|
Finding and Evaluating RV Parks and Campground Investments
By
Dave Reynolds
Of all the questions I receive from investors
that are looking to purchase an RV Park or Campground there are two questions that are
asked most often:
-
How do I find an RV Park or Campground deal that
makes sense?
-
How do I place a value on that RV Park or
Campground?
These are important questions and there are
several ways to find RV Parks and Campground investments and even more ways that one
can approach evaluation of that investment. When I first started in the
business about 12 years ago, I spent a lot of money driving across the country
looking at listings I found in major newspapers and on the internet. While this
allowed me to see a lot of potential deals, it was a big waste of time and
money. Many times I would get in my car and drive 1,000 miles only to find that
the park I was looking at was a complete dump, had unrealistic profit and loss
projections, or was already under contract by another investor.
I soon realized that it was worthwhile to do a
more thorough analysis before visiting the property. If it passed the initial
analysis, then I would try to get an accepted offer and request detailed
financials from the seller. If it still looked good I would schedule a trip to
visit the park. Before implementing this strategy, I was visiting about ten
parks for every one I purchased. Now, that ratio is more like two or three
to one and I
am not on the road all the time.
If the RV Park looks good on paper, get
it under contract before spending $1,000.00 in travel and two days to visit it!
In order to find a RV Park or Campground that makes
sense financially the most important part is to be able to quickly identify
and separate the good deals from the bad. The only way to acquire this
skill is to educate yourself on this business (through books and other
resources) and start looking at as many RV Park and Campground offerings as you can.
With the availability of information on the internet you can accomplish this
task quickly. Go to
www.rvparkstore.com and other internet websites where you can view over a
400 RV Parks for sale.
Whether you are a new or seasoned investor in
this asset class I would suggest getting the information on as many properties
as you can and then put them side-by-side and analyze each one. You will get an
idea of the capitalization rates, expense ratios, occupancy levels, and rental
rates for different markets. You will find prices all over the place but if you
invest the time and effort in evaluating deals, you will start to develop an
idea of what to look for in terms of price-per-space, how seasonal RV Parks
differ from overnight type RV Parks and other important factors.
Invest the time in evaluating as many deals as
possible and invest the money on properly educating yourself on the
business so that you can separate the good deals from the bad and concentrate on
those with promise!
So where is the best place to find an RV Park or
Campground? The best answer to this question is that you should try as many
logical approaches as possible. As mentioned above, I would suggest you start
by checking out the websites that have hundreds of Campgrounds for sale
like
www.rvparkstore.com
and other commercial real estate sites. There are new
parks listed daily on these sites and the best way to utilize these services is
to sign up for notification of new properties for sale. This way you have a
better chance of jumping on the good deals before they are available to the
general public.
About half of the RV Parks that I have purchased came as a direct result of
listings on the internet.
The next strategy that I would suggest is to
start a direct mail campaign to RV Parks that are in the markets and
states that you are interested in. This has accounted for several more of
my purchases. If you obtain a good list of addresses, you can
target only those properties in select markets
expressing your interest in purchasing an RV Park or Campground.
I have experimented with postcards, letters, and
even actual purchase contracts and have found that the response is about the
same for each of these. The key has not been in the type of piece but in the
frequency of mailing. I have received many calls from RV Park owners
saying that they have received our numerous mailings over the years and are
giving us first shot at the park since they know we are a legitimate company. I
actually had one seller pull out a file included over 25 mailings from us. In
another instance I mailed out 1,000 letters to two states expressing our
interest in buying Mobile Home and RV parks. I followed this up about 2 weeks later
with the same mailing piece (in error) and found that my response rate was about
100% higher from the second mailing. So the key with direct mail is in getting
a good list to mail to and frequency.
There are several other options that I have used
with varying degrees of success. I have listed some of these below.
-
Driving through parks in markets
you are interested in and talking with the onsite manager/owner or following
up with cold calls or letters to parks that you would be interested in
owning. The advantage of this method is that you see the park before you
start any communication with the owner and it will give the owner a level of
comfort dealing with someone that made the effort to see the park first.
This works best with an owner that lives onsite and you can meet
face-to-face. I have purchased several parks this way and there are many
other parks I still have an open line of communication with the owner that I
anticipate purchasing when they are ready to sell..
-
Making cold calls to parks in markets I am
interested in. While this works best when the owner answers the phone, it
can be very frustrating. I have been hung up on many times as have my
employees. However, if you don’t mind the frustrations, this is a viable
method of finding potential deals. Besides being hung up on, the biggest
frustration I have had is that you often get the response that anything is
for sale at the right price (which is usually more than it is worth).
-
Another option is to stay in contact with
real estate brokers that specialize in the sale of RV Parks. The
key here is to stay in constant contact with these brokers in order to get a
copy of all of their listings as soon as they receive them. Before they put
the listings on the internet they will send out the information to the
buyers they know are serious in hopes of making a quick sale. You want to
be on that list so you get first shot at the good listings. Once you have a
relationship with a broker and especially after you successfully close a
transaction with them, they will know that you are a real buyer. I have one
broker that I have purchased three parks from and he knows what I am looking
for and contacts me anytime he gets something that fits those criteria.
-
Along with staying in contact with those
brokers that specialize in RV Parks and other commercial real estate, you
should contact brokers in those specific markets you are looking to buy
parks. Many times these brokers will not have any idea about the internet
sites that can help them sell the parks and otherwise do not understand how
to value and market mobile home parks. While many times their listings will
be grossly overpriced you will occasionally find those listings that are
priced right or even better… under market.
-
Newspapers (online and offline), trade
magazines, local and national MLS services, and other websites.
-
Country tax records, banks, appraisers,
movers, dealers, and other industry professionals.
The key to locating good potential RV Parks and
Campground investments is to be diligent in your search and use whatever methods work
best for you. The best deals are usually found by finding those parks that
are the least advertised.
Finding and Evaluating RV Park and Campground Investments
(part 2)In my last article I
discussed several ways to locate an RV Park to purchase. In
this article I will discuss the methods I use in evaluating an RV
Park once I have found one that looks like a winner.
So how do I determine what a specific RV Park is worth?
I want to know how many lots there are, the gross income, net
operating income, how many are seasonal and monthly versus daily,
what the rates are, what expenses the owner is paying, and who is
responsible for the water lines, sewer lines, and roads.
A good rule of thumb that I use to start with is that I take the
gross income of the RV Park and multiple this by a factor of 5. (The
“5” number is an arbitrary number based on my experience in
evaluating deals).
For example if the park has a gross income of $100,000 per
year...
Then my initial value calculation is $100,000 x 5 = $500,000.
If the park is on the market for $1 million I will probably pass.
If the park is on the market for $600,000 or less than I will
probably look into it further. Remember this simple
calculation is very generic and may or may not be the true
indication of the value of the RV Park.
As you will read in any appraisal handbook there are 3 basic
valuation methods. However, with RV Parks two of those
methods, the cost and sales comparison methods, have some flaws that
skew the results. The cost method does not take into account
the business component of the business or occupancy levels. It
would value a 100 space RV Park the same whether it has 100%
occupancy or 1% occupancy.
The sales comparison method is also flawed in most cases due to
the lack of quality and recent comparables to select from. RV
Parks have been increasing in value over the last few years as has
other real estate. With relatively few sales to draw from, an
appraiser will typically use sales from a couple years ago and sales
from markets 100 miles or more away from the subject property.
Even if there is a similar sale in the same market and in the same
condition, one park can be much more attractive than the next.
Differences in expense ratios, occupancy levels, and rental rates
can make one park worth 30-50% more or less per space than a similar
park down the road.
Due to the flaws in the first two methods I put all my efforts
into valuing an RV Park or Campground using the Income or Market
Capitalization method. Under this method I take the Net
Operating Income divided by the Capitalization Rate to come up with
the Value. While this might sound like a simple process, it
can be quite complex coming up with the true Net Operating Income
and decided what cap rate to use in the formula.
A simple way to think about the cap rate is that it is the return
you will receive year one based on the current projections if you
were to pay cash for the property. If you put $1,000,000 cash
into a CD, you can expect somewhere in the 5% range for your money.
Obviously, if you were to put $1,000,000 of cash into an RV Park
where there are risks and time involved in managing that investment,
you will want more than a 5% return on that money. Cap rates
have been all over the place in that last few years but they are
once again rising. The parks that are selling now have cap
rates in the 9.00% and higher range. Determining the proper
cap rate to use in the formula is arbitrary and will depend on what
you are looking for as an investor. One investor may be
satisfied with a 7% cap and the next investor needs to buy at a 12%
cap in order to justify the risk and time involved. I do not
even look at RV Parks that I can’t turn into at least a 10% cap
rate. The range of cap rates on the market today fall in the
5% to 15% range with most parks falling into the 8% to 11% range.
Another factor in determination of an acceptable cap rate has to
do with the requirements of your lender as well as the interest
rates on the loan you use to purchase the property. If you are
borrowing 80% at a 10% interest rate and are trying to buy the
property at a 7% cap rate, you will have a large negative cash flow.
On the flip side, if you are borrowing 80% at a 4% interest rate on
a 7% cap rate, you should have a positive cash flow. So the
interest rates are important to consider in the equation.
After determining what is an acceptable cap rate you need to
rework the profit and loss statements you receive from the seller or
broker. I call this the “Net Operating Income Reality Check”.
Your goal in this process is to determine the actual projected
income and expenses for the first year after you take over
ownership.
Figuring out the actual income can be as simple as using the numbers
from the Seller's income tax records (if they are reporting all the
income) to extremely complex when all the income is not being
reported. These issues are discussed in my book and our new audio
series.
In this case we will assume the seller has been reporting
everything and so we use that number. If the rates charged by the
seller are way under market you might consider adding in a portion
of the increase rates into the equation if you plan on increasing
the rates after taking over. I will use up to 50% of this increased
revenue if necessary.
The next thing to do is to come up with the anticipated expenses
based not only on how the park is currently operating but also based
on how the park will operate with you as the new owner. For
example, if the current owner is managing the park, then you need to
plug in an amount for management and payroll taxes and workers comp.
If the park has vacancies and there is no advertising expense, then
you need to plug in an amount for advertising. And so on.
After coming up with the income that the park is currently
generating and deducting from that all the anticipated operating
expenses including the reserve for capital expenditures you will
have what is called the Net Operating Income.
Note: Net Operating Income does not included deductions for
Mortgage Interest, Depreciation or Amortization. If these
numbers are included in the expenses you need to add them back to
come up with the Net Operating Income.
If you take the Net Operating Income and divide this by the price
you come up with the Capitalization Rate (Cap Rate). Also, if
you divide the Net Operating Income by the Cap Rate you come up with
the price and so on.
Many RV Parks and Campgrounds will offer owner's housing and if
you are looking to buy an RV Park and operate it yourself, this will
also come into play when determining value.
Other considerations on the value of the park will be the
entrances, streets, landscaping, utilities, parking, lights, storage
sheds, number of singles versus doubles, swimming pools, clubhouses,
etc. The nicer the park typically the lower the cap rate and
the easier it will to tap into better financing programs. In
addition to the quality of the park considerations many mobile home
parks have other factors that need consideration. This
includes such things as vacant lots, land for expansion, park owned
homes, and seller financed notes.
|
