Latest / The On The Rise Podcast / The Asset Class Nobody Brags About With Nathan Jameson
Transcript
- Rise48 Equity: All right. Thanks everybody for joining again to the On the Rise podcast. This is your host, Jeremy Dyer. Really appreciate you being here with us again today. I've got another amazing, amazing guest. ⁓ as I do always, I've got Nathan ⁓ Jameson. Nathan, welcome to the show. Thanks for having me. Really great to be here. Yeah, absolutely. And I'm honestly I'm really looking forward to this call with you or this ⁓ kind of conversation on the podcast today because I hear a lot about this kind of affordability. you know, crisis. ⁓ we hear a lot about, you know, manufactured housing and different ways to really drive down the cost, you know, of homeownership. But but but before we jump into some of those topics, I know you've been really, you know, successful at scaling, you know, a a home building company from 30 million to 160 million. ⁓ you've been involved a lot in the manufactured housing, affordable, you know, housing space. So we'd love for you to let our listening audience know a little bit more about yourself, your background, your journey. You know what you're focused on today, et cetera. Sure. I appreciate the opportunity to do that. I ⁓ was in college and got a my first job offer out of college, ⁓ actually while I was while I was still in college was to go into investment banking with Lehman Brothers. And this was pre-9-11. So I mean, pretty wild to think about now. I I didn't take that in part because I didn't know what investment banking really was. and ⁓ and as I began to understand it, I really was more interested in kind of the tangible built environment. And the idea of, you know, shuffling paper from one side of the table to the other side and creating creating value ⁓ just seemed a little foreign to me. and I really gravitated ⁓ post-MBA into the built environment, ⁓ initially with ⁓ what was a small home building company in eastern Pennsylvania. that over, you know, 15 years or so we turned it into the largest privately owned home building companies in the country ⁓ and through the Great Recession. Right. And so as I as I'm out there today now and and raising capital and running our funds and managing real estate, helping my team members, many who are, you know, younger and didn't experience the Great Recession the way we did, ⁓ you know, the reality is that there's a lot of people out there who who've only lived in an environment where everything is up and to the right. So one of things, you know, we bring to the table, whether it's, you know, educating or ⁓ working with our investors or buying assets is is you know, we know that sometimes it turns the other way. And we're in a very uncertain time right now. But you know, fast forward, ⁓ had a you know great run with with this home building company. And then ⁓ as as I exited that, just needed an opportunity to invest my own capital. And I started doing a number of different things, but the thing I like the best was was manufactured housing or what we call mobile home parks. And ⁓ I bought about a dozen of those myself. And then ⁓ after I'd kind of proved that out internally, some folks asked if they could invest with us. And ⁓ we're now on our third fund, my soon to be fourth fund next year. And ⁓ we've had tremendous success for our investors. That I think, you know, often the media headline is right, ⁓ investors in private equity and and manufactured housing. But I also want to say I think we've been hugely successful for our residents. Because we've bought almost exclusively from I'll say mom and pop owners who did not have the capital to keep these communities sustainably affordable. They didn't have the capital to fix potholes, to replace obsolete homes with new homes, to take care of aging sewer and water systems. And we've been able to do that and preserve these communities as affordable housing for the long term. Yeah, it makes total sense. And what you're speaking to there is, you know, that, you know, the the current seller's liquidity starved, right? They've got a ⁓ a sizable amount of deferred maintenance, you know, items that, you know, just aren't being dealt with. ⁓ and that's where the real kind of arbitrage or value can be created. ⁓ before we talk about kind of the value add side of things, ⁓ I'd like to talk about why manufactured housing as opposed to other you know, investment asset classes that exist out there, whether that be, you know, commercial multifamily, self-storage, ⁓ assisted living, you know, industrial retail, et cetera. So one of the reasons I chose it is it's one of the I'll I'll say two real estate asset classes that's uncorrelated to economic growth and decline. So I I think if you look at kind of the all the food groups of real estate, manufactured housing and self-storage are effectively uncorrelated. To whether the economy goes up, the economy goes down. And I'd spent most of my career, you know, 14 years in home building, which was highly correlated to what happens in the economy. And I wanted to focus on something that was that was, you know, withstood the test of various real estate cycles. What I didn't know when I started in it is one of the greatest things about it is the depreciation aspect. And ⁓ I frankly, I was I I didn't understand. I thought while I'm buying land. ⁓ and land's not depreciable. I like the returns, but I wasn't getting depreciation. And then I went through the whole research and went with my accountant and a cost segregation firm, and we began to understand, ⁓ no, land is actually a very small part of the acquisition. Most of the acquisition is land improvements. Roads, water, sewer, ⁓ site improvements for a home, piers, and so on. And ⁓ so I began to benefit and the the investment benefited from that, ⁓ those depreciation losses. ⁓ and I would say As a real estate professional, which that's how I file my taxes as a real estate professional, ⁓ that's tremendously beneficial. So I can use those losses across all kind of income. ⁓ but even for our investors who aren't real estate professionals, that what it means is their their investment in one of our funds is effectively tax free or tax deferred ⁓ for an extended period of time. Yeah, that makes total sense. And I, you know, when I talk to real estate operators, you know, we oftentimes have the conversation about, you know, needing to you know, run the business with your head, you know, on a swivel, right? There's times when there's headwinds, there's time that times that there's tailwinds. But, you know, one of the big kind of tailwinds that I'm seeing is that really the affordability crisis. And I it depends on who you ask, but the last time I heard the average age of a first-time home buyer is now 40 or 41 years of age, which is pretty remarkable considering that, you know, just 15 or 20 years ago, you know, it was ⁓ in the low 30s as far as, you know, single family homeownership, you know, first-time home buyers. Another thing that I've been hearing a lot about is the ⁓ number of 18 year olds amongst the population is at a historic low. And then another thing that I keep hearing about is the fact that ⁓ household formation now is not beginning until 26 years of age. So I mean you've got all these kind of different changes to the demographics, and I totally understand obviously from an economics perspective, you know, manufactured housing or mobile home home home mobile home park communities. you know, can be fairly, you know, recessionary or resistant. You know, but beyond that, what are some of the other maybe, you know, headwinds and tailwinds that you're seeing in the space? Well, the biggest tailwind is is supply demand. ⁓ we're seeing, you know, a reduced number of mobile home parks nationwide because frankly, when you know an older owner who hasn't been able to maintain the property, someone doesn't get to them soon enough, there becomes a higher and better use. for that property. And so someone buys it and tells everybody to get out and they build, you know, their perceived higher and better use. Maybe that's a data center, maybe it's a warehouse, maybe it's an apartment complex. ⁓ and so the reality is we're having increased demand and decreased supply. And I'm not aware of another asset class in any category in the history of the world where that happens over an extended period of time. You know? If there's an asset that's in demand, eventually the market will will rise to meet that demand. And frankly, it's impossible because of regulation. And what we see is increasing regulation, particularly in coastal markets, but even increasingly the Midwest and the South, ⁓ we'll see ⁓ the the fact that municipalities and states are making it so hard to build. And that unfortunately is a in and once it's a It's a headwind for building new manufactured housing, but it becomes a tailwind for all existing manufactured housing. And it's a headwind for new manufactured housing because it's it's financially infeasible to bear the cost of all of the entitlement risk and permitting and then the infrastructure improvements at today's cost and then sell a hundred and fifty thousand dollar home. You just can't absorb, even if you're capping the rent on that home and creating some additional value. If I can sell a a ⁓ Finnish lot to a national home builder for more than the price of a brand new home, well, guess what I'm gonna do? I'm gonna sell lots to NVR or DR Horton or Toll Brothers. ⁓ and so that's why that's getting built. The cost of building is is just too high to build an affordable product. Yeah, it makes total sense to me. I'd like to talk to maybe that more sophisticated, you know, investor a little bit here. And and some of this I think is more semantics than anything, but When when people hear manufactured housing, I think they automatically go to trailer park, right? Yes. And a lot of people don't like to invest in trailer parks unless you're a sophisticated investor and you really truly understand the difference. So, you know, what is it that sophisticated investors that are investing in manufactured housing or quote unquote trailer parks, you know, what is it that they understand about the asset class that the average person just simply doesn't? Well, may maybe we're all a little contrarian. I know I'm a little contrarian. So when someone tells me, ⁓ I'd never invest in that, my ears perk up and I go like, ⁓ well, that makes me that's interesting. That probably means things may be under underpriced and there's an opportunity there if if the world says, ⁓ it's it's not a good investment. ⁓ or if if if an investment is something somebody wants to talk about at a cocktail party, I'm probably not interested. I probably am interested in the thing that they're maybe embarrassed to talk about. ⁓ we think about manufactured housing in three categories, the lowest being the trailer park. And and that trailer park is kind of it's it is kind of the stereotypical, ⁓ stigmatized housing community that that you're thinking of. And a lot of those homes were pre-HUD, you know, pre-1970s, and they haven't been well maintained and the pride of ownership isn't there. And and effectively, if you buy a community like that and you raise the rent to market, you've totaled the homes. Right. So a a manufactured home trades under a title. There's not a it's not you know, it's like a car a vehicle title because it's is in fact it has a VIN number. And so, you know, we're all familiar if you get in a car accident and and it's the the accident damage is more than the car's value, you've totaled the car. Well, if I raise rent too much on a trailer park, I've totaled the homes there. And that, you know, that just means I've lost all my tenants. They're not going to be willing to pay, they're gonna leave. ⁓ we're more focused on mobile home, well, I'll call mobile home park and manufactured housing. So those would be kind of tier two and tier three, the highest or nicest would be, I mean, many manufactured housing communities, the average consumer isn't gonna know that they're actually the homes were built in a factory. ⁓ they might be all multi-section homes with a a site built garage. ⁓ they might have kind of ⁓ crawl spaces with parged walls where it just, you know, looks like a a site built home. ⁓ we're playing in the space we really like kind of the the bell the center of the bell curve, which would be that middle space where there's probably the biggest value to be added and then harvested ⁓ on the back end. Yeah, that makes total sense. I'd like to double click on this kind of concept of the value add. ⁓ you know, where where does the value add really come from in manufactured housing? I know you kind of mentioned, you know, obviously increasing rents, which makes total sense, you know, but I would assume maybe occupancy. infill operational efficiencies, you know, or something else? It's absolutely all those. And you want to earn the rent increases. We want to start with the deferred maintenance and the capital improvements. And those fall in kind of the utility categories most often. You know, is is sewer operating properly? Is water functioning as it should? ⁓ Is electric functioning as it should? And could people get to their home without driving through a pothole and losing their car in it? ⁓ you know, paving is one of those really high value improvements that we can quickly make in a community. We want to do those things right away. So I I put those kind of an infrastructure improvements. On the occupancy side, that's the next level of improvement where we really do want to bring in brand new homes and ideally sell them to a homeowner who then rents the land and the kind of community infrastructure there. And over time then what happens is the overall ⁓ Appearance and value of the community is increased. And not just the value for the landlord, the value for the residents. So many people don't know, but mobile homes, manufactured homes, have been increasing in value as a percentage at the same rate as site-built homes. Now, it's increasing a lower amount because they're more affordable, but percentage-wise, people are growing their equity in communities that are well maintained. Conversely, they're losing equity in communities that are not well maintained. I'm Zach Haptenstall, CEO and co-founder of Rise 48 Equity. Our goal is to help you protect and grow your wealth by investing in large multifamily apartment buildings. We do all the work as far as sourcing these large apartment buildings from the brokers, doing all of the on-site management with our vertically integrated property management company, doing all the renovations with our vertically integrated construction company. We completely rebrand the exteriors. We will renovate the interiors to our full platinum-level scope, which increases the value of the asset to get that profit margin for the investor. If you'd like to learn about how you can partner with us on these exciting opportunities and go to our website and set up a call with our team. Yeah, that makes total sense. Now, I you ⁓ I know you've been in the real estate space for a while, and you know, we all we we all kind of know what happened, you know, in kind of the aftermath of COVID where a lot of markets were supply constrained. You had a lot of domestic, you know, migration occurring, you had the work from home movement becoming fairly popular, you know, and during that time, you know, you could be an average, you know, operator or somebody that was owning a piece of ⁓ real estate. And benefiting as a direct result of organic rent growth going up and to the right. which covered up a lot of mistakes, right? And I think during this time, you know, in the market cycle, people aren't quite as fixated, you know, on that exit, but they're more fixated upon, you know, what is the current immediate cash flow, you know, that the investment itself, you know, will generate. So maybe you can kind of speak to that as it relates to, you know, manufactured housing. Yeah, well I will say that what's happened over the last five to eight years is, you know, the prices for manufactured home communities have gone up as as investors have understood and and learned about the benefits, all of which we've talked about here, ⁓ whether it's the going in cap rate or the depreciation or the steadiness through different market cycles. What that means is the cash on cash returns, you know, you're paying a higher price, your cash on cash out of the gate is going down. So it like let's say you're investing with a value add ⁓ group, like like we are, you really want to dig into understanding well, how how are you going to create the value? What is the cash flow gonna look like? Because early on, we'd expect that cash flow to be, you know, I mean might might be less than a treasury yield early on. You know, I'd say early on, say the first year or two. But through the rent imp rent increases and the capital improvements and the infill, the home sales, you know, we expect to grow that. into an eight to twelve kind of cash on cash return over time on an annual basis. ⁓ And so I I still think that that that delta is really what matters. It's not about what you where you get kind of ⁓ going in immediately. It's how much can you increase it. And that's where the real value is when you ultimately then exit the properties. Yeah, that makes total sense. I'd like to to read something from the Wall Street Journal to you that I just hit my inbox today. And it talks about a new housing law that boosts prospects for factory built homes. And it's basically this kind of landmark, you know, legislation that cuts building costs up to $10,000 ⁓ through lower a lower regulatory environment or lower regulation. So maybe you can speak specifically about, you know, what's happening at the federal level ⁓ to drive down the cost of ⁓ affordable housing and how does that impact your business? Well, I I believe it's fair to say that the ⁓ the most impactful part of this legislation for our business and for manufactured housing is the ⁓ prior requirement that mobile homes or manufactured housing had a chassis, a permanent chassis. You think about like a vehicle has a chassis. And that in so so some of that ten thousand, most of it is removing steel from the bottom of the home. There's there's savings there. Ultimately, that's not the biggest win. The biggest potential win, and we're not there yet, is that by removing the chassis, do we convince lenders that this home is not mobile? And it's not intended to be mobile. And the the problem is lenders historically have viewed manufactured housing as something that could get up and drive away, taking their collateral with them from the site. And as a result, our consumer 760 credit score, 800 credit score, is paying. Hmm, 40% higher rates ⁓ than the average site built home mortgage borrower. So, you know, if we can improve the borrowing for high, you know, credit worthy customers for manufactured housing through this legislation, that'll be the big win. We're not there yet, and you know, we're dealing with the government, so I wouldn't ever hold my breath on it, but I'm hopeful. Yeah, that makes total sense. I I I I'd like to get a little bit more in kind of the terms of your your crystal ball outlook. on the manufactured housing space. You know, where where are we at right now, you know, in the market cycle? You know, we talked about the headwinds, we talked about the tailwinds, but there are there have to be, you know, certain opportunities, you know, that exist out there in the space today as a direct result of, you know, the the skyrocketing interest rates, you know, the oversupply in a lot of the Sunbelt markets across the country. You know, just kind of wanted to get your your thoughts, you know, on on where we're at right now, you know, and kind of the the cycle for manufactured housing. Yeah, kind of at a at a micro level, I would say we're sorting out some of the folks who made mistakes. You know, they were capital raisers, not operators. And they raised money and they bought with floating rate debt into an asset class that they really didn't understand. ⁓ and you know, it's funny, th there's folks who we'd all say, ⁓ they're pretty inexperienced. What were they doing raising, you know, 10, 20, 50 million dollars? But on the other side, there were some pretty big investors. I mean, you know, big Wall Street firms. that didn't know what it took to bring a new home in. And it took them literally years to figure it out. Now they have enough capital and enough commitment to the space that they're going to figure that out and they'll stay in the business. So we're in the middle of kind of sorting that out. At a macro level, we are in a maturing real estate industry. And I think you have to go back and say, well, I mean, this is hard for you and I to remember. I I've I've read it because Sam Zell talked about it. Early on, ⁓ people wouldn't ⁓ do a apart apartment buildings weren't viewed as an institutional asset class. You go like, wait, what? That wasn't so long ago. Like 50 years ago, a lot of people didn't do view apartments as an ⁓ institutional asset class. Where we're going in manufactured housing is we're gonna see continued compression of of cap rates, you know, relative to whatever the market is. So they will more and more mimic what we see in multifamily housing. And it is fully institutional, investment grade product. ⁓ with you know, the best loan terms available on the market, whether that's CMBS or agency debt. And we're gonna see, you know, I saw Apollo announce last week another almost billion dollars dedicated to the space. And what do we know about big Wall Street firms when they raise money? They're gonna spend it. And the way they're gonna spend it is they're gonna bid prices up. Now, I might not buy at the price they're willing to buy, but hopefully we're in a position to sell to them when they're ready to buy. Yeah, it makes total sense. And I appreciate your perspective there. ⁓ with that said, Nathan, this has been a tremendous ⁓ episode. Really have appreciated your kind of perspectives on the manufactured housing space and full disclosure. You're the first podcast guest that I've had on, and we're almost 300 episodes in to talk about this topic. So ⁓ I'd like to leave our listening audience with ⁓ maybe ⁓ one or two different ways that they can learn more about you and connect with you offline. Well, I'd love them to reach out. ⁓ my email is Nathan at arcsventures.com. ⁓ they can find us online at that arcsventures dot com handle. And you know, we're ⁓ periodically raising capital for different funds focused on manufactured housing. ⁓ we're about to close our third fund here over the next sixty days. And ⁓ you know, even if it's not an opportunity for them, what we really want to be is we want to be educators. ⁓ probably the most unique thing about our firm is I'm the largest investor in all of our offerings. And so, you know, I'm risking my money, you know, before and alongside all of our investors. And I I I've just experienced their appreciation for that as we continue to grow and try to do well by them and by all of our residents. That sounds wonderful. Well, we'll definitely put the links in the show notes for the episode. And Nathan, again, really appreciate the value that you brought us today. Thanks very much for having me on. Absolutely. And listening audience, thank you again for jumping into yet another episode of the On the Rise podcast. Look forward to having you join us on the next episode.