A new year means a new chance to hit your goals. Have you made your New Year’s Resolutions yet? One should be to buy an RV park at a great price. With all of the uncertainly in the American economy today – and low returns on traditional investments – can you really get anywhere following the traditional path of a 9 to 5 job and a retirement account? Or are you better off controlling your own destiny, being your own boss, and seeking 20% returns instead of 2%. And is the lifestyle of many RV park owners attractive, being surrounded by nature and having multiple, interesting roles throughout the day from sales to customer relations to property maintenance? If you want to change your life in 2017 for the better, then consider making a solid investment in an RV park.
Memo From Frank & Dave
The Metrics To Making A Successful RV Park Purchase In 2017
So how do you make a good RV park purchase in 2017? Here are the basic steps that have been working for decades, and will serve you well in the New Year.
Build your deal funnel
Before you can even look at RV parks for sale, you need to know what you’re looking for. How much do you have for a down-payment and how much will that buy (figure on 5 times the down payment which represents 20% down). What areas of the nation do you want to be in? Will you actively manage it? What is your expectation on cap rate and cash-on-cash return? These all need to be decided on the front end, not as you start looking at deals for sale.
Put as many RV park deals as you can into that funnel
Once you have developed your sorter, it’s time to pour as many deals as you can into it, to find the right ones. It’s the same as mining for gold; first you build the filter and then you pour in as much dirt as you can. Where do you find the raw material of RV park deals? The most common methods are 1) RV park brokers especially with pocket listings 2) on-line deals on sites such as www.RVparkstore.com or www.loopnet.com 3) direct mail to RV park owners and 4) cold-calling RV park owners. If you work it hard, you should be able to find around 10 to 100 deals at all times to evaluate.
Tie up the winners under contract immediately
When you find an RV park that has the basic material you are looking for, you should move quickly to put it under contract. This takes it off the market and buys you time to evaluate it without potentially losing it. There is no worse feeling than seeing a good deal, spending way too much time thinking about it, and then calling to buy it only to find somebody beat you to it. The way that all RV park owners play the game is to tie up under contract any deal that has above-average potential and then do due diligence to see if you really want it, with the potential to give it back without penalty if you decide you don’t want it before the end of the due diligence period.
Perform great due diligence
What separates the average RV park buyers from the great ones is the ability to perform terrific due diligence. Benjamin Franklin once said “diligence is the mother of good luck” – and that’s completely true today. Due diligence is the ability to ensure that the assumptions of the RV park are correct and that the market and demand are promising. As an RV park owner, you determine your own success or failure based on the quality of your RV park purchase. Those who can perform top-level property examination have a huge advantage.
Get a winning loan
We are in the golden era of RV park financing. There are a large number of financial options, from regular bank lending to CMBS conduit debt. Lenders have come to favor the low default rate of RV park loans, and have rewarded that success with as easy access to debt as there’s ever been. You can get similar terms on an RV park loan as you can on an office building. Pretty impressive for a real estate sector that used to be considered more of an alternative investment than a mainstream one.
Understand the keys to successful operations
Once you take over an RV park, you are thrust into a world in which smart management is key. You need to have a mastery of everything from marketing to infrastructure. There are some basic operating principles that, once you know them, will keep you in the success zone. And the failure of former owners to understand basic management systems is what often leads you to be able to buy RV parks at a fraction of their real value.
The road map of success in RV parks is well established. Like a GPS system, you can map out a winning approach to hitting your goals, and proper due diligence dispels most risks. 2017 is a great time to start the process to being a successful RV park owner.
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Scenes From The History Of The RV
The 1929 Covered Wagon travel trailer was the first mass-produced RV. Built by Arthur Sherman, there were 50 Covered Wagons manufactured daily, which represented one out of every six sold in the U.S. at that time. It was built with a plywood shell covered in coated canvas stretched over tarpaper. The company went public in 1937.
The 1929 Wiedman Housecar was the first motorhome. It was quite lavish compared to the Covered Wagon and was owned by celebrities including Maw West.
The 1935 York Rambler had an all-steel body and an integrated storage “trunk” on the front.
The 1937 Hunt Housecar was built by Hollywood producer Roy Hunt. It features an aluminum body and a very futuristic design.
The 1939 Schult House Trailer was quite advanced for its time, with an all-steel body and more creature comforts than most earlier models. It was the first RV to feature a refrigerator and a stove.
The 1954 Holiday Rambler travel trailer was the start of the modern manufacturing era. Holiday Rambler is one of the largest RV producers in the U.S. even today.
This 1958 Airstream Flying Cloud was manufactured in California and features a gas heater, refrigerator, cooking stove, pressurized water system and 110 volt electrical system – all the comforts of home.
The 1964 Coachmen Cadet was the first production model built by Coachmen, which has been one of the most influential pioneers in the RV industry.
The 1966 Mustang travel trailer featured a “bunkhouse” design with a second story bed, as well as the first model with bathroom and shower.
The 1967 Fan Luxury Liner featured the first torsion-bar anti-sway engineering. At this point, the focus was on higher design in the actual safety and handling of the RV.
The 1969 Pace Arrow was Fleetwood’s first motorhome. Fleetwood went on to become one of the most dominant forces in the RV industry, but their motorhome division began with this model.
If you are interested in seeing these and many more pioneering RV models in person, consider visiting the RV/MH Hall of Fame and Museum in Elkhart, Indiana. It’s the only RV-dedicated museum in the U.S.
The Potential Impact Of Higher Interest Rates On The RV Park Industry
Interest rates are at their lowest levels in American History. It’s a safe bet that they will increase in the years ahead. So what will the impact be of higher rates and how can you insulate yourself against this reality?
Interest rates cycle
The first assumption is that just as soon as you think you have a handle on interest rates, they change again. Interest rates cycle from high to low and back again. So the best you can do with interest rates is make some macro assumptions on direction, because none of us really know the exact levels they will rise or fall to (and that includes the Federal Reserve). Ballpark guesses are as tight as you’ll ever get.
Quantitative Easing has suppressed rates for years now
Since 2008, American interest rates have been artificially suppressed using a system called “Quantitative Easing” in which the central bank buys securities to depress interest levels. The result of this manipulation has been the lowest interest rates in American History (in 1776, for example, interest rates were 6% to 8%, which is far higher than today). So we know that there will be an increase in rates with nothing more than the end of this program. So you pretty much want to bet on higher rates in the future.
The future of interest rates is probably 1.5 points higher
Economists have forecast that Quantitative Easing is artificially holding interest rates 1.5 points lower than they should be. And we all know that the nation cannot afford to buy securities forever, so it’s a pretty safe bet that interest rates will go up 1.5 points in the future. That will take the interest rates on most RV park loans to around 6% to 6 ½% (which is the historical norm – even back in 1776). Will they go even higher? Unlikely, as the U.S. government is the single largest debtor in the world, with over $20 trillion in debt. It will go bankrupt if rates go much higher (and will struggle to handle even a 6% rate). If rates head higher, it’s likely the government will manipulate rates back down to manageable levels for its own budget.
So you have to buy based on this reality
So when you buy an RV park, it’s essential to remember that rates will probably go up a point or so in the near future. So don’t cut your numbers so close that you can’t handle that increase. Give yourself plenty of room to manage your way around higher interest rates. Some brokers and sellers will try to convince you that low interest rates are here to stay. They’re not. So build yourself some cushion.
And have room to grow revenues to cover any unseen possibilities
The best way to build yourself a safety net is to buy RV parks with room for improvement in occupancy and rents and then work like crazy to improve on those areas. Or choose a property that you can substantially decrease the operating costs on. There’s no better feeling in an environment of rising interest rates than having your net income increasing much faster than financial markets.
Hedge the future with the right loan product
Another way to protect yourself is with the right mortgage product. We favor long-term debt with fixed interest rates – typically ten years. You can obtain this in CMBS conduit markets. But what about loans under $1 million? Work with a local bank to explore the options in loan term length. We advocate refinancing a property two years ahead of expiration of the loan, so you really need five to seven year debt to give yourself plenty of time to boost net income and find an alternative lender before the loan matures. And keep all interest rates fixed. Don’t let the bank bait you into a variable interest rate loan with a lower initial payment.
Interest rates are going up in the future. Buy RV parks accordingly. There’s no reason you cannot maintain a good firewall of safety in an increasing rate environment.
How An RV Is Manufactured
We all know what the finished product looks like, but how do they build the modern RV? Here’s a review of the process.
Build the chassis
The first step is to build the chassis and everything that will take the RV down the road. This steel work is done in-house and ends with a rolling chassis that’s ready to hit the road. Of course, for right now it just rolls into the next department.
Build the floor
Now the floor of the RV is built on top of the chassis. This is the initial platform for the rest of the unit, so it has to be perfect and ready for the weight that’s about to be added.
Install the cabinetry
All modern RV manufacturers build their cabinetry in-house, so they start installing these features as soon as the floor goes on. It’s easier to install these items before the walls are erected, so that’s why it comes first.
Raise the walls
With the floors and cabinetry completed, it’s time to install the walls. These have already been fabricated, so they go on rapidly.
Put on the roof
With the walls on, it’s time for the final assembly: the roof for the RV. This is a much more difficult task as you have to get everything perfectly in-line on all four sides to make it happen, as well as installing the various flashing and sealants.
After that, the final part of the process is simply the final trim items and inspections to make sure the RV is perfect and ready to go to the dealer or customer. As soon as everything in inspected and approved, the RV goes out the door of the plant and is warehoused for shipment.
The RV manufacturing process has been fine-tuned continuously since the 1929 Covered Wagon (the first mass-produced RV). The modern factory can produce an astounding number of units per day, and maintain tight control standards. And every one of these RVs ends up on the road and in RV parks from coast to coast. So basically these plants are what is increasing your RV park occupancy with every order.