The RV park business model is fairly simple, yet too many investors don’t understand the mechanics and therefore miss the entire opportunity. With traditional investing faltering as a result of Covid-19, alternative investing is far more profitable – but only if you understand how it works. So here’s the plan to make money with an RV park.
Buy it at a reasonable price and with the correct raw material for success
The first step is that you must find a deal that has solid infrastructure and location – the raw material that is required for all the next steps. If you buy an RV park that has a lousy location, or is falling apart, you will not be able to succeed no matter how good a business person you are. Benjamin Franklin once said that “diligence is the mother of good luck” and thorough inspection of the property is essential. The other issue, of course, is how much you pay for the property. It needs to be at a cap rate of 8% to 12% based on actual current net income (and that means including all the real expenses that many sellers leave out, such as projected property tax based on the sales price and not the current assessment).
In summary, the starting point for making money with an RV park is to buy one with solid fundamentals at a reasonable price. Sounds a lot like Warren Buffett’s theory on stocks, right?
Unlike a Buffett stock pick, however, the RV park has an ability to boost revenue much faster than any corporation. The reason is that most moms and pops have missed out on current marketing tools related to the internet. They are still relying on signs and magazine ads and have zero visibility on Google and no website. Also, a worn-out mom and pop owner simply lacks the energy to boost revenue and to elicit social media reviews or just bring the enthusiasm that makes people want to stay longer. In RV parks, it’s typically not a situation where the rents are too low (although that might be an issue) but more a problem of underutilization of all those vacant lots.
Many moms and pops have let their expenses spiral out of control over the years. You see this primarily in labor cost but it can manifest itself in other issues. The problem is typically the result of following the same paths every year but paying a little more without ever questioning the benefit of that cost. Successful RV park owners analyze every cost and think to themselves “do I really need to do this and, if so, is there a cheaper way to do it that delivers the same effect?”.
Make it worthy of a lower cap rate
When you take any RV park to the next level (appearance, reputation, stable income) you are immediately rewarded with a lower cap rate form the appraiser. The reason is that the cap rate reflects the “risk” inherent in the property and a rough-running RV park is far more risky to the lender than a good stabilized one. The impact of a lower cap rate is huge. If you bought an RV park at a 10% cap rate at a price of $500,000 and can get the cap rate lowered to just 9% based on improving the looks of the property (assuming the net income didn’t increase at all) you would now have a valuation that’s $56,000 higher. And if you increased the net income by just 20% and dropped to a 9% cap rate it would represent a value that’s $167,000 higher. That’s a huge amount of gain in just a year or two.
Refinance to a lower interest rate – or even “cash-out”
Another profit-maker with an RV park is to refinance it as you make it more attractive and more profitable. In this way you turb-boost your cash-on-cash return by adding more leverage to your diminishing down-payment. The highest level of this art is when you can do a “cash-out” refinancing and therefore have zero in it and a return rate that is infinite. In the example above, if you were to refinance the RV park after increasing the value by $167,000, then your rate of return would increase by around 50%.
Making money with RV parks is not rocket science – but it might as well be. Most people just don’t understand the concept or the RV park business in general. Don’t miss out on this superior form of alternative investment. It’s that easy.