How much in Reserves? - Posted by Shawn Sisco

Posted by Tony Colella on January 06, 2009 at 18:46:45:

That’s why I prefer to keep it all at a manageable size and in time sell some to pay off others. For now, its all doable.

Tony

How much in Reserves? - Posted by Shawn Sisco

Posted by Shawn Sisco on December 31, 2008 at 10:15:45:

I am seeking input from other MHP owners who have utilized the business model of creating notes, then selling note (or the cash flow from note) to purchase more inventory.
I implemented this model a little over one year ago, and have created 12 notes and sold off 4.
My questions regard to what level of reserves should be maintained for this business model to fulfill its recourse agreements with investors.
I realize that this type of forecasting is not an exact science, I am asking for your opinions based on your experience of how many of these deals are likely to wash-out each year, and how many months of payments are typically missed during the re-marketing phase.

I had on deal gone bad 2008 as one of my note customers drown, and I had the home resold in 46 days. I donâ??t feel that I have been overly aggressive in lending as I have rejected many more applicants than I approved. My credit selection criteria I will not lend to customers unless they have had paid as agreed accounts in the past, housing cost not to exceed 30% of income, and down payment of not less than $1000.

How much should held in reserve as a percentage?

Re: How much in Reserves? - Posted by JeffB (MI)

Posted by JeffB (MI) on January 03, 2009 at 07:33:01:

Shawn, I’m perhaps not qualified to answer this question since I have sold notes only on a non-recourse basis, but I will say that I have about a 40% default rate over the lifetime of a note. This percentage includes friendly give-backs as well as cases where the payor was evicted by the park.

Naturally, the more volume you do, a single home repo will be less meaningful (a lesser percentage of the total cash flow).

In short, if I had to take a guess, I think 30% would also be adequate, unless a macro-economic disaster were to occur. One could argue we are already at that point!

Jeff

Re: How much in Reserves? - Posted by Anne_ND

Posted by Anne_ND on January 03, 2009 at 06:14:15:

Shawn,

Are you selling the note and servicing it? or borrowing funds against the cashflow/mobile home with full recourse?

I do the latter, and always make sure that my cashflow from the property (after the investor is paid) gives me a good buffer against those notes that go back.

For instance, let’s say I have 10 MH notes that each pay me $200/month. I hypothecate the notes (borrow against the underlying note) such that my investor gets $140/month. So I now make 10 x $60/month = $600/month. If 30% of the notes go bad at once, I still have enough income to cover paying all 10 investors, assuming I haven’t committed to using those funds for other things like paying bills or paying lot rent on those same vacant homes.

Losing the income AND paying lot rent is the big problem, because your costs can quickly add up.

I’ve had vacant units take 1-6 months to fill, with varying amounts of repair needed between tenants/buyers. This time-to-fill varies greatly with time of year (tax refund season is about to be upon us- hallelujah!), location, and a bunch of other variables that still escape me after 6 years of doing this full time.

All I know now is that when a unit becomes vacant and sits for a while I need to lower the price, the monthly amount, or my requirements.

And because I’m letting more people in with lower amounts, I’m doing things like making improvements that are permanent. Like laminate instead of carpet. This has the double benefit of being durable for years and looking very attractive to new prospects.

How much you hold in reserve is a personal decision based on your knowledge of the market. How willing are you to keep significant funds liquid earning not much, while you have the ability to do Lonnie deals and make much more than 20% with it? The more deals you do, the lower your risk of any significant percentage of your homes going vacant at any time- and you have insurance for catastrophic loss, I assume. Because this is affordable housing, we are pretty well buffered against an economic downturn.

Good question.

Anne

I love the part about . " How willing are you - Posted by Celeste-fl

Posted by Celeste-fl on January 03, 2009 at 16:16:00:

to keep significant funds liquid earning not much". I have a hard time letting go of funds making me 3% in the bank when they could be buying me plenty more land deals making 20% plus. I could buy 12 more free and clear land deals at 20k each bring in $600 a month rent and then I would have no funds left, but there is something about having that money there that makes me fell better not smarter.

Re: How much in Reserves? - Posted by Bill Kay

Posted by Bill Kay on January 03, 2009 at 15:31:52:

Hi Anne, my name is Bill Kay and I’m relatively new to the cash flow business, but I have been in the transporting, installation, buying and selling M/H for about 5yrs in Las Vegas. I am currently trying to sell 3 notes, but I really like your idea of borrowing against the notes, rather than selling them. It seems like there are a lot of people are buying and selling notes. I have not heard of anyone lending against M/H notes. I guess I’m going to ask all prospective purchasers if they would lend against my notes, but I was curious if you or someone else reading this post had any information on individual or companies in the business of lending against M/H paper.
I would sincerely appreciate any advice
Thank you, Bill Kay.

Affordable housing buffer - Posted by Lin (NC)

Posted by Lin (NC) on January 03, 2009 at 15:10:24:

I just wanted to make the comment that because we’re offering affordable housing doesn’t mean that we won’t feel the repercussions of the downturn. I think we’re in a good position to recover quickly in this particular housing tier, but I am definitely feeling a shake-up as my tenants lose their jobs and move. I am having to downwardly adjust my deposits (down payments) and rents (monthly payments) as well as upgrade my units (installing laminate and pulling out carpet) to entice new occupants to sign with me.

I think the new rule is to be flexible and take note what’s working for you. This is no time to stubbornly stick to what has worked for the last 15 years while your properties sit empty.

I know this is slightly off-topic, but wanted to add it anyway.

Lin

Re: How much in Reserves? - Posted by Shawn Sisco

Posted by Shawn Sisco on January 03, 2009 at 07:07:21:

Thank you for the feedback Anne. To answer your question; I have been borrowing against the cash flow.

As this business model is still pretty new to me, any info from others helps greatly. In the case of my MHP, at this time I can personally underwrite all the notes used for the infill of the remaining vacant lots. I do however have my eye on a larger infill project, and I can see how I could get into trouble if I neglect to maintain adequate cash reserves.

I would think 30% in reserves should be sufficient under most circumstances. Anne, does the fact that the proceeds of these notes are used to create more income via infill of a vacant lot affect your opinion as to the percentage of reserves maintained?

" How willing are you - Posted by Tony Colella

Posted by Tony Colella on January 03, 2009 at 16:34:49:

It is contrary to how most of us were likely raised “money in the bank” being the best use and most comfort.

The reality of an investor’s life is that for the most part, money in the bank (other than reserves) is money not being put to proper use. Sure we have times when we hold cash so as to be able to take advantage of anticipated opportunities (during the acquisition phase of our careers).

In the current macro economic climate it may serve investors well to have that cash at the ready (in my opinion) for those opportunities but I also suggest that same investor keep an eye on the value of the US dollar.

If the $850 plus bullion should ever leave the banks and actually find its way to the citizens of this great country, those banked dollars could be devalued quickly depending on what media and line of thinking you may be leaning towards.

Personally I suspect that as the stock market continues to make no sense (ups and downs based upon what???) and the coming treasury bond bubble burst (again just my thoughts), investor capital from investors outside the housing market may find its way to the cash flow properties such as parks and rentals.

Again, just my 2 cents.

Tony

Re: How much in Reserves? - Posted by Anne_nd

Posted by Anne_nd on January 03, 2009 at 16:06:35:

Bill,

I use private investors, not institutions. You need to let the people in your life know what you are trying to do and what yield they can expect. There is money out there, you just need to ask for it.

good luck,
Anne

Re: How much in Reserves? - Posted by Anne_ND

Posted by Anne_ND on January 03, 2009 at 08:04:59:

No, I didn’t take the proceeds of the notes into account, but using them to create more income would only strengthen your position, I would think.

I meant to add that if you are actually selling the notes, not borrowing against the cashflow, then one should keep cash liquid in a savings account, or other easily-liquidated form. I think 30% is plenty for more circumstances.

Anne

Re: " How willing are you - Posted by Celeste-fl

Posted by Celeste-fl on January 03, 2009 at 17:04:10:

So you think cashflowing parks and rentals will have some life again in the coming months? Houses here that once sold for 130k and did not cashflow are now in the 30-40k range and cashflow all day long with no buyers. I will still take a 20k mobile home on land over a 30k house manly due to the insane taxes and ins on houses. Ins and taxes on a 20k mobile home $65 a month and rents for $600 a month. Ins and taxes on a 30k house that is still tax ass at 100k is $375 a month and rents for $700 a month.I will be watching for that outside money coming in. If it does I will increase my buying while there is still deals.

Re: How much in Reserves? - Posted by Bill Kay

Posted by Bill Kay on January 03, 2009 at 18:53:30:

Thank you very much for your response Anne.
Heads up fellows: I’ve got notes and I’m looking for cash.

Re: " How willing are you - Posted by Tony Colella

Posted by Tony Colella on January 05, 2009 at 16:34:43:

Celeste,

I understand your concerns regarding the cost of insurance, especially in Florida. But bear in mind that this cost is an expense that would need to be included in the cash flow analysis.

I would not only want to look at this higher expense but also demand for the housing and the inherant differences in asset classes from stick built to mobile home.

I am a die hard cash flow investor. Cash flow is my primary motivator in investment analysis, however, we must remember that we are looking at what might well be the greatest exchange of wealth our country (and perhaps the world) has yet to see. These are grand terms I realize but I want to make a strong point.

Asset classes might well change in value in dramatic fashion.

Bank lending will have to return at some point. Let’s face it, how long can banks stay in business taking billions from the gov’t only to use portions of that to pay interest… or is that the now stardard operating ponzi scheme procedure…ah but I digress.

When banks get back to business, stick builts will understandably be first to be financed I would think. That being the case, where money is available, demand will find the means to employ it. Housing will remain a demand.

If stick built homes are cash flowing at $30k then buying a land/home package for $20k may be too short term a thinking process. Please understand that I believe there is no right or wrong decisions regarding long and short term for each individual investor, I speak only for myself here.

You might want to view these $30k stick built properties like a land play. You buy them if the cash flow, even with the higher taxes and insurance, to hold them by renting them until the market returns.

The land play on the land/home package in your example is likely to be lower in lump sum cash gain and longer to come to fruition.

One last concern for me would be the rental demand for the two asset classes. How do you see them comparing? Are the stick builts in higher demand than the mobile homes? This would seem to be the case but I have learned not to assume these things. It might be something to look into. If you are like me, people ask me what this house (stick built) or that house rents for. I have no idea. I have to remind them that I don’t rent stick built homes or in stick built neighborhoods. I rent trailers in trailer parks and land/home packages.

Tony

Re: " How willing are you - Posted by TT-NC

Posted by TT-NC on January 04, 2009 at 05:48:49:

If i could find deals in my market that cash flow like you say are abundant in your market, i would probably be cautiously buying. Fl has alot going for it demographics wise and you have to think there will be a bounceback at some point.

One thing i find to worry about sometimes is if the economy does worsen alot(i don’t think it will due to even more stimulus coming and the “pendulum swinging back”), could we see a time when rents come down to make bad deals out of what looked like good ones? I am not sure that has happened before, but i still worry!

Tracy

Re: " How willing are you - Posted by Celeste-fl

Posted by Celeste-fl on January 05, 2009 at 17:25:38:

Houses are in much higher demand then mobiles in my area. That being said, mobiles have no stigma here and are a normal way of life. Most people would take a house over a mobile but if they can save $100 a month in rent then they will take a mobile. The rents on houses have went down about $150 a month in past year while the low end Mobiles stayed the same and still rent out below house rents. Houses have over corrected here. We are back to the mid 1980,s retail prices.

Yes I am only looking at cashflow at this point. I’m worried if we have more hurricanes in the future then Ins will go higher and houses will not cashfow. The Ins companies value the mobiles at next to nothing so a hurricane would not hurt the cashflow much.

IT is a hard choice, more cashflow now and less money down the road or less cashflow now and more money down the road. I also live off the cashflow now and that makes a differnce in my buying decision.

“Asset classes might well change in value in dramatic fashion” So are you saying the gap between the rich and poor will widen and the middle will disappear.

Re: " How willing are you - Posted by Celeste-fL

Posted by Celeste-fL on January 04, 2009 at 06:48:36:

I agree and until recently I had no problem pulling the trigger on deals.I know the time to buy is when everybody else is running the other way, but I keep reading about how bad things could get, like rents going down and unemployment going up. The economist are saying the end of the world is just around the corner. So I just sit here frozen with deals all around. Maybe I should stop reading so much.

Re: " How willing are you - Posted by Tony Colella

Posted by Tony Colella on January 06, 2009 at 06:32:27:

Perhaps looking at adding one or two stick builts to your portfolio may be a way to have a small addition to cash flow now (until insurance rates go up) while providing you a longer (mid term) appreciation capture on the stick built. That nest egg may take some time to come to fruition but it might be a nice chunk of cash in the future that you could then use to buy other assets outside of the stick built class.

Or what if you bought one of these $30k stick built homes with the sole intention of paying it off as fast as possible. Take any positive cash flow from it and put it towards the mortgage. If you were able to pay this home off in a few years by putting extra cash here and there on the principle, you might have it paid for in a very short period of time.

Heck, I bet there are quite a few folks we have all known who drive cars that they borrowed more than $30k on. They usually stretch that payment out to 7 years and still pay it off. I would still encourage you to get a longer term loan of course (20 or 30) but use your self discipline to pay it off much, much faster.

This way if the insurance goes up in the future you will have the room for it, after the mortgage is paid off.

Personally I think that we need to consider these type of options. We are facing uncertain macro economic times. Some old world solutions of simplicity are not bad ideas to consider now. Besides a free and clear stick built house or two would go along way to establishing yourself, your net worth and your banking position for the future. If all goes well and the gov’t pulls us out of this somehow (though I am very skeptical right now) then you are sitting quite pretty with free and clear, stick built assets. If not then you have bought low, based upon downwardly adjusted rents and have a plan for both the mid and long term for these properties.

Tony

Government pull us out of it- HA! - Posted by Shawn Sisco

Posted by Shawn Sisco on January 06, 2009 at 12:19:28:

Tony, when we get out of this mess, it will be acomplished by us in spite of the actions-not bacause of actions by goverment. I don’t know what it will take to get the Gov out of the way, but that is the first necessary step.

Re: " How willing are you - Posted by Celeste-fl

Posted by Celeste-fl on January 06, 2009 at 07:39:57:

I’m not a big fan of leverage now days. I know this goes against everything you and I was taught. I just see so much bad things with leverage nowdays. I started with tons of leverage and making $100 a month cashflow on each unit. That did not turn out well. Leverage has its place for growth, but not peace of mind. I would rather have 20 free and clear assets then 40 leveraged. Plus financing is much harder nowdays and I’m in a position to buy up to 10 more houses or mobiles free and clear without mortgages. I still ask myself is this the best use of money. I know my returns would be higher with leverage ,but I don’t need all that hassle. I also live a simple life and don’t need a million to be happy.

My life plan is to keep expenses low and cashflow at maybe 3-4 k a month over expenses and take 7-8 weekly vacations a year and see the world.