Although today is April Fool’s Day we have no desire to play a trick on you. Our mission, from the beginning, has been to bring you straight forward information on the RV park industry without any underlying motive or shenanigan. As the 5th largest owners of RV & Mobile Home Parks in the U.S., we are only interested in presenting factual information to the RV park investing community, whether you’re an owner, future buyer, banker, appraiser, or other industry professional. And we take our job very seriously. The RV park industry has made huge strides over the past decade in becoming a mainstream form of real estate investment, and we want that to continue. Goofy jokes and cartoon do little to further the cause. So if you were hoping for some humor or practical jokes in this issue of the newsletter, we’re sorry to disappoint you. But if you want the same honest content that we always provide, then you came to the right place.
Memo From Frank & Dave
The Impact Of Higher Interest Rates On RV Parks
You have read in the past few days about a .25% increase in interest rates, and the declaration that there will be at least two more similar hikes in the months ahead. Of course, the truth is that interest rates have been the lowest in U.S. history as the result of “quantitative easing” by the government following the advent of the Great Recession in 2008. So what will these increases – however slight – impact the RV park business?
The importance of “spread”
The first concept that we need to discuss before analyzing the impact of interest rates is the concept of “spread”. “Spread” is the difference between the interest rate on the loan and cap rate on the deal. For example, if the cap rate on an RV park is 9% and the loan interest rate is 6%, then the spread is three points. And a three-point spread equates to a 20% cash-on-cash return, which is the goal of most RV park buyers. This helps to explain the importance of interest rate increases.
Higher interest rates mean that you have to increase NOI to maintain your “spread”
To effectively deal with higher interest rates, you have to be able to increase the net income from the RV park to maintain the desired “spread”. So if the rate just went up .25%, then you need to increase the NOI of the RV park by a similar amount. But bear in mind that your loan won’t show an immediate increase of .25% (unless it’s an adjustable interest rate loan) so your ability to match this “spread” really does not occur until your loan is up for renewal.
RV parks have been historically good at increasing NOI
When interest rates go up, the types of real estate that get hammered are those with long-term leases that can’t be altered, such as office buildings and shopping malls. However, RV parks are not that type of real estate. Our leases are effectively daily, and that means that you can raise your rents slightly immediately, with no restrictions. On top of that, most every RV park has additional occupancy potential. This ability to immediately raise revenues to match any interest rate hikes is a huge strength.
The limitations of raising rates in today’s America
One thing the media never discusses is just how different America is today than during the administration of Ronald Reagan. Under Reagan, interest rates shot up to 16%. But that was back at a time in which the U.S. national debt was only less than $1 trillion. Today, our debt is around $20 trillion and, as the world’s largest debtor, the U.S. would become insolvent with only a small increase in interest rates. That’s why most smart investors believe that interest rates can only move up roughly 1 point going forward, and that means that virtually every RV park is safe from damage.
It’s a given that interest rates in the U.S. are going up. It’s also a given that RV parks are one of the most adaptable investment vehicles to meet this reality.
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RV Park Negotiation 101
We’ve been negotiating RV parks acquisitions for over two decades. That’s literally thousands of negotiations that led to hundreds of purchases. So what have we learned about negotiation over the past 20 years? Quite a bit, actually.
The importance of enthusiasm
People love enthusiasm. And that includes RV park sellers. When you are enthusiastic, it’s contagious, and sends a clear signal to the seller that you have every intention of closing on the deal. Many negotiation books get readers off on the wrong foot, by telling them that you should never be enthusiastic but, instead, act like you don’t care – that will get the price down. This is a terrible plan of attack. Sellers always gravitate to the buyer who is wildly enthusiastic. So don’t fake disinterest if you want to succeed.
Americans love to negotiate. And that means trying to drive the price up from where it began. As a result, you must always make your offer lower than what you are actually wiling to pay. If you tell the RV park owner, “I’d pay you $400,000” then it’s a safe bet that the final price will be $420,000 or $430,000 or $440,000 – anything but $400,000. If you want to pay $400,000, then you’d start with an offer of maybe $360,000. You can always up your offer, but you can never go down.
Be fair and consultative
Sellers respond well to buyers who are intelligent and negotiate based on science and not just impulse. We call this “consultative” buying, because you take on the appearance of being a paid employee of the seller and not just a normal buyer. If you note all of the details of problems with the property – as well as bids to fix these items – then your price takes on complete legitimacy. And you should always be a good listener and give fair consideration to what the seller says, in turn.
The importance of bonding
There is probably no more powerful force in negotiating a deal than “bonding” with the seller, which basically means becoming their friend. When the seller likes you, they are more willing to bend over backward to lower the price or maybe carry the financing. Nobody wants to help their enemies – and you’re basically either a friend or an enemy to the seller – there’s no grey area. So how do you become a friend? By being nice and listening attentively. By no lying and always showing up on time. And, sometimes, simply by sheer luck; by resembling someone form the seller’s past that they liked.
There is no “no”
Some people hear “no” and think that’s the end of the negotiation. That’s never the case. A “no” only represents an opinion for that moment in time, but is the opening for a whole new round of negotiation. Things change in the lives of sellers, and the “no” of today is the “yes” of tomorrow (after they get that bad health diagnosis or get served divorce papers. Be persistent and never give up.
Negotiating an RV park purchase is a mixture of both strategy and luck. And sometimes we make our own luck by approaching the purchase the right way. These tips will get you started.
Popular RV Park Clubs: The Insider Report
America is filled with discount clubs, from SAM’s to COSTCO. And RV owners are no different – they want good deals and are willing to pay annual memberships to get those discounts. So what are the most popular RV clubs, and how do they function? Would any of these work as a partner for your RV park?
This is one of the largest and oldest of such clubs, so we thought it was a good place to start. Good Sam’s costs the user $25 per year for a membership, which gets the customer 10% off each time they stay at an RV park affiliated with Good Sam’s. While this is not a huge discount, many members join to take access to the additional 30% off of merchandise at Camping World, which is the nation’s largest RV supplier and repair facility. There are roughly 2,100 parks that are included in the Good Sam’s network, which is the largest grouping in the U.S.
KOA is the other best-known group operating in this space, mainly from their decades of visibility with prominent (if not obnoxious) signs along the nation’s highway system. They charge roughly $27 per year, which gets you 10% every night’s stay at one of the roughly 500 properties that are part of the KOA system. One of the key complaints, if you look at on-line reviews, is the quality and location of the KOA properties.
This club pays offers much higher discounts than the two above, coming in at 50% off with the one-time cost of $44 per year. It has a very large number of RV park members, with around 2,100 parks participating. If you look on-line, it has excellent reviews. It seems to be perhaps the most effective message and easiest system for members to utilize. Of course, the only problem for the RV park owner is the giant discount. However, if the lot is vacant otherwise, does that really matter?
This club is a mirror image of Passport America, offering 50% off participating RV parks with a roughly $39 per year annual fee. There are about 1,200 member-parks in this system, so it has not been able to garner as much traffic as Passport America. Nevertheless, it does have a large number of RV owner members.
This club costs members around $40 per year, and gets them special deals (not a constant discount, however) at around 1,000 different RV parks. This service appeals mostly to seniors, and involves discounts to both RV parks and some attractions.
This club has an entirely different business model. It costs the user $545 per year, and gets them their first 30 nights free in a participating RV park, followed by a cost of only $3 per night thereafter. While this may sound alluring, the on-line reviews were not encouraging, with some users saying that the RV parks that participate are not very nice in location or condition. It also requires you to move around frequently, as it only allows a couple nights in each location under these terms (we’re guessing that the member RV parks use this service to get new people to try them out.
This club costs around $44 per year, and offers the user one free night per year in a number of participating RV parks. The downside is that the number of RV parks that participate in this program seems very limited.
Boondockers and others
Then there are a number of RV clubs that offer strange services for the money. Boondockers, for example, charges $25 per year and gets you spaces in participating member’s driveways and backyards. These variety of clubs are not for your mainstream RV owner, and can’t really be counted as legitimate resources, in our opinion, for RV park owners.
There are a large number of RV clubs in the U.S. that attract users looking for discounts. As an RV park owner, you might want to consider participating in one or more of these options. While they offer discounted rent, half rent is better than none if the lot is vacant. And by increasing the breadth of your awareness and customer base, you may get additional benefits for those who return without the discount, or tell their friends.
All About Feather Flags
One of the greatest inventions for RV park attention is the “feather flag”. These are those vertical bursts of color that offer everything an RV park owner could want – color, movement and consumer excitement. So what makes this perfect for just about every RV park?
The only form of flag that does not need wind to work
Traditional flags look like sticks without wind. They have no color or “pop”. But you can’t always expect there to a nice breeze to keep your flags looking good. But feather flags don’t require any wind at all. They are built to be completely flying straight out even inside a building.
Very efficient footprint
Feather flags take up very little room. They only occupy about 9 square feet of total ground space including overhang. This means that you can put them nearly anywhere – even in the median island or in a property corner at the entrance.
Looks great along a fence line
There’s probably no more attractive feature to large amounts of road frontage than the addition of consistently spaced feather flags. You can use them in all one color, or in a variety of patterns. We have found 50’ spacing to be adequate, but there’s no limitation. You can see these flags from literally miles away, and it not only gets the customer’s attention, but sends a positive first impression.
These flags cost between $100 and $200 (for both pole and flag) and that makes them one of the most powerful dollar-for-dollar marketing options. And that does not even include the low required maintenance. We’ve found them to have long lifespans, and they rarely break except in rare extreme weather events.
If you’ve got some frontage on a major road or highway, or just want to give your entrance or common areas some punch, then consider feather flags. They’re inexpensive, low maintenance, colorful, attention-getting – just a great product for any RV park application.
RV Park Road Options
Every RV park in the U.S. has one standard feature: roads. Yet there are many different options here, all with their own unique advantages and disadvantages. So what are the options for RV park roads, and what are the insider secrets on each one?
This is the Cadillac of the industry, but also the most expensive and rarest to find. Concrete is a one-time fix for a road system – if properly installed and maintained. Perhaps the only negative to concrete streets is the extreme cost to replace or patch them if they become damaged, as well as the fact that they can begin to look ugly if there are chock full of tar seam patches.
Asphalt is a great product – for asphalt companies! Asphalt looks great initially, but then starts to turn grey and fall apart not long after, with gatoring and potholes common. The only solution is to ultimately repave more asphalt on top, and that’s extremely expensive. Unlike concrete, it’s a continual money pit.
Chip and Seal
This is a very hardy road surface, and the standard for many county highways. You lay down rock aggregate, then thick tar, and then finer stone on top. The pressure of vehicles on the road pushes the smaller rock into the tar, and the end result is an extremely strong road surface that actually gets harder the more it is used. The only downside to this surface is the extreme mess when you first lay it, but after that it has much the same characteristics as asphalt with a much longer life.
This is a white stone that contains a high degree of calcium, that is commonly found as the strong surface underneath asphalt. It can be bladed into a relatively flat surface and is extremely cheap and easy to repair (you just put more down in the pothole, blade it, and you’re ready to go). The downside is that it’s dusty and rough when you drive on it.
This is a finer stone surface than road base, and is not as dusty when you drive on it. The downside is that, since it is a finer rock, it does not compact as well and is a “softer” road surface that is more prone to potholes and washing out. It’s inexpensive to install and repair, however.
We hate this option, as do most customers and bankers. It suggest that your RV park is lacking infrastructure, and dirt roads are basically mud pits when it rains and dusty messes when it’s dry. While it’s the cheapest option of all, it’s rarely the best one, and it is nearly impossible to get a bank loan on a dirt road park.
There are a number of road options for an RV park, in a variety of costs, appearances and operational results. This list should get you started.
Living In An RV Park You Own – A Reasonable Concept?
Many RV park owners live in their properties. In fact, this is a common benefit of buying an RV park for many owners. But is that a realistic option for you?
Except for “overnighter” RV parks along highways, most RV parks have spectacularly beautiful settings. This is a huge draw for living there, as well as for your customers to pull in. So the location of your home, at an RV park, is always a huge positive.
Tax advantages and cost advantages
Since the owner’s home is a common part of the transaction, it is rolled into the overall purchase and any gain on sale is typically capital gains (if held long enough and in keeping with tax laws). You also have a low cost on your side of the equation, as the home can be maintained with utilities and maintenance as part of the overall property and your staff.
Nice customers rarely bother you – with exceptions
RV owners are an upscale crowd that is extremely cordial and respectful. They have no interest in bothering you, except in the event of a dire emergency. We never hear of RV park owners having problems with their guests, and most find these personal relationships rewarding. Unlike your current neighborhood, however, you’ll be the automatic mayor of the town.
Better to leave your private home unmarked
That being said, many RV park owners prefer to leave their home completely unmarked, so there is a complete separation of work and personal time. The office is for business and their home is for non-business purposes. This is completely reasonable, and your guests will understand that.
Living in an RV park is an extremely attractive option for many RV park buyers. It’s both economically smart as well as a stylish and attractive setting. You should consider the benefits.