RV parks and mobile home parks used to be the same thing. About a half-century ago. But since that time, both have created their own business model with little shared between the two. And one big difference is that many RV parks have a 2-point higher cap rate – but potentially for good cause. However, this issue can be used to your advantage if you buy the right RV park.
How the business models are different
RV parks and mobile home parks have completely different approaches. Mobile home parks are more attractive to passive owners because the residents are extremely “sticky” (with an average tenancy estimated at around 14 years), the residents pay for their own utilities via submetering, and there is little in the way of common areas or management intensity. RV parks, on the other hand, have customers who can stay as little as one night, the park pays all utilities without any billbacks, and there are widespread amenities leading to additional labor costs and management intensity. They could not be more different in many respects.
Why RV parks have higher cap rates
There are several reasons that RV parks traditionally sell for cap rates roughly 2 points higher than mobile home parks. These reasons include:
- The perception of higher risk in customer turnover requires a higher cap rate to justify that risk.
- Lenders are not as excited about RV parks as they are mobile home parks, so the interest rates are higher and cap rates are an extension of interest rates. Fannie Mae and Freddie Mac, for example, do not do loans on RV parks as they are not residential in nature, even though they do over 50% by dollar volume of all mobile home park loans and at extremely low rates.
- Since RV parks are more management intensive, investors demand a higher cap rate to justify a larger amount of their time and risk.
How to outsmart the system
If RV parks have higher cap rates due to risk and bank lending issues, then clearly there’s an opportunity to profit by simply mitigating these risks. So how can you reduce the risk of both the business model and the lending environment?
- Do tremendous due diligence to remove the risk of the average occupancy of the RV park from past operations. How is this possible? By figuring out a byproduct of occupancy and then working backwards to figure out what the occupancy actually was. For example, if you can calculate or estimate the average electrical cost per day of an RV in the park, then you can take the actual power bill from the electrical company and divide through to see how many nights of occupancy there really was. You then multiply by the nightly rent and you should have a number that ties to that on the financial statements. If not, then you have a real problem.
- Only select RV parks that are “destinations” and not “overnighter”. One garners longer tenancy and greater demand and the other is simply a stopover spot on the way to the ultimate destination. Destination parks are easy to spot; they have lots to do around them and inside of them. They are typically loaded with amenities and a simple Google search highlights a huge number of attractions in the immediate area.
- Have the seller carry the financing and you can escape the lending racket altogether. This allows you to get lower rates and to avoid a tremendous amount of stress. Since most RV park sellers are moms and pops, the door is often open to seller financing. Here’s a tip on how to get it. Appeal to basic economics. If the seller gets paid in cash, they have to pay income tax and then put it in a CD or Treasury Bill for maybe 1%. If they seller finance, on the other hand, they only pay tax as they receive the payments and they get around 4% to 5% on the debt – that’s four to five times more annual income to them as investors.
- You can cut through much of the management hurdles of owning an RV park by self-managing it. While this is not required, many owners find they really enjoy replacing their day job with a career as their own boss, with a varied schedule and both outdoors and indoor assignments.
RV parks are not for everyone, but for those who admire their appeal to several megatrends (Baby Boomers retiring at 10,000 per day, Millennials who love the outdoors, and the social distancing that Covid-19 now requires) they can be an excellent investment tool. The trick is to reduce the negatives to the business model and to harness the lower prices they provide.