An RV park is, by definition, an income property – it’s value is based on how much income it produces. Some sectors of real estate offer low returns and others higher. But to really make impressive returns a property has to provide some simply tools to drive the numbers to a high level. And RV parks offer these tools. So what are the three steps to making a huge return with an RV park?
Step #1: Find an RV park that has solid fundamentals but poor management
There are many great RV parks out there – great location and great infrastructure – that are suffering from poor management. This is entirely different from those that are fairing poorly due to problems with visibility, property condition, and market selection. What you are looking for are cases where you think “this could be a great property but the management is horrible” as opposed to “the management’s not bad, but I wonder if there’s a way to overcome this poor location”. It’s no different than the Flip or Flop show on HGTV – the plan is to find a property with good bones and then bring it back to life with better marketing and supervision.
Step #2: Buy it based on current performance and apply sensible debt
Having found a property with good fundamentals but poor management, the next step is to simply buy it based on its current performance. An RV park is an income property – not land speculation – and its value is derived strictly from current dollars and cents. You cannot pay more for the property based on potential, but rather the formula is based on the actual net income over the past twelve months. If the seller says “you know that with a little effort you can make this a much better place” may be true, but why would that profit not go to you, the buyer, rather than the seller who failed in his application of management principals? And, in buying it at current value, you also need to apply sensible debt to the purchase to leverage your returns. This will be in the form of seller financing or bank debt, typically at 20% to 30% down payment.
Step #3: Enact strong management to push occupancy and cut costs
“Chainsaw Al” Dunlap – America’s most effective turn-around expert from the 1950s on failed industrial conglomerates once said that the business plan is simply “sell, sell, sell and cut, cut, cut”. That’s pretty much true with RV parks, as well. Most moms and pops are terrible at on-line marketing, and this serves as one of the most important opportunities with most RV parks. When you add Google visibility, a great website, and social media reviews and marketing, it’s not unusual to boost occupancy and revenue by 25% or more. On top of that, good sales management – often just a positive attitude – will result in customers staying longer (the average length of nights spent on the road by an RV owner is 23, so how many of those are you going to garner?). On cost cutting, it’s typically a focus on bringing common sense to each line item, with the largest savings often coming in the form of staffing and smarter maintenance efforts.
Now let’s prove this out with science
Assume you bought an RV park with a great location and infrastructure – but terrible management – for $500,000. It has a net operating income of $50,000 per year, based on current occupancy and costs (so the cap rate is 10%). You finance it with a loan with 20% down ($100,000 down payment and $400,000 bank loan at 5%). You then set about better managing the asset and grow the net income by 25% to $62,500 per year. Your $100,000 is now yielding $62,500 in next income less $20,000 in loan interest, so a total of $42,500. That’s a 42.5% return on investment per year. Do you know of any other investment yielding those type of numbers? That’s equivalent of to over 42 years of 1% CD rates of return per year with an RV park.
Making high levels of financial return with an RV park is not that difficult if you apply the science correctly. If you can simply find a good property with poor management, put a loan on it, and then spike the net income higher with better sales and cost cutting, you can have outstanding returns quickly and with little risk. The road map is there for the taking.