allocation. So, this is taking a look at some of the biggest family offices out there. So, I think that that's just a great thing to consider because when I was younger, I feel like all the influences, all the money was being spent on creating this sound bite around like Wall Street and invest with money managers.

And you learn that in school, you learn that on commercials, you learn that via just their education arm that goes out and stretches wide and far. But what I found in my research is that really only about 15% to 25% of most of the wealthiest people's net worth in the world is actually in the stock market. And in some cases, it's a lot lower than that. But you dig into real estate, you dig into private equity, you dig into all the other alternative investments that are out there and you see that most of them have over half, and in this case, almost 60% of their net worth in these alts.

Ferd Niemann: Yeah. I mean, I think it's good for asset allocation, for diversification. I mean, obviously, a large portion of those are probably private also, whereas the stock market is clearly a public investment. But yeah, private companies, private equity, and then alternative assets, real estate, and then obviously, MH. Real estate's not that alternative but niche real estate. I was actually interviewed for a pension fund, and I was looking to raise money for private home parks. And these guys said, somehow I don't know how they found me, but they found me and a handful of other guys, and there were six groups apparently interviewing, and they said they had to place a minimum of $50 million. But out of their like trillion dollar fund, they had to put a minimum of $50 million with at least one operator in alternative investments.

And they didn't tell me and I wasn't selected. Actually, I think they have not selected anybody. So, I got a very brief report. They end up changing their mandate but it was interesting that they had MH. They were interviewing three MH people, somebody from storage, somebody for marinas, and somebody from helicopter leases.

Justin Donald: Whoa.

Ferd Niemann: I'd never even thought of that. Oh, yeah. You know, basically, subleasing private helicopters as an investment. So, they were like their pension fund was specifically looking for niche alternative assets because they had so much exposure to the plain Jane stuff.

Justin Donald: That's fascinating. There's a family office. I had never heard of the helicopter deal until I talked to this family office based out of Charlotte. And one of their big strategies this year. And they've been doing this for a few years is this helicopter lease. And it's really performed well. So, it opened my eyes to yet another interesting alternative investment. But it is kind of interesting when you hear the word alternative and you hear real estate being put in there and you made the comment yourself, these aren't alternative investments. These are actually the typical regular investments for the ultra-wealthy. It's actually funny, what is considered a traditional way of investing being the stock market is actually one of the smallest asset allocations of all of them. But it is kind of comical that the way that language plays into it where, "Hey, this is your traditional way. This is what the professionals do versus this is alternative to the way most people do it,” when in reality it's not alternative. It's actually what the majority of the wealthy people do.

Ferd Niemann: Yeah. I think the distinction there is the wealthy people recognize that there's some nuance and some special sauce in these “alternative assets.” So, to them, they're not as much alternative. They're the bread. They are the bulk of the portfolio, whereas mainstream America, they don't have access to that. Some of it you don't have access to because you don't have just the knowledge. Some of it you're limited because if you're not an accredited investor or sophisticated investor, the minimums are higher. But then I think part of it is just we're just force-fed. I mean, I used to have my security licenses. When I was in college, I got a degree in finance accounting of my MBA. I thought I was going to be a stock guy. Well, then I started reading Rich Dad Poor Dad and all the Robert Kiyosaki books. I went to the Russ Whitney seminars and others and like, "Man, I don't really believe in stocks the same way.”

Then you read like Tony Robbins’ book, MONEY Master the Game, which really kind of exposes the actively managed funds like 96% underperformed index. So, I was like if I'm going to invest in the stock market, index feels like a pretty good option here relative to an actively managed fund. But of course, there's not a lot of 401(k) providers, financial advisors, broker-dealers getting paid when you're buying the index funds. So, we are force-fed a lot of that. I mean, I've been teaching my team that as far as the training, just like an internal company training. I've been doing a number of topics on Finance 101 and so on just to expose my staff to these topics and these pitfalls and these topics. But, yeah, I mean, I'm with you, man. Diversify with the “alternatives” is a good way to go. And MH to me is it's kind of like a hybrid and it's backed by real estate but it's not so commonplace that it's as competitive and it's ripe with fee structure and other problems.

Justin Donald: That's right. Well, because there's a stigma, it means less people are competing for these products. So, it's still the least consolidated real estate asset class by a large stretch. You know, you've got multifamily. You think of like apartment complexes. They're about 90% institutionally owned. And then you take the inverse of that and you've got baby boomers, moms and pops that basically own 90% of the mobile home parks that are out there. So, a lot of them coming up for retirement, a lot of them looking to move on. So, still a pretty amazing asset class to get into. So, you started back in 2018. So, it's been about six years. How many parks and how many units have you been able to purchase over that period of time?

Ferd Niemann: Yeah. So, to clarify, I started full-time in ‘18. Our first park I bought in ‘14, so I had one park. This is when I was still at county government. I bought one park in ‘14. I think I bought one and two in ‘15, one in ‘16, and then at ‘18 started more full-time. So, I had four or so before I jumped in but I still had a regular day job at that point. Now, I don't have a regular day job. So, we've bought 24 parks. We've sold six, no, seven now. We just sold one, actually. We sold seven. Total lot is about 1,600 sites. So, as small as 16, so given that's the one I just sold. And then as big as 153. Most of ours are in the 40 to 65 range. When you buy a park that's 50, as you know, it's called institutional grade because it's eligible for Fannie Mae and Freddie Mac Finance. So, those are pretty competitive. So, I tell people, "49 is one better than 48, but 50 is a lot better than 49 in the marketplace eyes.” So, it's hard to buy 200 site parks to 300 site parks with any sort of scale, with any sort of rapidity at a fair price.

Justin Donald: Yeah. A lot of competition, too much competition in that space. We at one point had no competition. Now, you see a whole lot more.

Ferd Niemann: Yeah, in hindsight. I didn't know about syndications or anything like that when I started. So, I mean, in 2014, in 2017 was just all my money, me and my dad. Well, we only had so much money but it's like where I kick myself is I probably could have bought 25 parks in those three or four years before it was cool and I just didn't have whatever that was going to take $10 million laying around. But if I would have known better, I maybe could have found the $10 million through investors. So, about half of our deals, we have no investors and about half of them we've syndicated.

Justin Donald: Yeah. I love it and I love that you've gotten into the syndication game because it is a great way to scale your operations by the one thing that we're all typically limited by, which is capital. And like you, I started pretty close to you, a couple of years beforehand. And we've gone slower than you but we're still pretty close to the same size, same number of lots. I think we're a fewer number of parks but about the same number of lots. And I've had to do it slowly because I've only used my own money, right? I've never raised money to purchase these parks. But like you, sometimes I think to myself, “Huh, should I have gone in and scooped up a whole bunch of way back when?” But I'm also happy with the way things have turned out. And we've got some great assets all in one location and primarily one location. But that brings up a good point. You said you've held most of yours. You've sold seven. You just recently sold one. Why sell versus why hold?

Ferd Niemann: So, the park, some of it is by design depends on the business plan. So, the park that I just sold I specifically bought for its houses. So, I knew I was going to own it. It was 16 sites. I bought it at a time when it was hard to get houses and new houses were through the roof. So, I said, "Man, this is a park. It's $300,000. It’s a small price, ten homes. The homes were all nicer ones like 2010s and newer. So, the homes were worth over 300,000 and they were in a lower dollar, lot rent market. I can move to a higher dollar market and I could kind of jigsaw puzzle them in. So, it’s based on lot sizes and perimeter setbacks and so on. So, for that case, I bought the park, where there were a bunch of were vacant. We just moved them out. We had two people that were living there. We put them on leases, and then we sold the park with 2 out of 16 occupied. We can now sell it at a premium because now it's got the ability for value add.

So, somebody on low, you know, if I had a park that’s full, the young guy trying to get into space is like, "Well, I don't want to buy a coupon clip or I need a value add and I can't afford the $800,000 park. I want to buy the $150,000 park and take it up.” So, that park, that was by design. Other parks, the one that was 22% expense ratio, I was going to refinance it with Fannie Mae, and they wouldn't let me take cash out until it’s held for so many years. They wanted more seasoning on it. But they had some topography challenges, had some infrastructure challenges, but it was really a good park. I was like, "If I sell it now, top of market, we're going to make a killing on it.” If I have to wait three years, like what's the cost-to-capital of that? So, we ended up, we bought it for 2.725. We sold it for 5.2 million 20 months later.

So, it's like we have over $2 million gain in less than two years. We were able to 1031. We broke it out in the TIC and then we had investors. So, we did tenant in common, the investors and us, which I was one of the investors also. We bought into an apartment complex in Kansas City with a client investor friend of mine. And then we took the LRGP money and went bought other parks without investors in this case because it was too big a number for the parks we found. So, why do we sell it? Because when you think about Sam Zell or Warren Buffett, they'll say sometimes, "If you can sell it for… This is my pen here. This pen is probably worth a dollar. If you offered me $2 for it right now and I say no, I essentially just bought it for $2. And to me, this isn't worth $2. But if it is to you, I'll let it go.” So, now, that's oversimplifying it because there's portfolio premiums for size. There's economic and operational efficiencies based on proximity and location from one thing to the next where your staffing is.

So, for me, it's just been do I want to own it this day or not? And then early on, I mean, I needed to sell a couple of them in order to fund a bigger one. Yeah, right? So, trade up. So, I've got a park right now for sale, and it was one that I bought it and it wasn't a long-term play for me. I bought it right. So, now I can make some money on the sell. And I look at the, you know, in Illinois, for example, I probably have 300 vacant sites. Well, this park has like six vacant sites but it's the worst of my parks in Illinois. So, the next home I fill is the lowest dollar lot rent. The next home I find, am I going to bring it into this park? No, because it's more valuable at these other parks and this particular park, in my opinion, cannot support new home prices but should be 60,000 plus.

So, I need to be used-home prices, 30,000 to 40,000. Well, I only can find so many used homes in the next 100 or go in these other parks, which means I'm not going to take this smaller park to the next level. So, if I'm ten years out before I get to it, I might as well take my chips off the table today, take those monies, put them in a park where they can get a higher dollar return.

Justin Donald: Yeah. That makes a ton of sense. You know, I like that. I like that strategy. You had mentioned a couple of household names, Sam Zell and Warren Buffett. And for those of you that are unfamiliar with this space, this mobile home park investing space is so attractive that these two individuals, two of the greatest investors of our time, are two of the biggest owners in this space. So, you've got Warren Buffett, who owns Clayton Homes. They manufacture the majority of mobile homes and have the best programs out there for park owners to be able to fill up their lots. And they've created a great financing program on it where you can actually bring homes in for $0 down. It's pretty incredible.

And then you've got Sam Zell, who most would consider the greatest real estate investor of our time, if not ever, a guy who actually had the most, he was number one in three different real estate asset classes, which most people will never be number one in a single one of them. But at the same time, he had the most office buildings, apartment complexes, and mobile home parks, and he timed it perfectly. I got a chance to hang out with him and spend some time with them before he passed away, which is really cool. And he still says the single greatest investment he ever made was the park he bought in 1983, his very first mobile home park. And then what they did over the next ten years in acquiring parks and in 1993 going public. I shared a bunch of this story in my update and expanded edition of The Lifestyle Investor that's going to come out soon.

But the guy's brilliant. So, like he literally timed the market to sell all of his commercial real estate before the financial crisis. So, offloaded all, offloaded almost all of his apartment portfolio, right, and these are the big buyers, right? We're talking Blackstone. We're talking billions of dollars. And then he decided he never was going to sell his mobile home park portfolio. His equity lifestyle properties is still the number one mobile home park holding in the world. So, you got smart people like this in the space that tells you it just screams that there's a great deal. And most people don't realize that you want to be where there's the most inefficiency. The stock market is so darn efficient, it is hard to make money. It is hard to be a day trader. It's hard to outperform just being in an index like you had mentioned before, only 4% to 5%. If you measure the last 15 years at various points in time, only 4% to 5% of money managers actually outperform it. So, it's better and cheaper to just do it yourself.

Most people, so literally 95% to 96% of the people managing money, you're going to pay more to have them perform worse than if you just invested in the S&P 500 index. Most people don't get that. That's a very efficient market. The opposite would be mobile home parks, very inefficient, tons of opportunity, tons of ability to make alpha or make that extra return above and beyond the norm.

Ferd Niemann: Yeah. No, totally. I mean, I was reading the other day, it said if you're trying to beat the market, it’s like beating the market is like playing a game, let's call it poker, playing poker against guys and gals that play poker all day, every day as their passion, their obsession, and they have unlimited resources in order to get better and smarter at it. And you're going to try to beat them or you're going to pick the guy down at the Edward Jones or the Northwestern Mutual office two blocks down, and that guy's going to beat them, beat the industry, versus just bet on the companies. It seems tough. I mean, one thing I like about MH, as you mentioned, the fragmentation, the lack of consolidation industry. It means I can still compete against some of the big boys. Now, I can't compete in cost of capital or volume of capital and number of analysts on my team but as a small guy, I can be nimble and I can be local and I can find deals off market.

You know, there's a deal in my hometown that we bought when we were trying to buy it for like five years, and the guy was a grumpy old man and he ran a concrete business. He lived in Doublewide in the middle of the park, and he had a rent box and his rent box said, "Do not knock on my door. Put the money in the box. Period.” They don't deal with anybody and we had to knock on his door for years, every six months, “Hey, you want to sell your park?” “Go away.” “You want to sell your park?” “Go away.” Not, "Maybe.” And he said maybe. And we paid his price. He had a fair price, which I thought was a good price for me but he's like, "Here's my price, not a penny less.” And we paid it. The reality is Blackstone is not going to get ahold of that guy.

Justin Donald: That's right.

Ferd Niemann: He had a flip phone because apparently, flip phones work well around concrete dust where smartphones die. So, even to this day, he uses the flip phone. So, he doesn't want to do text, doesn't have internet, doesn't respond to emails, and you're not going to go to his door. He's not going to respond to junk mail so I can find the deal more than the big boys because of we're fragmented. And then when I'm trying to sell a deal, sell a home compared to a competitor, my manager, I'm like, "You're only one, or at this point, probably two phone calls away from every decision being made.” You know, now I got more middle people, but at the time it was like, "Hey, look, this person, they're coming from the park down the street. Big REIT owns it.” They said, "We're moving this week, but you've got to put a shed in or you got to give me a house with a parking space,” and he wasn't ready.

And my manager's like, "Hey, well, we put in a driveway for this guy. Gravel driveways, $200.” I'm like, "Yes, get the sale,” or the big guy's got to go to corporate. They got to go to the next corporate. And then it's three days later. They've lost the sale. So, the lack of professionalism in the industry creates some opportunities for us as smaller operators even in the eyes of the big boys coming into the space. The big boys validate the space, create more financing options, create more exit strategies, create better reputation in many respects because they're going to fix problem properties but we can still compete with them because there's a local piece to it and/or just the speed of being a smaller company.

Justin Donald: That's right. And we have the ability to roll up to the size that they would purchase at. They're not going to do the heavy lifting. They're not going to go door knock. They're probably not even going to send out fliers but they will buy a bigger portfolio. And so, we're rewarded for aggregating a number of lots that they would like to, in one fell swoop, purchase and be able to sink some money in and make them better and get their return. And they pay ridiculous numbers in a very good way for those who were handsomely rewarded for rolling up these properties.

Ferd Niemann: Yeah. Rolling up just as a mere bulk premium definitely can work, right? And you mentioned that that's definitely one option but I like, in particular, and I heard a guy say this in a big-time broker nationally who he represents some of the REITs. He said, "Here's where you guys can get rich.” He said, "Buy the parks that are not in REIT quality and get them up to REIT quality.” They will let you take that money off the table for you doing the hard work. So, buy the park that's 50% occupied and get it up to 80. You can get up to 100 if you want, but if you go up to 80, it's very bankable and they'll pay a premium. They don't care that you made 2, 3, 4 or $5 million on the park. They'll make the next man or two. They're the long-term holder. They'll hold it for 25 years. They'll hold it for 50 years. They will reinvest in the infrastructure that's going to die in ten years where you need to do the infill, which means the infrastructure means typically fix the roads, demo the bad homes, cut down the trees, paint the homes, make it a better place to live and fill it up. If you do that, they're the ones that will put in the sewer, the $250,000 sewer system or take it to the city sewer where you may not need to do it or may not have the financial capacity to do it.

Justin Donald: Yeah, I love that. And earlier you had talked about tenancy in common or a TIC. And I think this is a really important point because most people, well, I guess most people don't even understand what a 1031 exchange is but that's where you take a like-kind property, exchange it for another like-kind property, you can defer your tax. And you can do this indefinitely until the day you die. So, a lot of people in real estate do that. Now, most people think the only way you can do that is by basically selling one deeded property and purchasing another deeded property. Or maybe it's selling multiple, buying multiple, whatever it is but you being on the deed. There is one little loophole to that, and that would be called tenancy in common where there are these funds where you can actually take your 1031 dollars, you can declare this as one of, I guess, the options that you're going to pursue. And then you can go into the fund.

Basically, what ends up happening is you kind of get assigned a deeded property then you take those shares and you transfer it into the fund so that way it's less risky and you have access to a piece of all the deals. And then when that property sells, you kind of go out and exit with that property. So, I'd love to hear any other thoughts that you have on it and the way that you've done it in the past because I think this is one of the best opportunities for people that are selling properties but it's one of the least known opportunities.

Ferd Niemann: Yeah. Happy to cover. I mean, what you described I think maybe you didn't use the same verbiage that I perhaps would have but one piece of that you were describing, I think, is what you would invest into a Delaware Statutory Trust or a DST via the tenant in common structure. That is good for some. It wants to be completely passive, and typically diversified so it's a standard. So, there's a middle layer or there’s a third option, I guess. The standard 1031 exchange is I bought this pen for a $1 or real property. I bought this piece of dirt for a dollar. I sell it later for $3. My gain is $2. If I did it in less than a year, it's short-term gain, ordinary income tax. But did it more than a year, it is long-term capital gains, which is a lower income tax bracket. If I take my money, I got to pay tax on the $2. And if I depreciated it down, I got to have a REIT cost recovery or depreciation REIT recovery.

But if I take this $3 and I buy something that's $3 or more, the regular 1031 is saying kick the can down the road. If you want to still, and perhaps forever, right? Until you die. If you want to continue to be an operator, you own the park or property in an LLC name. You buy the property in LLC name. No big deal. The challenge becomes when people say, “I don't want to actively manage anymore, I'd like to sell for $3 and I'd like to basically retire but I don't want to pay taxes on the $2.” So, how do you do that?” Well, you have to buy this new property. I’ll get my red pen out here. You have to buy this new property, tenant in common, and it's one piece of dirt but you split it into two different pieces of ownership inferred maybe the operator and I can charge you some sort of fee ES management or property management fee but we would actually if it's a single piece of property, 123 Main Street, we would own it. As tenants in common, we would both be on the deed and we'd both be owners, but maybe one of us is more active and gets a management fee of sorts.

And then if you wanted to not go with just say for the operator, you wanted to go into a bigger fund, you could go on to it. You could 1031 into a Delaware Statutory Trust, and then you would own, it almost feels like shares. The problem with the DST is once that sells, you can't keep kicking it down the road because you no longer really own real property. Like, it's rolled into this bigger fund mechanism versus the two tenants in common, where it becomes more complicated, the deal that I mentioned that I sold, we had a syndication. So, we had GPLP is one. Well, then we decided to split. So, we dropped it down into tenants in common and we had LPs and GP, GP, GP. There were three GPs. We then could take our moneys and go invest individually or together as tenants in common. So, it's a little more, it's not just a little, it's a lot more complicated of a sales structure and entity structure than a regular 1031, but it can be really helpful as an alternative way to continue to invest in real property.

And it used to be you’d have to be real property but that's where the TIC is important because if you just invest into it, like let's say you sold and you want to invest in Justin's new LLC, well, you're not going to own real property. You're going to own membership interest in Justin's LLC, which is not going to qualify as 1031. So, you need to own real property as tenants in common.

Justin Donald: Yeah. And there are a lot of groups that we work with. Some of them sponsor the Lifestyle Investor Mastermind. Some of them are our experts, our expert panel in different industries. But there are a lot of funds where you can do what you described with a DST, a Delaware Statutory Trust, but you can do that using the same mechanism as that uses but in a fund structure. And there is still a way that you could kick the can down the road and do it again. So, they have gotten a little smarter and we've got probably either 8 or 9 different groups that have, that we've done this with. For people in our community, I think we've had somewhere now around 70 members having had exits over the last five years.

So, a lot of people with capital that they need to deploy, many have had real estate gains that they have that they would like to defer. So, we've been able to find some pretty creative ways to help people legally defer paying taxes and really work with some operators that have an incredible track record.

Ferd Niemann: Yeah. And good job. Yeah. There are some options I think springing in stuff through. There's a revenue procedure that kind of gives I won’t to say safe harbor but it gives guidance that it's like a 15-factor test on. So, it's very nuanced as to how to do it. So, you want to make sure everybody's in the loop. Your 1031 QI, your attorneys, the other party, investors, that it can get quite technical to navigate.

Justin Donald: Yeah, 100%. What type of financing have you used for your properties? Have you stuck with local banks? Have you ended up, I guess, some parks probably didn't qualify for Fannie or Freddie. Some maybe did down the road with some improvements. I'm curious what it looks like. And for most people, just there's a few different tiers. You've got basically in the bank category, you've got local banks, regional banks, and national banks. And then you've got conduit or CMBS, and then you've got agency, which is like Fannie Mae, Freddie Mac, kind of like extensions of the government, subsidies from the government on being able to buy if they have to meet a certain criteria to be eligible. So, I'd love to hear you speak on that and talk about what you've used personally.

Ferd Niemann: Yeah. No problem. And that said, the fourth category is seller financing, which is not a real bank, obviously, but that's more common in MH than anything else. I mean, I think on the law firm side, we probably do at least 10% seller financing. Like, my apartment clients, my storage clients, they don’t even bring it up like it never happens. But on MH, it seems to be more common because mom-and-pop 25 years ago couldn't get a loan because the market wasn't there for banks at that point. So, they assume the next, “I can't get a loan,” or they're like, "Yeah. Whatever, I don't need the money now. I just like the annuity of it.” Some of them will not let you prepay like, “I'll sell to you in 15 years, but you can't pay it off early. I want the same thing every year.” So, that's common. I've done two deals with seller finance. All of my acquisitions I have done with local bank or regional bank financing.

I have one deal that we ended up not closing. Many of them to sue the seller on it and we ended up doing a mutually agreeable settlement that we got a big check for. But we were going to do Fannie Mae on that deal. The catch with Fannie Mae is you have at least 50 sites. The loan is going to be at least a million bucks, and it's got to be a pretty high-quality park. And you typically have to have 80% occupancy or better. So, 40 to 50 may not even make it, 80 out of 100 you'll get agency, and typically that will be over $1 million loan. There are some markets that are not approved, peer review, or they need the original criteria. Like, one deal I looked at, they're like, "Okay. We'll give you agency financing but you need to have this kind of manager like a manager with this many units experience, like the actual on-the-ground manager.”

I have refinanced three deals with Fannie Mae of mine. I've not done CMBS as a borrower. As a law firm, we do a fair amount of CMBS or bridge lending. That's not for the faint of heart. CMBS is the most painful of any of the lending sources. Fannie Mae and Freddie Mac can be painful. The terms are good. Typically, they'll have interest only or they'll have a 30-year amortization. They'll have rates that you cannot get in the regular market. The rates are favorable. They used to be if you had tenant site lease protections, which now are mandatory but they used to be optional. If you were like a reasonable landlord, they weren't that onerous for landlords. I did them. They would then give you reimbursement of up to 15,000 of your third-party reports.

Justin Donald: Wow.

Ferd Niemann: And you got like 10 bps lower on interest rates so it was really favorable. So, what I've done, I've purposely like the deal that I mentioned that I sold for 5.2 million, that deal was eligible for Fannie Mae when we bought it because it was 94% occupied, it was in a good market, and the price is 2.725. So, it was big enough. But here's why I got the local bank. I realized if I bought it, I was going to get a 75% loan at 2.7 million, and I was going to be locked into those proceeds for at least five years, and maybe they would give me a supplemental loan for five years. But instead, I bought it on the recourse loan, which meant I have more risk at recourse local bank loan but then I pushed the value up because we bought it at a favorable price too. It was worth more than that, but I realized I could get the value up above 4 million in a year.

So, I was like, "If I could do that, I could then go refinance, take 3 million out of that 100% of our money back, and then some.” So, that was the plan or the reason that I end up selling that deal was because I had previously done this on trailer parks, and Fannie Mae seeing those other parks, you had a great story. You got rid of the drug dealers, you demoed the crappy homes, you brought in 25 homes in a year, you repaved the streets, you paint every house. You have a story. You saved the town. But on this particular park, which is in St. Louis Market, they're like, “You just bought it right.” I was like, “So, I'm penalized for that? The last guy did a great job.” I mean, he really did. He lived nearby. He had an office on site he tinkered with. It was 94%, but he just didn't infill the last one or two lots.

So, we in-filled two lots and we raised the rent $30. We added a small playground and we fixed a couple of potholes. And then we painted like ten houses. So, that was not much of a story. It was like wasn't that hard of a lift. So, the bank's like, "We're not going to take cash out.” And I was like, "Then I have trapped equity.” So, I called a national broker and I said, "Look, I'm going to wait it out. I got to wait another year or so and I'm going to refinance. But if you guys can sell it for here also, now I'm only giving you a four-month listing because by then I'm eligible to start the process again.” And they got the number and it was a crazy high number. It wasn't worth that in my opinion. Some New York property group wanted to be in the space, raised $100 million, and it was their first acquisition and they really wanted it. It was a good park, so that was like a good one to start with.

But to me, that's why I took the local bank debt because I was going to exit with agency and then just the circumstances were such that I ended up selling. But, yeah, but typically agency has the far best terms but they're also going to make you do a property condition assessment, which means if there's a pothole, you're going to fix it. If there's a tree with a dead branch, you're going to fix it. And not that you wouldn't anyway, but they're going to find stuff that you didn't really care about. Like, I don't care about striping the parking. I just care about like there's parking. They want you to stripe them. Then you got to have so many handicapped spaces and so on even if it's too many than what you think you'd ever need for a customer base. So, anyway, that's kind of my jam on bank financing.

Justin Donald: Yeah. That's awesome. I love just getting into this. By the way, I've personally had two parks fully seller-financed and then I've had four parks partially seller-financed. And that is my favorite way to buy. You know, that's also a non-recourse loan. And so, it just means, basically, if anything goes wrong, they can only take the property back. They can't sue you for all your other assets, which I like. It de-risks the deal. So, hey, this has been awesome. We've had a ton of fun. We didn't even get into due diligence and you're great at due diligence, but I appreciate it because you actually are offering a really cool due diligence product that you've created that you use to our audience for free. So, I thank you for that. Are there any quick words that you want to share as we're wrapping up on the importance of due diligence? Because this is, in my opinion, what makes or breaks a deal.

Ferd Niemann: Yeah. I mean, as far as quick words, I mean, just diligence you can't do enough of it. So, I mean the big ones, know your market as far as demand, test your financing assumptions, test your operating assumptions, run last iterations, hire the pros when you need to. Like, if you're not a surveyor, don't do your own survey. Skip the survey. If you're not an attorney, don't do your own title review. If you're not an environmental engineer, don't do your own phase one. And then I would just think, you know, I got a checklist as you mentioned. I'll share the checklist with your audience that's got 100 things on there but just really getting to know the market and don't trust the seller even if they seem like a nice guy. Sellers lie. Make sure your contract has good provisions of sellers lie. Not all sellers, of course, but we've seen people completely lie that there's $1 million sewer problem and they already got three bids saying $1 million and then they represented that there's nothing wrong to the sewer.

Justin Donald: Wow.

Ferd Niemann: And so, diligence, diligence, diligence. You can't do enough of it.

Justin Donald: That's right. Well, I just want to, again, just reiterate how impressed I am with you. I'm thankful to be a client of yours. I'm thankful for your counsel on so many things. And for those of you that are looking for a really good attorney, you do a lot of stuff. You don't just focus on mobile home parts, but you do a ton in that space. You're an expert in that space, but you can do all things real estate. And I know there's other partnership agreements and all kinds of things. So, for anyone looking to upgrade their legal team, I would highly recommend reaching out to Ferd and his team. I've had the luxury and privilege of working with him and many of his other attorneys on staff. So, where can people find out more about you?

Ferd Niemann: Well, thanks, Justin, I appreciate the nice words there. We appreciate you, of course, as well. You can find me on LinkedIn, Ferd Niemann. My website, we've got Niemann Law Group once again on my shirt here. That's the website for the law firm. Our syndication stuff is Third Ivy Properties like third base, ThirdIVProperties.com. But find me on LinkedIn. You can hit me up, ferd@niemannlawgroup be the easiest way to get me over email and go from there.

Justin Donald: I love it. Well, thanks for spending the time. This was just an awesome episode with just great information, so we all appreciate it. And I like ending every episode with a question to our audience. So, to those of you that are watching, to those of you that are listening, what is one step that you can take today to move towards financial freedom and move towards a life that's truly on your terms, one that is not by default like most people, but rather by design? So, think about one thing you can take from Ferd today and implement it today to move in that direction. Thanks so much and we'll catch you next week.

Ferd Niemann: All right. Thanks, Justin.