RV Park Investing Newsletter

July marks the start of the second half of 2018. Is your glass half full or half empty. We find that what makes us excited about any year is how we are progressing on our goals. On RV parks we already own, that progress is measured in hitting or beating budgets. But if you’re looking to buy an RV park, how do you ascertain how you’re doing? We think that the key to finding the right property is found in one word: volume. Those that look at a lot of deals always seem to find the right one. So focus on looking at as many deals as possible and let the law of averages do the rest. We find our deals in four basic categories of leads: 1) on-line listings on www.RVparkstore.com 2) RV park brokers 3) direct mail and 4) cold calling. We have also had success in the past by dropping in and talking to various RV park owners that have locations that we admire. But the most important thing to do in the second half of 2018 to hit your goal of finding an RV to buy by year end is to ramp up the volume in the second half. Because volume is that makes great deals happen.

So you’re looking at an RV park and the most you want to pay is still less than what the seller will accept. If you pay that little bit more, it’s called “stretching”. It means going beyond your comfort zone. What you’re doing is essentially borrowing from the future, by relying on greater net income going forward to justify the price you are paying today. So the question is when should you “stretch” and when should you let the deal pass?

The different types of “stretching”

Sensible “stretching” is betting on the future performance of the park and effectively taking a leap of faith on your ability to bolster income or cut costs proportional with your “stretch”. The most common areas that you can “stretch” on are 1) increased occupancy 2) higher rates 3) lower operating costs through greater efficiency or reduction in management cost.

When to “stretch”

Some RV parks are easy to envision with the potential for immediate and drastic improvement. For example, if the mom & pop owners refuse to embrace the internet age and their RV park has no webpage or visibility on Google or any appropriate search, then it’s a pretty safe bet that you can drastically boost occupancy by bringing it into the 21st century of marketing. Or perhaps the current owner has a manager that is getting paid $50,000 per year because they’re a family member, and you know that you can replace them with a $30,000 employee immediately following purchase. Those are the type of instances when you can pay more and not be gambling.

When not to “stretch”

While there are some easy bets out there on turnarounds, there are also some that are not so safe to gamble on. For example, you would never want to pay extra for an RV park based on the assumption of massively higher occupancy. While you might unlock an extra 10% with that new internet marketing push, you would not want to bet you could double revenue with it. And, even worse, remember that you are paying the seller for net income that does not exist. If you fix the internet problems, shouldn’t you reap the reward for that, and not the former owner? Don’t cheat yourself by “over-stretching”

Conclusion

Everybody has engaged in “stretching” at some point in their RV park career. The key is to know when to do it, when not to do it and how to keep such efforts sensible. These thoughts may help point the way.

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A recent article in the New York Times suggests that RV parks represent a unique opportunity to have a gated community lifestyle for a fraction of the price of a stick-built house. Is there validity in this concept? And, if so, how can you position yourself for this future evolution of the housing market?

What makes a gated community work in the first place?

Why do people want to live in gated communities? Because they want to feel secure and pampered and surrounded by activities with like-minded individuals. RV parks offer virtually all of these attributes. In fact, many RV parks offer more amenities than most gated communities can even imagine.

Can you live in an RV full-time?

Then comes the issue of comparing the concept of living in an RV to that of living in a stick-built structure. Most Americans have little knowledge of that a modern RV is like. But once they see the design, finish-out and desirability of the product, they are immediately sold on the idea. It’s also important to remember that most residents in an active, gated community only use their home as a place to sleep or read while it’s raining.

Will the city or town allow you to do so?

Some cities will not allow an RV to stay in one position full-time. They have limitations on occupancy. Others have requirements on a potion of the total lots but will allow full-time occupancy on some of the lots. And still other RV parks have no limitations at all. The important point is that every RV park owner needs to know the rules on the front end before they start to attract full-time residents.

What’s the upside for the RV park owner?

Having full-time residents has one terrific benefit: more secure income. RV parks are based on a daily change in customers. But you don’t always have ever lot filled when nightfall nears. Some lots may only be occupied 30% of the year. So a full-time resident on that lot increases your revenue 300%. But there are other benefits to this added stability. One is that residents who plan on staying long periods of times tend to have greater pride of ownership and investment in their immediate surroundings including nice outdoor furniture and even fixtures like carports. They also attract their friends at a much faster pace than transient visitors.

What’s the downside for the RV park owner?

The downside of the full-time resident is that they typically pay a lower amount per night as a volume discount. That’s about it. Many of those who stay for just a day or a week actually appreciate having stable, long-term residents who can give them information on local dining and activities. And most lenders like having a component of revenue that they can count on as 100% stable.

Conclusion

RV parks are, in many ways, substitutes for gated communities. Their popularity is ever-increasing in this regard, as the quality of the product and attractiveness of the setting are discovered by retiring Baby Boomers.

If you are looking for new financing or re-financing on your RV park, then you need to learn all the options out there and have a capital markets consultant help you in obtaining the ideal loan for your property. There are many new types of loans developed over recent years that you should consider, as they have more attractive rates and terms than prior offerings.

MJ Vukovich is an expert on RV park debt and he works for Bellwether Enterprises, which is one of the top debt consultants in the U.S. He is also a third-generation park owner who speaks your language. So give him a call today at (612) 335-7740 and let him tell you what he can do for your property, or email him at [email protected]. Let him know Frank & Dave sent you!

The Federal Reserve recently announced its intention to continue to raise interest rates going forward, with the prediction being an entire point of rise over the next 12 months or so. So if higher rates are a given, how can smart RV park owners hedge this trend?

Always push net income to outpace interest rates

With rising interest rates, the only way to defend yourself is to increase net income at an equal pace. And the #1 way to do that is with higher revenues. Improve your marketing and make sure your rates are in-line with the market. Try to increase customer stays by giving them entire activity kits of all the area has to offer. And keep your costs as low as possible. If you can increase net income in-line with interest rate increases, then you will feel no impact.

Lock on long loan maturities at fixed rates

When interest rates are rising, smart RV park buyers are always looking to lock in fixed rates for as long a time as possible. It’s the reverse of when rates are falling and all owners are trying to get variable rates and short maturities. Try to get at least 5 years, but fight to hit 10 years in loan term if possible. You’ll be glad you did.

Understand the rate ceiling

Following the Great Recession, the government deployed quantitative easing to drive rates down to nearly 0%. As this program has been ending, rates have been returning to normal rates (which have averaged around 6% since 1776). But don’t think that the sky’s the limit. While Ronald Reagan was able to drive rates to nearly 14% during this reign, he did that when the national debt was under $1 trillion. Today, with over $20 trillion in debt, the U.S. government would be insolvent at much higher rates than where we are today, as it is the largest debtor in the world.

The big risk is renewal, so plan well ahead

In times of rate instability, the greatest risk any RV park owner can face is in loan renewals. The problem is that many banks pull in their horns when they have trouble guessing where rates are headed. So give yourself plenty of time to refinance. We typically start the refinance process two years ahead of maturity. This gives us not only a year to find a new loan, but another year to sell the property if we fail, before the note comes due.

Conclusion

Sure, rates are probably going to go up. But that does not mean that you have to be exposure to this risk, or that you can’t buy RV parks in times of rise. It simply means that you have to acknowledge this trend and plan accordingly.

9 out of 10 “negotiation” books at Barnes & Noble will tell you that good negotiators always fake that they have no interest to get the price down. That may work on used cars and refrigerators, but we’ve never seen it happen with an RV park. Why? There’s a bunch of reasons.

Warren Buffett’s opinion

Warren Buffett – the top investor in the U.S. and somebody who is known to give some good wisdom – has said that “without passion you have no energy, and without energy you have nothing”. That’s 100% true. So the very existence of desire is critical in making a deal happen. If you really don’t have that type of drive to buy that RV park, then hold off until you find one that you do.

It’s contagious

If you have that passion and excitement, then the worst thing you can do is to hide it. Because sellers find enthusiasm contagious and it makes them want to make the deal happen. Think about things that you’ve sold in the past. Watch the show American Pickers. Did you notice how you got turned on by buyers that were super excited to buy that asset. It’s 100% human nature, and hiding that energy is stupid.

Makes the seller comfortable that you’re the right buyer

When you have passion to buy an RV park, it tells the seller that you’re a real player who is really going to pull the trigger and close on the property. That’s hugely important. When you hide your true feelings, you simply make the seller less confident in you, and that could potentially be a deal killer – particularly if they find another buyer with the passion that you are hiding.

Will propel you over obstacles

And you’ll need that unbridled enthusiasm to propel you over the obstacles that always pop up during due diligence and financing of the RV park. When things run afoul, the enthusiastic buyer always finds a way to solve the problem through negotiation or thinking outside the box. The non-enthusiastic buyer will just say “OK, I didn’t care anyway …”

Conclusion

Be enthusiastic. Stay enthusiastic. Don’t let “negotiation books” ruin your true power of passion. What works on used cars does not work on RV parks.

We saw a sign in a Marriott hotel recently that said “It’s the little things that make the big things possible” and was attributed to J.W. Marriott. So what did Marriott mean, and how does that relate to RV parks?

Don’t overlook the importance of tiny items

What are the tiny items that can shape a customer’s first impression? Litter on the ground? Peeling paint on the office door? Every square inch of your RV park has a role in customer satisfaction, and you can’t overlook any part of your business if you want to succeed. Get out and walk your RV park as frequently as possible and make sure that you are not missing some of those tiny details that are so important in creating a quality product.

The multiplier effect of cap rates

Every little thing you accomplish in an RV park pays huge dividends when it comes to the standard value multiplier of real estate. Here’s an example. Let’s imagine that you go over the top to make sure your entrance looks extra attractive. As a result, let’s assume you bring in just one extra RV each week, that stays for 4 days at a cost of $30 per day. That will increase your revenue by $480, with virtually no additional cost. Annualized, that’s an extra $6,000 per year. At a 10% cap rate, that’s an increase in value of $60,000 just for putting an extra 30 minutes of attention into your entry. And that’s the true power of the “little things”.

Building a “brand”

Another part of Marriott’s logic was his building of a brand tor their lodging chain. If you take care of small details, you build a reputation for offering great service and a great product. That takes that little better entry effort, for example, to a whole new level. Just maybe that extra attention to detail opens the door for a capital partner who wants to invest with you, or a bank that selects you as an account they want to be a part of.

Conclusion

Marriott was right – the little things really do make the big things possible. So if you want to build an RV empire – or just maximize the one you currently own – then change your focus to the tiny things in your property and making them perfect. The dividends are huge.