Last week I published a post about the ideal time to start your own investment firm where I highlighted the importance of having the requisite skill-set, a trusted network, and some sort of a competitive advantage.
However, sometimes there are outside influences which can lead you to starting your own firm. Brad Johnson, co-founder of Park Street Partners, shares the story of why he started Park Street and how he chose his unique asset focus:
If you’re currently seeking clarity in your life or career, I have one piece of advice – have a baby. Okay, so that’s probably not the best advice in the world (especially if you’re 22, single and often forget to feed your pet), but it’s shocking how much perspective you’ll gain when you’re suddenly thrust into parenthood.
Personally, my son was the sole catalyst for starting my real estate investment firm. After he was born, I immediately realized I was on an unsustainable career path, which – while lucrative – was going to take far too much time and focus away from my growing family. Don’t get me wrong, I love to work, but 60-70+ hour work weeks dedicated to keeping numerous clients, potential clients and a cadre of managing directors happy is not real conducive to work / life balance. Work was the undisputed winner. Sadly, it’s a lot easier to flake on loved ones for work than the other way around.
Furthermore, having a baby is an undeniable reminder of your own mortality (you know…circle of life, beginning and ending of Lion King). I began questioning the premise that I needed to trade my time for a paycheck and couldn’t stop thinking about building something to pass on to my son.
Sure, I could slave away, see the little guy on weekends and leave him a fair amount of cold hard cash in 50 years, but I would prefer work on my own terms and then hand him a money machine: his own mini real estate empire along with an operating business he could make his own. If he doesn’t want to take over the business, at least I’ll know he’ll be free to pursue whatever brings him joy and personal growth. If that is poetry, MMA Fighting or a life of video games, I will have failed as a father.
Anyways, sounds great right? But how does one go about starting this process? Funny enough, I didn’t really know before I made the leap to start my own investment firm. I made up my mind and resigned fairly impulsively (at least for me). It was roughly two thirds of the way through the year, so I basically lit a sizeable bonus on fire. Stupid? Absolutely, but I knew it was only going to get harder to leave.
While I didn’t have a detailed plan, I did have a very clear investment target. I was going to buy the most unloved, most misunderstood, most inefficient real estate investments in the world…mobile home parks. I know, yikes. This is typically where I lose most people in conversations about my company. Although it’s starting to feel like you need to run a $10mm+ venture backed startup to be deemed interesting these days, but I digress.
So why mobile home parks? I could write a book, but for now I’ll distill it down to my favorite feature: lack of competition. Mobile home parks offer investors:
- Almost no competition from new supply – municipalities are not exactly in a hurry to entitle new mobile home park developments for their community. If you own the only mobile home park in town you’re the affordable housing equivalent of Microsoft circa 1997.
- Few institutional players to compete against – it’s a highly fragmented, inefficient market, with the largest players owning less than 3% of the total properties.
- Loyal customers – there is little incentive for tenants to leave a park for a competitive property. The tenant typically owns the home (we rent them the land) and it costs +/- $5,000 to move a mobile home.
- Few young and ambitious entrants – The mobile home park business dominated by white haired, bushy eyebrowed, wacky characters. Compare this to tech startups or investment banking; where there is a new crop of polished, Ivy League educated and energetic individuals to contend with every year.
Furthermore, I’m not too worried about future competition. Economic theory would suggest that the outsized returns offered to mobile home park investors would slowly erode with new entrants. Yet, mobile home parks have been around for decades and yet are still largely ignored by real estate investors.
How can this be?
While they are far more complicated than one would think, it’s mostly related to perception and pride. If presented an opportunity to buy an undervalued mobile home park, I believe 99% of real estate professionals would shudder and summarily dismiss the opportunity. This is precisely why we (Park Street Partners) love mobile home park investments. To steal a line from Seth Klarman of Baupost, we want to “buy what is loathed and despised”.
This reduced level of competition translates to higher in place cap rates and (thanks to minimal ongoing capital requirements) superior cash flow returns relative to other real estate asset classes of comparable risk.
Why Niche Investments Make Sense For Younger RE Entrepreneurs
I’m not making the argument that mobile home parks are the ideal asset class for everyone – they’re a lot of work and you can get crushed if you don’t know what you’re doing. Rather, I’m suggesting that it might make sense to focus on a profitable real estate niche rather than be 1 of 5,000 real estate professionals looking to reposition class B/C apartment buildings located in class A locations.
This is especially true if you’re younger and don’t have an ironclad, decade plus track record. To raise money from people you don’t know really well, you’ll either need to gain their complete trust, or offer them something fairly unique. For me it’s mobile home parks, for you it might be an apartment conversion to Airbnb hotel. Or perhaps you want to capitalize on Boomer retirement by converting empty suburban office buildings to medical suites or develop assisted living subdivisions that don’t feel like retirement homes.
These strategies certainly would be more compelling than pitching potential investors with, I’m going to buy 4% cap apartment buildings, put in stainless steel appliances and bump rents 10%. This pitch works only works if you (as a senior partner, not an employee of a RE firm) have a history of delivering stellar returns to investors or… you’re pitching your rich Uncle.
Additional Tips For Starting Your Own Real Estate Investment Firm:
- It always takes longer than you think – double your “down side scenario” estimate of how long it will take your startup to become a viable enterprise.
- Partner up with someone that shares your vision and complements your skill set. It’s better to share the minor setbacks and victories (there will be plenty of both) with a partner. Plus, if you go solo, some investors will naturally want to know what happens to their investment if you can no longer manage the asset. This is the “what happens if you get hit by a bus objection”.
- Do not partner with someone that always agrees with you; they’re not adding much marginal value.
- If you want to spend things up, partner with someone that already has a verifiable track record or access to a number of accredited (wealthy) investors.
- If you’re raising money via private placements (SEC Rule 506 of Reg D) don’t let a $500 per hour lawyer run up your tab without defined spending caps. Shop around for a securities lawyer that is willing to prepare your private placement memo, operating agreement and subscription agreement for a flat fee. Most quotes will be in the $25K to $10K range. You might find someone who will go lower, just make sure he/she is a quality securities lawyer with substantial experience preparing real estate offering documents.
- At times you’ll be tempted to negotiate your own debt – immediately slap yourself. Let the pros deal with the loan officers; you’ll spend way too much time dealing with banker questions and requests. Pay the commission (out of closing) and be done with it. You’ll probably get a slightly lower rate that will more than cover the broker fee.
- Think like a lean start-up: don’t over hire until you’ve proven the investment thesis and leverage technology to the hilt. It’s clearly the easiest time in history to start a business. I’m shocked how little money we spend on administrative costs to run our business thanks to tech. We spend next to nothing for email and website hosting, phone services, CRM software, graphic design, advertising, bookkeeping, etc.
- Put strong language regarding the release of your deposit (ideally by single order) in your purchase and sale agreements. Some sellers might make it difficult for you to get your refundable deposit back should a deal go south, especially if you have soft timelines based on the receipt of requested due diligence items.
- Don’t neglect your acquisition pipeline. It’s easy to focus on the one or two deals you have under contract. However, once those deals close or worse…if they don’t close, you’re back at phase 1. Treat acquisitions like a sales funnel. Never stop looking at new deals. This will also ensure that you don’t fall in love with one deal and start ignoring red flags just to get the deal done.
- Make brokers fall in love with your firm. They want commissions – you want better deals. If you’re young with a smaller bankroll or investor base, you might want to find a younger, rising star broker that has some pocket listings (semi-off market deals). The two of you can grow together. Only make offers on deals you’re confident you can close, take down one or two and them you’ll be that broker’s first call whenever they have a new off market deal to sell.
If none of these tips work for you, just default to my initial advice – have a baby. If you look at the baby and feel nothing, then call your rich uncle.
Brad is the co-founder of Park Street Partners, a private real estate investment firm focused on mobile home park investments. Park Street Partners seeks to deliver outsized cash flow returns through syndicated real estate investments to help its investors achieve their financial goals.
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