By Frank Rolfe
With 10,000 baby boomers retiring per day, there has never been more demand for RVs and the retirement lifestyle of traveling America in an RV. And with more RVs on the road (currently over 8 million of them), they all have to have a place to park for the night – or head for a destination. Many Americans are taking advantage of this demand by buying RV parks as an investment. But how do you successfully buy an RV park?
Normalize the numbers
When looking at the financial statements for an RV park, it is important to “normalize” these numbers through averaging. Don’t buy an RV park based on one year’s revenue. Numbers can be flawed due to unseasonably cold or warm weather, or even because of local construction projects and the price of gasoline. You need to see several years of statements to get a true handle on how much the RV park can be expected to produce in income.
Look at current performance
At the same time, you have to focus on the current numbers on the RV park. Declining revenue over several years can suggest that there are bigger problems ahead, while growing income means just the opposite trend. The most accurate reflection of reality for the RV park is what you have going on right now. So when you average the numbers, you are hoping that they support the current revenue, and that the current revenue is up from the prior year. Any other setting means that you need additional caution and probably a lower price for the property.
Evaluate based on a rate of return
Even though RV parks can appear fun and attractive, it’s still all about the money. You can’t overpay for an RV park and have a happy ending. Before you being looking at RV parks to buy, you need to determine what rate of return works for your goals. If you say to yourself “I need a 20% cash-on-cash return to feel good about this investment”, then you know that you need to buy a park at a 10% cap rate with 80% leverage in the form of a loan. Your focus should always be on the math. Where many buyers screw up is that they buy based on scenic beauty or pride of ownership, and lose sight of the big picture, which is all about the money.
Factor in capital improvements
Remember that the total cost of a project is not only the initial price, but also the cost of the improvements. Some buyers forget this simple fact, and only calculate their rate of return on the original price of the RV park, not counting any improvements. We have seen cases in which the renovations to the RV park can cost as much as 50% of the total purchase price, which can reduce a perceived 10% cap rate down to 7% — which can make the entire RV park upside down on day one.
Leave room for error
Things happen. You need to always be ready for a rainy day. Don’t put too much down on any RV park deal – leave yourself some money in the bank. In addition, don’t cut your budget too tight. If the RV park can make $5,000 per month, don’t saddle it with a $4,999 per month payment. Remember the old saying “under-promise and over-deliver”, and put in a bunch of “padding” into every number you budget. That way, if your estimates were off – or the market dips temporarily — you’re still O.K.
Perform great due diligence
Benjamin Franklin once said that “diligence is the mother of good luck” and that’s as true in RV parks as any other type of real estate. Don’t leave your investment to chance; increase your odds by performing good due diligence.
Don’t take risk without sufficient reward
If a seller is wanting you to buy an RV park with poor financial information, or declining revenues, or it’s located in a sketchy area, or the survey shows it’s in a floodplain, then the price of the park just went down substantially. You have to be compensated for greater risk by higher return. Don’t let the seller try to convince you that the perceived problem is low-odds and not worth worrying about. Every risk is real and must be accompanied by a price concession. Another way to overcome troubled deals is by having the seller carry most – if not all – of the financing on the deal. That transfers the risk back on the seller, and insulates your potential loss if the deal goes bad. It’s been said that all bad deals can be fixed with zero-down seller carry, and that’s not far off.
RV parks can make excellent investments, but only if you use common sense and focus on the money. There are thousands of RV parks in the United States, so don’t stretch or rush to buy the first one you see. Mitigate risk and do great diligence – and stay completely focused on the rate of return – and you should be able to find the RV park of your dreams.