Why Mobile Home Parks Are One of the Best Cost Segregation Assets in Real Estate

David Wiener: Somewhere out there right now, an investor is looking at a manufactured home park deal and passing on it because on paper it looks like a small, unglamorous asset next to a shiny new apartment complex. What that investor doesn't realize is that the ugly duckling of real estate might be sitting on one of the best tax outcomes available anywhere in commercial property. Here's why. On most manufactured housing communities, the operator doesn't even own the homes. Residents own their own homes and just rent the land underneath them, which means almost the entire purchase price of the deal sits in roads and utility lines and pads and site work, not a twenty seven and a half year building. And when you run a cost segregation study against that, the numbers get almost crazy. We're talking forty, fifty, sometimes eighty percent of the purchase price landing in categories that qualify for one hundred percent bonus depreciation in year one. Today we're breaking down exactly how that works with somebody who lives inside these deals every day. I've been looking forward to this. So stick with us through the full conversation because by the end you'll understand why manufactured housing might be the most underrated cost segregation asset class in real estate and whether it belongs in your portfolio. So let's get into it. Welcome back to the Tax Strategy Playbook, the show where real estate investors, business owners, and tax professionals come to turn complicated tax rules into practical tax strategies that protect cash flow and build wealth. I'm David Wiener, also known as Mr. Cash Flow. Beyond hosting this show, I'm also a cost segregation provider with CSSI. So today's topic is not just something I talk about on a podcast. It's what I do day-to-day for real estate investors all across the country. Today I'm joined by Leo Young. Leo is the founder and the managing partner of Cornell Communities, a private equity real estate firm acquiring, operating, and revitalizing manufactured housing communities across eight states. He's led more than $75 million in real estate transactions, currently operates a portfolio of over 500 pads, bringing institutional experience from a $4.5 billion private equity fund together with hands-on operating discipline. Before real estate, and I want to know about this a little bit, Leo was the number one regional salesperson for Tesla. Leo, welcome to the show.

Leo Young: Thanks so much for having me on, David.

David Wiener: So for somebody who's never looked at a manufactured home park as an investment, how would you describe the asset class in plain English for them?

Leo Young: So the business model of manufactured housing communities is that you are a landlord in the literal sense. So you want the residents to own their own home that sits on top of your land and you service the land. So you're paying the taxes, you're maintaining the utilities and the lights, the roads, etcetera.

David Wiener: Fantastic. So okay, so you went from a top sales role at Tesla into manufactured housing specifically. How did you make that switch? What pulled you into that niche over

Leo Young: Yeah.

David Wiener: any other type of real estate you could have gone into?

Leo Young: But we could definitely unpack my my life story. But so I studied finance in college. I was always very curious. I enjoy philosophy and I'm curious about the reason behind things. So finance was natural to me because it was the kind of embodiment of philosophy in the real world. It's like, hey, if you believe in a certain company, a certain property, then you want to buy it at a lower price and then sell it at a higher price. So after college, I pivoted into sales and Tesla. And the reason being is that I I was an introvert. I wasn't really good at speaking. You know, I hated sales. And I also knew deep down inside that that was the perfect time for me to fix this huge weakness that I had. So you know I kind of faced my fears. I went into it. I learned sales from the inside out. I still don't like sales, but hey, you know, I did enough. I created my own success and You know, is the top salesperson. During that time I got quite burnt out. Tesla is a very intense company to work for. it's amazing, it's such a a valuable experience looking back. but at the time, they grind you super hard. So for me, I had the realization that I need to build cash flow, I need to build wealth that doesn't depend on me showing up. And that's how I found real estate. So I started investing. as a limited partner or a passive investor into some apartment buildings and fell in love with real estate. Then got my license, was learning and earning, you know, transacting all different types of real estate as a a broker, then got recruited to join a a national fund on their acquisitions team to kind of learn the institutional playbook. And then afterwards got the tap on the shoulder from a mutual friend who kind of knew my background into real estate. He wanted to start this fund from scratch. focused on manufactured housing or mobile home parks. I liked it because I'm a very in impact driven person. and I like the fact that you're a steward of affordable housing. there's a lot of misconceptions in the space, which we could definitely unpack as well, but that's how we got here.

David Wiener: Yeah, well you definitely didn't dip your toe into sales when you left when you went to Tesla, but

Leo Young: Yeah.

David Wiener: so the misconceptions. What would you say is the biggest misconception investors have about mobile home parks before they actually look at the numbers?

Leo Young: That they're easy to operate. So people mistake easy t to simple. So it's a simple business model, meaning that you're managing the land and the operations, but it's a lot of work to manage. So, you know, a lot of people they they just go in here, they're like, I wanna buy my own mobile home park. And then they they find out how hard it is to manage tenants, capex, and all that stuff, and they're like, Okay, I don't want to do this anymore.

David Wiener: Yeah, I know I know some guys just absolutely love doing stuff like that. And some guys say, nah, this is not for me. I don't really need the the grind, as you say, day-to-day, that sort of thing. So let's start with the fundamentals, because the ownership structure of these deals is exactly what makes the tax side so interesting. So walk us through what Cornell Communities actually owns when when you acquire a park. What do you actually own and what do the residents actually own?

Leo Young: So we typically like to purchase the land. So aka the community or the park. And we do own some homes with it. I think that's another misconception, is that we only own the land. That's not true because when you buy it, sometimes the the park or the community owner owns some homes that come come along with the sale. So we we buy the land and we like to have the residents own their own homes because of a number of benefits that we can go into.

David Wiener: Sure, I would imagine so. For for the listeners who assume a mobile home park works like an apartment complex, how does your balance sheet different? What's the difference between them on the balance sheet?

Leo Young: Yeah, it it's a lot more equipment and labor light. So whereas in a multifamily apartment building you you might have the entire building. So you have carpeting, lights, you have a leasing staff, you have a live in super and all these people and and components, versus for a mobile home park, you're managing the land, the infrastructure, the water sewer lines, the lights, the roads, all these things. So it's very different. And you definitely know, David, about The cost segregation and why we love it so much is because these are all land improvements.

David Wiener: Are are there any other property types that that look like that? I mean, I would think very few real estate asset classes look like that.

Leo Young: Yeah, there's there's a few. you know, similar ones are like R V parks to to some extent, maybe storage units or car washes I've heard. but you know, they all operate very differently and you know, for investors they they have to understand like who the operator is, you know, how these assets are operated.

David Wiener: Absolutely, yeah. So the ownership structure that you prefer, how does that affect financing and insurance and operations compared to a a regular multifamily deal?

Leo Young: Yeah, so so lenders actually prefer for you to not own the homes. And in in fact, a lot of lenders they won't even credit the income that you have on the park owned home section. because to them they they offer you great rates for financing or competitive rates because they see this as an annuity, because it's a very low default rate, very steady occupancy. It doesn't go up and down like multifamily does. You know, the turnover rate for a mobile home park is around five percent per year compared to fifty percent in multifamily. So lenders like this.

David Wiener: Yeah, you don't have to worry about a a bad tenant wrecking your house.

Leo Young: Yeah, exactly. And and for insurance as well. it's a lot less structures to cover, so your insurance rates are usually much lower.

David Wiener: That's good to know. So when a cost segregation study gets run on one of your parks, what typically shows up? Is it mostly the fifteen year property, the roads, the utility infrastructure, the pads, the fencing, the signage, clubhouse amenities, those kinds of things?

Leo Young: That's exactly it. And a ton of it fall in those categories. And you know, we see north of seventy, eighty percent of the purchase price. Yeah.

David Wiener: That's a good deal. That's why I love running cost segregation studies on on those and on self-storage and on, you know, car washes and those kind of things, because

Leo Young: Yeah.

David Wiener: the percentages are crazy. Studies on manufactured housing communities show forty to sixty percent of depreciable basis in five, seven, or fifteen. I don't imagine you get much five year property. Probably not much seven year property. But I'm seeing much higher than the forty to sixty, where in a typical like apartment building, you're gonna get probably twenty to forty percent. Does that is that match what you see in your own deals?

Leo Young: Yeah, I mean it it kind of varies depending on which properties they are because, you know, there's different utility setups. You know, some are public water, public sewer, some are well water, septic sewer, and there's different setups. So that range is more or less in line with what we we see.

David Wiener: now in the parks where you do own the homes outright, so park owned homes,

Leo Young: Mm-hmm.

David Wiener: how how are those classified for depreciation and why does that surprise people?

Leo Young: Yeah, it's depreciated much quicker than obviously the the land part is. And usually th those are what we get on the higher end, you know, pushing eighty percent of the purchase price for for the cost segregation.

David Wiener: For for the park owned manufactured homes, do they pretty much run like a typical say single family home?

Leo Young: Yes and no. there's a lot more repairs and maintenance involved, which is also why we we typically don't like to get involved in it. you know, the the components they're less sturdy than a stick built single family home.

David Wiener: How has permanent one hundred percent bonus under under the one big beautiful bill act changed the way you and your investors think about the first year after closing on a deal?

Leo Young: Yeah, so it's got a lot more interest into the space. I would say in the past year since it's been brought back. a ton more people are interested for our investors, but also for the larger institutions. You have family offices because their kind of business strategy is just buy and hold. They just want to pick up the tax benefit and just add it onto their portfolio and keep on going. So there's a lot more interest right now. we we obviously like don't know what's gonna happen, you know, w once the current administration switches over, you know, is the next guy gonna repeal this or something, right? So there there is something you're urgent. Exactly. Exactly.

David Wiener: Permanent is only permanent until Congress moves. I know we we had a lot of people who were hanging on and waiting and waiting and waiting for the hundred percent to come back. even on properties that went into service during the years where where it wasn't a hundred percent and they didn't realize, you know, it's not when

Leo Young: Mm.

David Wiener: you do the cost segregation study, it's when you acquire the property and place it into service.

Leo Young: Yeah. Placed and serviced.

David Wiener: So the categories exist, the math is real. And I wanted somebody other than me to say that. So let's turn

Leo Young: Yeah.

David Wiener: this into something an investor or an operator can actually act on. what I like to do is I like to give people a playbook. You know, in in the tax strategy playbook, we give some things that they can actually do. So step one I think would be at what point in the deals timeline should somebody commission a cost segregation study when they underwrite it, when they close or after the first year of ownership, in your estimation?

Leo Young: Typically we like to get a quote up front from our our tax engineers. That way we kind of know more or less what to expect because it it's slightly different for each deal. And when we actually commission the study is typically in the first year, so after it's place in service or call it a a few weeks after, just because we we want to get it done. That way our our engineers aren't backed up when it comes to tax season and all that stuff.

David Wiener: And and what information or or documentation do you hand over to the Cost Seg firm or the engineer to get an accurate study? And you mentioned having somebody on site. I preach that myself. It's important to have an on-site site visit from somebody who's trained. If somebody tells you to go take pictures, you don't exactly know what they're looking for. The engineers are looking for very specific things. A a trained professional taking the pictures is I think very, very important. but not everybody does that. So w what basically information are you handing over to them to get a defensible good study?

Leo Young: As much as you have on the property itself, the outlines. So if you have a survey, for example, you want them to know about it, or if there's any utility information, like how many septic tanks there are, for example, what the water sewer lines are are made out of. And if you don't have all of this information, you try to give them as much as you can and also connect them with your on-site contact who can walk them through, like, hey, you know. This is where the road starts, this is where it ends, you know, this is like, you know, the the curb belongs to the park, etcetera.

David Wiener: Yeah, and the stuff like the septic tanks and and the water lines and those kinds of things, that's something you can't take pictures of. You know? So I assume, you know, they or or we would need to have that information from you, where somebody who's just doing a single family home doesn't have to worry about any of that kind of stuff. So

Leo Young: Exactly.

David Wiener: Does does the strategy change at all for a for like a smaller family run park versus a larger institutional grade community?

Leo Young: On average, probably the larger institutional community has more info available compared to the the smaller call it mom and pop run shop.

David Wiener: And it probably has more investors too who have a stake in this.

Leo Young: Exactly. Exactly. So for us, how how we do it, we we raise money for a lot of our investments. So, you know, the investors they own a portion of the entity that owns the property, so they get allocated their pro rata share. so so knowing that as well, that's how we distribute it to them.

David Wiener: And it comes just comes to them on their K1, right?

Leo Young: That's right, that's right.

David Wiener: Okay. So let's let's talk a little bit about what this looks like actually in in dollars on a on a real deal. can you take us through an actual Cornell Communities acquisition? Nonspecific of course, but purchase price, what a cost segregation study identified and roughly what your first year deduction looked like. Do you have that information handy? Or f in your in your head?

Leo Young: Yeah. You know, I can go through rough numbers or I could pull up a specific report, but I think rough numbers, let's say we we purchased a a property for it was a million w 1.05 million and it was on city water, city sewer. It had all ten and own homes, and we were able to get close to eight hundred thousand in terms of the depreciable basis for that.

David Wiener: That's a win. Okay, so yeah. So eighty per s that's just about eighty percent. Now, how did that deduction affect the return profile you were able to offer your investors on that deal? I assume you estimated

Leo Young: You know.

David Wiener: it ahead of time.

Leo Young: Yeah, so we we actually don't factor in the tax efficiency into our our return projections. It's based purely on the financials and the expenses. So b because, you know, each investor they have different tax situations. You know, some are for example they're real estate professional, amazing. Or, you know, some live in a a state that handles, you know, bonus appreciation differently, like California, New York, New Jersey, for example.

David Wiener: So it doesn't change your your profile at all.

Leo Young: I mean it improves it in the in the real world, but you we we don't activate it for the calculations.

David Wiener: It but not not something you you offer to the investors prior to the deal. Any sales documents or brochures or anything.

Leo Young: We we we tell them exactly. Yeah, yeah. We we tell like, hey, you know, you should expect roughly, you know, a dollar for dollar, you know, you put in a hundred thousand, you'll get a hundred thousand in depreciation, but it's not like, hey, this is the specific amount that you'll you'll get and you know, you can take this amount in year one because everyone's tax situation is different.

David Wiener: Yeah. And and I'm constantly telling people, this entire podcast is not tax advice for your situation because your numbers are your numbers. And I do the best I can with my clients to make sure that it's before we go too far, it's something that they can use and I always recommend that they check it out with their tax professional before commissioning a study just because You don't want any surprises. You don't want us to find eight hundred thousand dollars in deductions and then have your tax professional say, Yeah, but you can't use it. That would be a disaster. So I always try and get as much information up front to give them some guidance, but I always leave it up to the tax professional to give them numbers. So if go ahead.

Leo Young: And yeah. Sorry, the the the one thing to to add as well is that, you know, even though you're not allowed to or like y let's say if you're not allowed to take it in in year one, you could, you know, use it to offset your your cash flow, which definitely helps as well, you know, w when it comes to making your cash flows more tax efficient and, you know, finance one one, you can compound that more over time.

David Wiener: Absolutely. And even if it's passive for somebody, this is passive income they're making. So that's a good thing. So

Leo Young: That's right.

David Wiener: if somebody's evaluating their first MHC deal I guess w what are they looking at? How do they how do they decide whether it's a good deal or not for them?

Leo Young: I will answer in in two buckets. So one is kind of what they're they're taught to do. And then the the second is kind of what they learn to do as they they get experience with your other investments and all that stuff. So what they're taught to do is like analyze the financials, you know, look at the underwriting. What what's what's the assumptions here? Like where are we bringing the rents, you know, what's the occupancy, what are the expenses, right? I think that that's stuff we can learn anywhere. And also, you know, people tend to try to compare, you know, deal to deal. It's like Hey, here's property A versus you know property B with sponsor B. And they're like, you know, that has the higher number, that looks better, right? I'll do that. Compared to Exactly.

David Wiener: But you gotta you also gotta know who the sponsor is a little bit and know a little bit about them.

Leo Young: Exactly. So that that's where the the nuance comes in, you know, after you've invested or you talk to a few people, you're like, okay, you know, I think the the jockey is more important than the horse. So the operator is more important than the property itself. because operations is what makes or breaks everything. doesn't matter if you get a great property at a killer price, like if you can't run it well, it's still not gonna perform well. so getting to know the sponsor, what their team is like, you know, there's some that are a smaller team, some that are a bigger team, you know, what kind of asset classes do they specialize in? Are they region specific? Let's say, you know, Dallas real estate compared to let's say mobile home parks only. So, you know, what their strategy is and what their experience is with similar projects than what you're looking at.

David Wiener: Yeah, the the ad slicks don't always tell the whole story. Somebody

Leo Young: Yeah.

David Wiener: can be great at marketing material and not great as an operator, and you have to do your homework a little bit. on any kind of deal with with an operator, you have to do your homework.

Leo Young: Yeah, exactly. And and one more thing to add too is there is some degree of gut feeling involved in this because and and that that's why, you know, for us, like we always try to talk to our investors, you know, before they they commit anything beyond just like going back and forth on email. Because there's a lot more that you can learn about an operator than just like emails or, you know, highlights, right? It's like if a project doesn't go according to your business plan, like what are you gonna do? How are gonna step up? How resourceful are you? How gritty are you? You know, how great is your team? Right? How are you gonna handle these things? so that that matters. And, you know, what quote unquote skin in the game they have beyond just like how much are they investing? It's like, are they signing on recourse to the loan? What's the exit process look like? Is there a path to agency lending where it's non recourse, or is it recourse the whole way through? these are more questions that are are nuanced that still are important.

David Wiener: So so a specific set of questions and the way they would find that out is simply by asking you, right?

Leo Young: Yeah, exactly. So we we have a conversation, you know, they they ask a question, they're like, you know, what what are the returns? You know, usually how I answer it is because I I'm both an L P and a G P so I'm like okay, okay, here's the straight answer to your question, but also the question behind the question, which I think is more important for you to know as well.

David Wiener: Yeah. so it would be good for them to have some some specific questions in mind when they talk to a to an operator to kind of feel those things out. And and yeah, I can see there's there's some gut feeling there too. If you get along with somebody, that's one thing. If if when you talk to you feel kinda like, I'm not sure. that's that's a a definite caution. So Before we wrap, I want to leave listeners with one clear next step. So if somebody listening remembers only one thing from this conversation about manufactured housing communities, what should it be?

Leo Young: So they're extremely tax efficient and also impact driven because you're advancing affordable housing and also winning in your investments.

David Wiener: Well, that's good to know. That's something that they should remember what's the first concrete step somebody should take this week if they're saying, Maybe I need to look into a manufactured housing acquisition? What should they do right away?

Leo Young: You should learn about the asset class and we have a lot of free education material as well on our website, Cornell Communities.com.

David Wiener: Great. And and all of Leo's contact information will be in the show notes at TaxstrategyPlaybook dot com. So that people can find and and I assume there will be a telephone number where they can get in touch with Cornell and and ask the kind of questions that they need to ask. Leo, this is

Leo Young: Exactly.

David Wiener: great. I Confess that I am no expert on manufactured housing communities. I've learned a lot. The big takeaway for me is the exact thing that makes manufactured housing communities different. Not owning the homes is the same thing that makes one of them the strongest cost segregation opportunities in real estate. But I hadn't even thought about the fact that you are providing people with affordable housing. We are in such need of that. thank you so very much for joining me on the episode. I think this was Yeah.

Leo Young: Yeah, I appreciate you having me on, David, and to the listener, I hope you got something useful out of this and I'm happy to be a resource where I can.

David Wiener: Fantastic. For everybody listening, this is exactly why this show exists. To find places in the tax code and the asset classes you already know where the numbers are simply better than most investors realize. Pair a well-run cost segregation study and permanent 100% bonus depreciation and and a manufactured housing park acquisition can deliver a first-year tax outcome that few other property types can match. So again, Leo, thanks for breaking this down for the work you and your team are doing to professionalize this asset class. And thank you to the listener for joining us on the Tax Strategy Playbook. I'm David Wiener, Mr. Cashflow. I'll see you next Tuesday on the Tax Strategy Playbook.