JF1159: Scale Your Business After You Have Some Success As An Individual Investor #SituationSaturday with Jefferson Lilly
Jefferson owns mobile home parks from coast to coast. He was having success individually and wanted to scale his business up to new levels. Now his company has its own fund, and is becoming more of a “small institution”. To hear how you can scale your company, make sure to tune in! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Jefferson Lilly Background:
- Co-Founder of Park Street Partners, a private real estate investment firm
- Owns 18 mobile home parks coast-to-coast totaling over $30mm in value
- Self-made millionaire, mobile home park investment expert, educator, and industry consultant
- Featured in The New York Times, Bloomberg Magazine, and on the ‘Real Money’ television show
- Based in San Francisco, California
- Say hi to him at http://parkstreetpartners.com/
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.
Welcoming back a previous Best Ever guest, episode JF 161 – holy cow, that was a long time ago! A lot has happened, and that is a perfect segue into the focus of today’s show, but first, let me introduce Jefferson Lilly. How are you doing, Jefferson?
Jefferson Lilly: Joe, it’s great to be back with you. Thanks for having me back on.
Joe Fairless: My pleasure. 10th February, 2015 is when your episode aired – How To Double The Value Of Mobile Home Parks. You’ve been busy since then, I imagine, right?
Jefferson Lilly: Yes. We have greatly improved the value of parks, we have scaled up now to have our own fund, and we’re about to launch our next fund a little bit later this year, just probably another two months. We’ve been hiring on people, we’ve basically grown from being successful individual real estate owners to beginning to be a successful small institution. We’ve been hiring people, putting in place systems and procedures… All sorts of things. It’s quite challenging when you’re a successful individual investor and all of a sudden there are no hours left in the day to do more deals, and the question is “What comes next?” We are into that next phase, and it’s exciting.
Joe Fairless: You know how to T it up, don’t you? That’s so perfect, it’s exactly what we’re gonna be talking about today… It is exactly what you said – as you have become successful individual investors, how do you scale your company? Your focus is on mobile home parks, and I guess first what type of assets, value (or however you quantify) do you have now, just to set the stage with where you’re at?
Jefferson Lilly: Yeah, we’ve got 18 parks, a total of about 1,540 pads. We have another 700 pads under contract, so knock on wood – I’m banging my head here, Joe, but not on wood – we’ll be at about 2,200 pads by the end of September of this year, 2017. That should make us one of America’s 50 largest mobile home park owners; we’ll get there in another couple months. And we are coast to coast – we have bought both in Spokane, Washington over the last year, and also in Raleigh-Durham, North Carolina. 15 minutes from Duke and 15 minutes from Chapel Hill – that’s a great market there. But 80-something percent of our stuff is still the Midwest – Wyoming, Kansas, Oklahoma, Illinois, Ohio, Wisconsin, Michigan… We’re mostly in the Midwest where the values are better, where cashflows are cheaper than on the coasts…But we’ve obviously bought opportunistically on the coasts when we’d come across deals priced more like they’re in the Midwest. Nothing better than getting a coastal deal at a Midwest price, but they’re not coming.
Joe Fairless: You’ve built your company and you’re the co-founder of Park Street Partners, so I guess there’s one other founder…?
Jefferson Lilly: Yeah, Brad Johnson, he’s my co-founder. His background was more fundraising; he had worked at Eastdil Secured, Wells Fargo’s real estate investment bank. He had worked at Advent and some other private equity real estate firms. He was a little more the finance guy, and then I had been in this business about seven years dedicated, operating my own two parks – which I still do – when we partnered up. So he’s more the finance guy and I’m more the operations guy, but I still do some of the fundraising and he does some of the operations. It’s not entirely black and white, but we have our general spheres of influence and expertise with our partnership.
Joe Fairless: Okay. Now, let’s talk about the challenges you were coming across as you are growing and what you’re doing about those challenges.
Jefferson Lilly: Yeah, so basically where we got I think by the end of 2015 going into 2016 – say a year after I was on your show last – was that there just weren’t enough hours in the day. We had both people calling us and saying “Hey, we wanna invest with Park Street Partners and co-own mobile home parks with you.” We also had brokers and even some park owners approaching us directly with parks for sale. Plus, of course, we had built up from starting at ground zero the partnership, and by roughly early ’16 I think we were up to eight or nine properties, and we probably had almost a thousand — let’s just say 700-800 pads at that point.
It depends in this business a little bit on what quality of parks you buy, but somewhere between getting to 500 and 1,000 pads you’re gonna max out; you’re gonna have too much to deal with with tenants, or rehab, or other asset management activities when you’re investing back into the properties. There just weren’t enough hours, so we partnered initially with a gentleman who actually brought us a deal and he helped us do some asset management, and then this year we’ve now hired on a full-time asset management person. We found that was really both value-add for the portfolio, and also where Brad and I were spending a lot of our time. So asset management in our world, the way we divide things up is basically as follows – managers deal with all three figure issues; that is, for instance, collecting $275 [unintelligible [00:06:41].06] rent, calling a plumber for $150 to come do a sewer on [unintelligible [00:06:45].20], calling somebody else for $200/week to come and mow lawns in the common area… Those kinds of three-figure things are all with the managers on-site at the property handle.
Four and five-figure stuff is like “Hey, we actually had somebody abandon a mobile home, and it needs $4,000 worth of rehab. It’s gonna need new floors, it needs a couple of new windows, it needs some new paint…” or “Hey, we’ve got a park with a lot of potential, but we need to repave it for $65,000.” So those sorts of four and five-figure investments back into existing properties is what we call asset management.
Brad and I were spending a lot of time doing that and trying to find a crew to come and rehab a house for $4,000. What Brad and I spend our time on now is six and really seven figure and up issues. That’s mostly raising money and buying parks. So again, we’ve hired somebody to handle the asset management stuff; we can go into that here in a minute.
We’ve also hired on a CFO, somebody who’s been in the business approximately 20 years doing nothing but real estate accounting and investing relations. That person makes sure that the numbers are right and that we’re getting reporting out to our 120-some-odd investors now we’re up to. And we’ve also just recently (a couple weeks ago) hired a gentleman who’s doing acquisitions for us. Unlike the other two, he has no previous experience in real estate. He’s a very bright guy, served our country abroad in Fallujah, and other places; he’s a marine with a Purple Heart and an Ivy League undergraduate degree, and likes to work hard. We’ve got him focused on outreaching both to brokers and to mobile home park owners to help generate deal flow.
So we’ve made three key hires this year. We thought that would make us less busy. When other people take things off your plate, you do get more busy, you get more deals and more capital and what not… But anyway, those are some three key hires that we’ve made to help us grow.
Joe Fairless: I’m gonna ask more high-level questions, but before I do, I have a very specific question about the last hire – he has no experience with real estate, but clearly, he’s a go-getter, for many reasons… How do you train him to find deals and how many deals are you all looking at on a weekly basis?
Jefferson Lilly: The latter question there is a great one, and we are literally building our database… I think we’re gonna do it in SalesForce.com or something like that, just to treat each deal effectively as a “customer.” You log it in there, how many points of contact have you had with it, is it a good prospect or not, when do you next make a follow-up phone call, what’s the next step… So I don’t have an exact number weekly, but I’m gonna guesstimate it’s a couple dozen deals per week, something like that. So let’s just say we’re probably clocking in at 400-500 deals that come across our desk a year, I would guess.
But putting in place systems and procedures – which we can talk about as well – helps us follow up with things… And I’m hoping in another couple weeks I’ll have a little bit better handle on exactly how many deals are coming in, and of course with the sources – how many are directly sourced from a park owner, versus what comes in from a broker, versus what comes in from our own podcast. We’ll see, but having him on board and building that system is a big win for us.
Joe Fairless: As far as the three hires, which one gives you the most comfort in terms of you not having to do it anymore?
Jefferson Lilly: Me personally, that’s probably the asset manager. Honestly, I wasn’t doing a huge amount of the accounting; my partner Brad was doing more of that. So he may say the CFO for him is his answer, but mine is gonna be asset management… Because I was still getting calls from tenants about “Hey, there seems to be flooding in the street. What can you do about that?”
Joe Fairless: Yeah, that’s tough.
Jefferson Lilly: Or “Hey, my neighbor’s making noise.” Or again, the manager would just say “Yeah, the guy in lot 17 just didn’t pay his rent and just kind of seems to have abandoned his house. What do I do about that?” Anyway, so having her on board is a big plus. I’ll touch a little here on system – we can do more later, but we use Asana; there are other similar packages out there, but basically it’s a very fancy online shared to-do list, so now if and when something like that makes it to me, that “Hey, in Cincinnati, Ohio park lot number 17 is vacant”, I can log that in, assign it out to our asset manager, and then we have weekly calls…
And we certainly communicate really throughout the week, more by text, some by e-mail, but we all have kind of an all hands on deck Monday morning call and we go through each of the properties, and now things aren’t falling through the cracks… Or at least we know if they haven’t yet been dealt with and we can say “Hey, what’s the status of getting that house renovated? Do we have a crew on board? When will this be back to revenue-producing?” Or again, “What’s the status of that $50,000-$60,000 paving bid for the other property and which one are we gonna accept and what are the payment terms? How quickly can they get going?” These are all things now that get logged in.
There’s an app through your phone, so we can watch all the progress on our phone. It helps us work better as a team, again, now that we’ve grown beyond just having three, four properties and 300-400 pads with far fewer headaches, to the scale that we’re at now with over 1,500 pads.
Joe Fairless: How do you spell Asana?
Jefferson Lilly: A-S-A-N-A.
Joe Fairless: Got it.
Jefferson Lilly: Slack is another somewhat similar tool, and probably if you just google “Asana competitor” or something, you’ll find a bunch of other… We like Asana; it’s free for up to I think 8 or 10 users, and we don’t have that many yet on it, but we’ll certainly pay as we grow. But just having something like that in place to track everything… People can upload photos, you can upload the actual PDF, the bid for the paving job – boom, it goes right there in that task for that property. And when it’s done, the manager photographs the pavement in place; it’s a done deal, and he uploads those and you can verify that the work has been done – that kind of thing. That’s all a big help.
Joe Fairless: What’s the compensation range – you don’t have to tell us what each of your people are making, but what’s the range for each of those three positions?
Jefferson Lilly: I believe they’re all at least on target to be six figures. So there’s a bigger base and somewhat lower bonus, say 75% base, 25% variable bonus base for our asset manager. The guy that’s out hunting down deals is probably the inverse – he’s about 25% base compensation and 75% bonus based on what he finds… So that’s the range, but I think most of these folks are gonna be coming in around 100k, maybe even 150k, depending on how they perform. This is not quite startup stuff — when I started with 66 pads under management, I didn’t have three six-figure people on the payroll, but we do now.
Joe Fairless: What type of bonus or performance structure do you have with the CFO? And again, it doesn’t have to be the specific structure you have with him or her, but just for someone who wants to hire a CFO, how do we put performance incentives in there?
Jefferson Lilly: I think that’s more just sort of “Hey, [unintelligible [00:14:20].09] job description is, that for instance all the numbers for every month to get closed out and are accessible to the partners within the first week of the following month, and the K-1’s get done on time”, that kind of thing. And then that’s probably sort of a 20% bonus, I think. That job is more cranking through numbers, whereas at the extreme opposite end, the guy that’s doing acquisition for us is really just going out, finding stuff de novo – new deals, establish new relationships, so we want him motivated to do that.
And then he kind of like a broker gets paid a percentage of the value of all the parks that we buy from the leads that he brings in.
Joe Fairless: Okay. As far as the asset manager – is that hitting a certain income or NOI figures?
Jefferson Lilly: Yes, that’s it for the bonus. It’s basically “Hey, we need to take the parks here from X to X+20% over the next year. We’ll do that by in-filling and/or bumping rents – you figure it out, but you need to deliver this higher NOI over the next year.” That’s principally-driven, again, by NOI, as opposed to goal-based things, which is more common for CFO’s.
Joe Fairless: How do you know if you’re hiring too many people too quickly?
Jefferson Lilly: Good question. We felt it was pretty clear that we had the need for this and that these were all full-time positions. We went about finding people principally by putting the word out on LinkedIn; I signed up for a LinkedIn recruiter account, which costs $120/month, and was then able to do very specific searches, well beyond my existing network of contacts, and again, search for people at certain companies, people that had been there a certain minimum amount of time, people that had certain keywords in their job description… So we thought it was great. We also put out the word, word of mouth, listed and put out the word on our own podcast… Honestly, that didn’t go really well; it was really going out proactively and finding people and putting that ad up on LinkedIn.
Plus, LinkedIn has its own computer algorithm that then generates leads for you of people that it things matches your job description. I didn’t find that to be helpful. People were just too far off base, but whatever – that’s fine that LinkedIn gave me some “matches” that I didn’t think were great matches. I mostly went out and looked for people myself.
Joe Fairless: The asset manager – I suspect good asset managers don’t ever wanna listen to a mobile home park podcast because they wanna escape that whenever they’re not at work; they wanna escape the conversation of having the local person say “It’s a vacant mobile home. What do I do?” – they don’t wanna talk about that, they don’t wanna listen to that stuff.
Jefferson Lilly: Yeah, you’re probably right, Joe. Had I thought more clearly, the way you obviously do — I would have not even bothered advertising on our own podcast.
Joe Fairless: I just asked when do you know if you’re hiring too many too quickly – when do you know when you should hire your first person?
Jefferson Lilly: In this business – again, I’m just gonna guess it’s probably somewhere between 500 and 1,000 pads. Just be honest with yourself – when are things falling through the cracks? When are you sitting there saying “Oh yeah, I forgot; two weeks ago my manager told me that that mobile home on lot 17 got abandoned and I haven’t done anything now to get it back into the rental pool and generating cash because I’ve been too busy with this, that or the other. So Just be honest with yourself and think about what you’re spending your time on.
We’ve made full-time hires — we’re actually looking now (I’ll put an ad out here, on your show) to hire somebody to handle inside sales for us, who will be responsible for posting ads on Craigslist, also in local newspapers, and then handling the inbound phone call about mobile homes for rent. That’s not quite a full-time job for us, so for that we’re looking for somebody — the perfect example would be somebody with prior sales experience, probably real estate sales experience, but at least prior sales experience, who’s maybe a stay-at-home mom and is not looking for full-time, but part-time, third-time, half-time, something like that is probably what that job is right now. For that role, again, we’re not gonna hire full-time, but there are people out there who are comfortable working part-time, and then we’ll just see how we grow.
We hope to double to about 3,000 in a year and a half, probably by the end of 2018. So that person that we hope to hire over the next month or so to handle the inbound calls will either then scale up and can work full-time for us, or we may switch to someone else working full-time… Or who knows, there’s nothing wrong with having a couple of half-time people doing a job like that if we find two people who wanna work from home. We’re flexible in accommodating people’s schedules.
Joe Fairless: Primarily, before these hires, was Brad the one interacting with investors when they had questions?
Jefferson Lilly: Certainly if it was specifically accounting-related, like “Hey, I’ve received my dividend check; it’s for X amount of money. I thought it would be more.” Or “I’m surprised it’s so much; I thought it would be less.” We get that as well.
So Brad has handled more of the accounting and would answer those sorts of questions. I’ve done certainly I think my fair share of handling inbound inquiries from folks that just kind of wanna know more; they’re thinking of investing 50k or up to a million with us, and maybe they’ve heard my podcast – those sorts of calls tend to come into me, because I do more of the podcasting. It does vary, but once it’s really sort of an accounting question, Brad handles all that. And then again, Brad does handle his own fair share of incoming questions about “Hey, what it would be like to co-own parks [unintelligible [00:20:30].12]?”
Joe Fairless: I thought the CFO handles that now though.
Jefferson Lilly: The CFO will be producing the numbers, getting K-1’s out, and then handling questions, probably more at the year end, that are fairly detailed accounting stuff. So our CFO will be handling more of that.
Joe Fairless: So here’s the question I’m getting at – I just wanna set the stage to understand the lay of the land. So it’s still in transition, basically, but my question was going to be if you’ve transitioned investor communication over to the CFO, what (if any) correspondence did you have with investors to let them know there’s a transition?
Jefferson Lilly: We haven’t fully transitioned that over yet, but what we’ll do is we’re ramping up now – now that we have more time to do quarterly reporting, it will probably be in the format of a recorded call. We’re obviously not a public company, but we will do basically an investor relations call, we’ll talk about what the numbers are, and then of course some other softer things – management discussion and analysis, like “Why did we make this acquisition, or how big is our pipeline now? What do we anticipate closing in the next quarter?” So we’ll do more of that, and then that’s a perfect time to introduce key hires and say “Hey, going forward, if you do have a specific accounting question, here’s our CFO’s contact information.”
I think all that will come into place probably for this next quarter we will have those calls and we will formally and officially introduce our CFO.
Joe Fairless: Cool. Anything that we haven’t discussed as it relates to scaling from successful individual investors to a successful larger company?
Jefferson Lilly: Yeah, I’ll talk a little bit about systems and then a little bit about financing. So also on the systems side of things we now use Rent Manager to collect all our rents and do all our rent accounting, and really beyond just rent accounting, it’s the whole P&L that’s in there. We like rent manager because it not only does the accounting, but it also interfaces with the check scanner. Joe, this is brilliant – it seemed brilliant to me, maybe it’s old hat for you, but we’ve given all of our park managers a check scanner. We never accept cash, but now when those checks or money orders come in, they can just swipe them through the check reader. It of course deposits the money AND it updates our rent accounting software in real time.
So there’s no question as to whether the guy in lot 44 has paid or not; we can see that at headquarters, we can see the delinquencies for each property… There’s no check in the mail story, it all just happens in real time and then we’re on the same page as our managers. So that’s a big thing for our accounting, and again, just to then control, really have systems around controlling any vacant lots or vacant homes – those all get flagged by the manager in that system and we can see it property-by-property.
Then we’re also using a solution called Avid Pay – all of our bills go in there, they get flagged up to the right person to be approved. Assuming a vendor has a bank account and they’ve input their information, we can just ACH them their money. Otherwise, we send them an old-fashioned check, but that just really helps with what was an otherwise unwieldy massive — receiving a fax from a manager, or an e-mail that “Hey, we owe $150 to this plumber” or we do now owe the $4,000 to that other rehab crew… Anyway, so we’ve got systems and procedures around our bill paying, as well. That’ huge.
And then also financing – we’ve now tapped into the CMBS market. That stands for Collateralized Mortgage-Backed Securities. It’s the fancy Wall-Street money; it’s no personal recourse, it’s fairly low interest rates… We’re borrowing ten-years fixed at about 4.6%, a year or two interest-only, on a 30-year amortization.
We don’t do all of our deals that way; you kind of need to have a 2 or 2,5 million dollar and up deal to really qualify for CMBS financing, but tapping into that fancy Wall-Street money has given us a cheaper source of capital, which helps us to make enhanced returns for our investors.
That’s something else we’ve done growing up beyond just being two guys and a couple of parks, to being a little bit of an organization now.
Joe Fairless: And just to clarify that – CMBS is for debt, right? Not equity.
Jefferson Lilly: Yes, sorry, that’s correct; yeah, it’s all for debt. We’re still putting down 25%, sometimes 35% equity and then borrowing – not always, but for our larger deals – 70% or 75% of the purchase price from these pools of debt that these firms put together and then sell off to institutional investors.
Joe Fairless: Any parting thoughts before we close this out, Jefferson?
Jefferson Lilly: That’s been a good and intense overview, Joe. [laughter]
Joe Fairless: I like peppering you with questions…
Jefferson Lilly: I’m giving a lot of information, I think…
Joe Fairless: Yeah, it’s been great stuff. How can the Best Ever listeners get in touch with you?
Jefferson Lilly: A couple things. First, our website is ParkStreetPartners.com. We’ve got information there for you if you’re thinking of co-owning parks with us, perhaps investing in our fund, or if you’re just thinking of buying a park on your own. Again, ParkStreetPartners.com.
Then we’ve got our own podcast, also our own LinkedIn group about now almost 3,700 people sharing tips and tricks and deal flow on LinkedIn, and we’ve got the industry’s first and only calendar of events, so that people can just suck that right into their iPhone or Android device or what have you, on your computer, and it just lists upcoming trade shows, conference calls, that kind of thing. Anyway, all that is at MobileHomeParkInvestors.com. You’ll get a link there to our podcast, to the LinkedIn group and to our calendar – MobileHomeParkInvestors.com.
Joe Fairless: And why did you choose to do a LinkedIn group versus a Facebook group?
Jefferson Lilly: Because this is more of a professional thing than a personal thing, and I personally find Facebook to be more annoying than useful, that’s why.
Joe Fairless: Got it. Fair enough. I ask because I’m in the process of creating a group for this show, and I’m debating between Facebook and LinkedIn, and I just wanted to hear your thoughts.
Jefferson Lilly: You let me know if I’ve made an epic mistake and you’re like “No, I get ten times more good leads off Facebook than LinkedIn. You’re such a goof, Jefferson, do it on Facebook!” You let me know, and then the next time I’m on your show I’ll tell you then about how wonderful Facebook is.
Joe Fairless: There you go. Well, you’ve got 3,700 people in your group, so I think you’re doing something right, that’s for sure.
Jefferson, thank you for being on the show. Thanks for talking about how you’ve scaled the business and specific ways for doing so. One is hiring the right people – you’ve hired an asset manager, a CFO and someone who’s heading up acquisitions. The compensation, the structure for that compensation, how you found them, and then the systems that you’re implementing, from Rent Manager, Avid Pay and getting the debt financing through CMBS markets.
Thanks for being on the show, thanks for sharing your advice again; I enjoyed talking to you, catching up, and I wish you the best. I hope you have a best ever day, and we’ll talk to you soon.
Jefferson Lilly: Okay, Joe. Bye-bye.