On this month in 1927 the first “talking” motion picture opened in New York called “The Jazz Singer”. Those who were early to adopt the technology prospered while those that held off and hoped that the old ways would prevail fell into financial ruin. The same is true of harnessing the power of the internet. It’s remarkable that there are still mom & pop RV park owners out there that don’t even have a website or visibility on a simple Google search. This lack of internet expertise has created huge opportunity for many RV park buyers who can make this quick fix and enhance revenue substantially. But the power of the internet doesn’t stop there. New breakthroughs are happening constantly, and all smart RV park buyers need to stay on top of these developments. Facebook Group and other forms of social media marketing seem to be the next battleground that will separate the most efficient RV park owners from the rest of the pack. Be on the forefront of these technologies and embrace them fully – it’s the right move for both your RV park and your customers!
Memo From Frank & Dave
How A Standard RV Park Deal Works
RV parks come in a wide variety of shapes, sizes and price points. Clearly, it’s hard to define them as an average when they range from year-round to seasonal, from coastal to the middle of America, and from overnighter to destination. But here’s a 5,000’ elevation idea of what a standard RV deal looks like.
The normal cap rate on an RV park in the U.S. is a range from about 8% to around 12% based on size and location. RV parks typically have a cap rate of roughly 2 points over it’s closest relative: the mobile home park. As makes sense, the higher quality of the RV park, the lower the cap rate. The cap rate is the net income of the RV park divided by its total cost.
Most forms of financing – from seller financing to CMBS “conduit” debt – have interest rates of roughly 5% right now and a 70% to 80% loan to value (LTV). The typical amortization is around 25 years. The financing market for RV parks has never been stronger.
The typical target cash-on-cash return level for RV park buyers is 20%. This is a function of leverage: with a 70% to 80% LTV, you need at least a two-point spread between the interest rate and the cap rate to hit 20%. To put that in perspective, a 20% cash-on-cash return would be equivalent to earning ten times the rate of return as a CD or Treasury each year. That’s remarkable.
Most RV parks have a huge amount of upside in revenue thanks to more efficient and effective marketing – traditionally internet related. And even once you have established a top-notch website and full search engine visibility, there is still much more required to make an RV park highly desirable to customers and to create positive word-of-mouth and reviews. Some of the top RV parks in the U.S. started with older, forgotten properties that were reinvigorated by new owners.
The biggest risk in most RV park deals are three key issues, two of which can be managed and mitigated during due diligence, and the third based on that intangible variable of “owner talent”. The risk of property/weather (such as flooding and fires) can be isolated and mitigated with proper insurance. The risk of market strength can be thoroughly analyzed during due diligence. However, the ability of the owner to properly manage is the one risk that you can’t solve with diligence or insurance – it’s 100% based on the owner’s understanding of the key drivers to success and their ability to execute on their plans.
Most RV park deals fall under these basic assumptions, but still there is a huge variance based on the property and location. This should give you a 5,000’ overview of RV park investing.
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Tips On Millennial RV Park Customers
We’ve been talking about the Baby Boomers for so long, it’s hard to realize that the #1 largest population segment today are the Millennials – people aged roughly 18 to 34. They represent roughly 30% of the entire U.S. population today and constitute roughly 38% of all RV park users. So what do you need to know about this important block of customers?
They don’t always arrive in their own RVs
Millennials like to use RV parks but not always as a place to park their own trailers and motorhomes. They are prone to rent the RVs they arrive in, rather than to own them. And they are also frequent users of park model cabins. This is a generation that grew up on Uber and the concept of renting rather than owning. As a result they often need additional help by the RV park owner on such simply tasks as parking their RV and connecting utilities.
A move away from motorhomes and larger RVs
Millennials are big into “living small” and this also translates into their RV choices, as reflected in the photo at the top of this article. Studies have shown that they are into “tiny” for several reasons: 1) they are firm believers in being environmentally friendly 2) they don’t like towing big objects due to inexperience and smaller cars and 3) they don’t like to spend lots of money. This trend will benefit RV parks that do not have giant pull-thru lots, as that’s not an essential item for this age group. The big loser with this trend are motorhomes – a new study shows that “towable” units account for 87% of the current RV market.
They like to stay connected
It goes without saying that Millennials are big into the internet – that’s the symbol of their generation. As a result, it’s extremely important to them to have solid wifi connections even when in an RV park. Studies have shown that 43% of Millennials say that access to the internet is a huge part of their selection of RV parks to stay at. Additionally, the ability to access the internet allows them to work remotely and to stay longer in the RV park.
They tend to arrive in groups
A study has shown that the average Millennial customer comes with a group of ten people, while the average Baby Boomer arrives with a group of only four. This means that amenities for larger groups are essential to entertain Millennials. Items such as pavilions and seating for larger groups are important, as are basketball, volleyball, and areas for group sports.
Millennials are the future of the RV park industry – and it’s a good thing as this gives the business huge longevity going forward. These tips will help you better identify how to be on the right side of this trend.
Looking At Buying An RV Park That Costs $2,000,000 Or More?
M.J. Vukovich is one of the top capital consultants in the industry. His specialty is to help you obtain bank or CMBS debt for your RV park. He charges roughly 1% of the loan for this service, and frequently pays for himself with lower interest rates and better deal terms than you can obtain. He’s paid only on successful completion of the loan.
For a free consultation, contact MJ at (612) 335-7740 and let him tell you what he can do for your property, or email him at [email protected].
Why RV Parks Are A Game You Can Win
Have you ever been to a carnival midway, with games of luck or skill that pay off with a stiffed animal or similar prize? Buying an RV park is very similar to selecting which carnival game to risk your cash to win a prize. So what are the positive attributes of RV park deals right now?
Easy to understand
The RV park industry is not a complicated business model. You own some land with improvements and a certain location, and people bring in and park their RVs there and utilize the amenities, at the same time paying a pre-determined rent for parking. For most people, it’s a whole lot easier to win when you understand what the rules are, and can focus on being a player rather than a learner.
Steady and growing demand
The U.S. has a few megatrends that are so huge that you simply can’t lose if you are firmly in their path – they are like the tide and nothing can hold them back. Fortunately, these American megatrends are all very supportive of the RV park industry. They include the retirement of 10,000 Baby Boomers per day (with many taking to the road in their RV), and decline of gasoline prices (which get more RVs on the road) and preference of millennials and younger age groups for RV travel.
Good deals available
Another huge positive for buying RV parks is simply that there are so many good deals available for two main reasons: 1) the original mom and pop owners are getting on in years and ready to pass the torch and 2) these original owners are often not maximizing income and this translates to lower prices with tons of upside. This window of opportunity is obviously not going to stay open indefinitely.
The reason that so many RV park investors are successful is simply because the game is extremely well situated right now to the benefit of the buyer. Simplicity of the business model, the surge in demand and the quantity of good deals have all combined to make RV park buying very attractive right now.
A Primer On Trees
This is a giant tree made of stainless steel that is at the St. Louis Museum of Art. You see, trees are all works of art, yet for the RV park owner they can also create difficulties. So here’s a primer on trees and RV parks.
They produce shade and aesthetics
The obvious reason that all RV park owners put up with trees – regardless of the problems – is that they are what creates ambience in the RV park, as well as needed shade for hot days and mystical “nature” to set the tone for campers. Without trees, no RV park can truly succeed as they are the #1 source of aesthetics and user happiness.
But their roots wreck things and leaves fall annually
Sure, trees are pretty, but what about their negative byproducts of root intrusion and leaves falling annually? You just have to bear with these issues, as the good outweighs the bad. Never let anyone try to convince you that the best course of action in your RV park is to remove the trees and the resulting negative issues. The only trees you should remove are ones that are unsafe to those underneath them.
Be careful what – and where – you plant
If you’re thinking of adding trees to your RV park, be careful in your selection. Not all trees are created equal. Choose hardy, native trees that do not need special handling or irrigation. And also don’t buy fast-growing trees that are of poor quality growth – these are notorious for losing limbs in windstorms and catching fatal diseases. Shoot for trees that can live for hundreds of years like pecans and oaks – not just a few decades like Mulberry.
Remove dead limbs and trees immediately
Insurance companies will require you to remove all dead trees and limbs immediately – something you should be happy to do as they are unsightly and dangerous. A single dead tree limb can do $100,000 of damage to a motorhome and even more to a human being. You should proactively watch for these cases of dead or dying trees and act immediately.
Make sure you have plenty of insurance
And speaking of insurance, it’s essential that you carry sufficient limits to handle even the worst catastrophe. These will vary by the state your RV park is located in and the size of jury awards, coupled with the type of park you own, the geography and weather risks, and the type of structures being insured. Talk to your insurance agent.
Understand the annual cost of pruning and budget accordingly
Properly maintaining trees is expensive. Don’t let some mom & pop owners try to convince you that you can do it yourself with a saw. Pruning trees is dangerous and should not be attempted by the RV park owner or their staff. You need licensed, insured workmen and that costs money. Be sure to have a tree company give you some bids before you buy the park as well as to give you an estimate of the annual cost to prune.
Trees are important to your RV park. And they need constant care to be healthy and avoid liability. Make sure you have a handle on the costs at closing as well as on an annual basis.
How To Shield Yourself From RV Park Liability
Let me first acknowledge that we are not attorneys or accountants and have no interest in providing legal advice. These are just some of the things we have been told over time by real attorneys and accountants as well as other RV park owners who have had problems, which are worthy of discussion with your professional representation. So what are some ideas to shield yourself from RV park liability?
Purchase the property in an LLC or similar entity
One simple idea to reduce liability personally is to simple never own an RV park in your personal name. This is actually a requirement from many lenders and makes complete sense as a business should be set up as a business. What type of entity is up to you, but the majority of owners seem to have selected a limited liability company or “LLC”. But this is up to you and your estate planning needs.
Proactively mitigate liability risks
Smart RV park owners would agree that the best way to stay out of trouble is to watch for risks and tackle them immediately. If you see a sidewalk that is uneven in height, or a big hole in the ground, or an electrical box with no cover, you should fix that ASAP and not wait for someone to potentially get injured. Think of the old saying “an ounce of prevention is worth a pound of cure”.
Carry plenty of insurance
If the plan is to minimize personal risk, then one of the best attack strategies is to carry plenty of insurance. It’s not uncommon for RV park owners to carry liability limits of $5 million or more per occurrence. That’s not overkill in a modern American court system – and once you have $1 million of coverage the cost of the additional “balloon” amount is not that much more. Ask your agent for what’s appropriate based on your state.
Get the correct insurance types
Good RV park insurance typically includes everything from liability to loss of income and EPLI. Talk to your agent, go over every possible issue and risk, and make sure that your policy addresses these concerns. If you are next to a river, you probably need flood insurance. If you have some park models, those need to be insured for replacement cost. Just as no two RV parks are the same, so should no two RV park insurance policies be identical.
Always try to settle and avoid court
The U.S. court system can be a disaster, with legal costs outweighing the actual damages in many cases. Smart RV park owners do everything they can to settle disputes rather than to rely on going to trial. So an important attribute for those who want to avoid litigation is simply to solve all issues amiably.
It is possible for the normal RV park owner to never have to worry about paying more than their simple insurance premiums – this is 100% the norm in the industry. To make this possible, discuss these steps with your attorney, accountant and insurance agent.
The Importance Of Infrastructure
The novice impression of an RV park is just some RVs sitting in a field. But this is not the case in reality, and you need to know this before starting to look at buying a real RV park. So what kind of infrastructure does an RV park need to have?
What customers want
RV park customers want paved or gravel streets that are solid and free of potholes. They want a clubhouse/office/store to serve their needs. They want some degree of amenities. They want wifi, water and electricity at their site. They want a dump station or sewer access. They want a place to cook and a picnic table to eat at. They want the grass to be mowed, and the property to have nice aesthetics, as well as a shady tree.
What lenders want
Lenders want all of the above items, as well as water, sewer and electrical systems that are in great condition. And they want all amenities to be in pristine condition, such as the swimming pool. They also want to see an attractive entry and sign out front, as well as nice signage throughout the property.
What future buyers want
Future buyers want all of the above, plus a strong identity with the RV community at large and a strong amount of goodwill from customers. They also demand computerized accounting records and accurate profit and loss statements.
What you want
You want everything described above. And that’s a long, long way from some RVs parked in a grassy field!
RV parks are much more complicated than most people think. It doesn’t matter that they are uneducated regarding the industry – what’s important is that you know better.
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