“You can never be too rich or too thin” is a popular expression. However, that’s just not a reasonable goal for most investors. While it’s great to have a safety cushion, it’s unreasonable for that cushion to be limitless. So how can you assess how much to hold in reserve, and to allocate the correct amount of net income to let you be happy but not miss out on an RV park deal? That’s the focus of this RV Park Mastery podcast. In a world in which problems seem to lurk behind every corner, it’s important to keep yourself reasonably protected – but not taking it to an extreme.
Episode 12: Enough But Not Too Much Adequate Cushion In Budgeting Transcript
You can never be too rich or too thin, but that's not really realistic goal setting. This is Frank Rolfe of the RV Park Mastery Podcast. We're going to be talking about how much money to keep around for a rainy day. Because again, I could easily say an infinite number. You can clearly not have ever have too much money for that rainy day. But if you approach life that way, you can't actually do anything. So really, all of us who are out there looking at buying an RV park, we're stuck on this fine line between being reasonably cautious, but not so cautious that you can't actually ever take action and buy anything. What do I mean by that? Well, let's say you're buying an RV park and you say, "Well, for safety sake, I'm going to assume that they made that much in revenue last year, but I'm going to dumb that down by 10 or 20%. And then I want to have a big old amount of money I want to put into this thing to make sure I've got enough on hand for the CapEx and the safety cushion and everything else known to man."
And then when you go to come up with a price for the seller, you can't ever come to an agreement, and that's because the seller's not adding in all these additional amounts. You can do that your entire life, but you'd never buy anything, because you'd never be able to reach an agreement with a seller. Sometimes you can simply be too cautious. Being too cautious means you can never get a deal done. But at the same time, if you're not cautious enough and you do buy something, then what happens to you? What if you under-allocated for a rainy day? What if you didn't have enough in there for all the things that may pop up? Then you'd be uniquely dire straits.
Now your investment would be in trouble, wouldn't be able to pay your bills. So the key, if you're going to buy an RV park is to make sure that you've got ample, conservative values on where you're going to be as far as money. But at the same time, you have to be willing to accept some degree of risk. How do you get that job done without making a mistake? Well, let's first talk why you'd want to hold some money back in a safe account. Number one, your concerns about the actual operation of the property. When you buy an RV park, all you have are financial statements and perhaps tax returns from the prior owner. You're basing your decision based on what this person is saying the last 12 months operating numbers were. You weren't there, you didn't see the customers pull in, you never actually physically collected the rent. So you're concerned that the person is lying to you about the money coming in and also about the money coming out. Well, based on that assumption, let's see how we can solve that.
Number one, on the expense side, that simple. I can actually get the real bills from every provider, whether it's the power company, water company, property tax, insurance. I can get it all. And beyond that, I can get at least three bids on everything that I don't know with certainty. If I say, "Well, mom and pop, they never had insurance." Well, I can call up an insurance company or two, and I can get a very, very accurate price. There's really nothing on the expense side that I cannot nail to the penny. So what about the revenue side? You'll say, "Well, let's talk about that for a minute. It is true with RV parks that we can't really see what happened with our own eyes over the last 12 months. But I do know one thing, I know there's a constant out there of human existence in an RV park, and typically that constant is electricity. If I know how much a day that RV use in electricity, I should be able to go through the electrical bills and divide by that constant and know exactly how many nights I had customers. And then since I know what the rates are, I can multiply that times the nightly rate. Lo and behold, I can extrapolate where the revenue sits compare with mom and pop are telling me and what I think it might be."
If you do that, you'll find you can get fairly accurate. It's just a guideline, you'll never nail it to the penny, but you'll see roughly if it supports what mom and pop are telling you. Now, if I go to that level of due diligence on the revenue and the expense side, can I still get burned? Well, sure you can, but probably not that bad. You can pretty much rebuild those numbers, both cash coming in and cash coming out, so you don't really have to have a giant safety cushion for that. What else would I need to safety cushion for? Well, CapEx issues. I might say, "Well, look at that pool, that pool might break. Maybe the next hard winter, the whole thing is going to crack, and I have to replace it." Or, "Look at these other amenities. Look at the building that I've got my office in and the store and all these various items. I don't know much about buildings, and I don't know how long it will last." We'll, exactly. Have expert guidance for you on these amenities. Get a property condition report if you need it. It depends on what the amenities are and how good you are extrapolating them.
If you think the roof is looking bad, well, get a price to get the roof fixed. But don't just throw money out there and say, "Well, I'm just worried about life, and so I want to throw in $100,000 as a safety cushion in the event of things breaking around here." That's not realistic. You have to do better than that, you need to put any more energy than that. There are people out there that do just that trying to buy an RV park, but they never bought one. Because they throw numbers out to sellers, which they'll never agree to. So they're really just wasting their time. Instead, put more effort in. Do more diligence work. Learn about those items and what the likelihood is of them breaking and then additionally what it would cost.
But to me, the big one of all these different ways to have a proper degree of cushion is to do what I call the best-case, the realistic-case, and the worst-case scenario. Now, what do I mean by that? Well, many of us, when we go to buy things, we only want to talk about the good news. That's just human nature, right? You never hear anyone talk about little, tiny fish they caught, always just the biggest fish they caught. Let's talk about someone in the oil and gas industry, they only want to talk about that one gusher they hit, never those 75 dry holes they drilled before they got to that one gusher. That's human nature. Many people when they're going to buy an RV park, they want to run the best-case scenario. They want to say, "Well, I'm way smarter than mom and pop, so I'm going to go ahead and run all these ads and get online and gosh, darn it, I'll beat their revenues by 25%."
Okay, well maybe you can, and that would be your best-case scenario, but you can't stop there. That only makes you feel good, but that isn't going to protect you. So then you do the worst-case scenario. This would be if everything in the world went wrong. So in a worst-case scenario, you'd say, "Well, I'll never hit mom and pop's revenue. Maybe I'll dumb that down by 10 or 20%." You might say, "Well, gosh, these amenities are neat, but I think they probably need a lot of work. They're probably going to break. On the expense side, they're going to reassess this thing and the taxes are going to go up and the insurance is going to go up." You put all of your concerns, quantify them, and put them on paper. That's your worst-case scenario.
Just as unlikely as the best-case scenario is to happen, so is the worst-case scenario. So then you look at something in between those two, and that's what we call the realistic-case scenario. Not the end of the world, but not the best things could ever be. Then you look at the scenarios and you say, "Could I survive these?" Well, the best case? Sure. The realistic case, normally yeah. And then you have the worst-case scenario and that's when you have to focus on, could you, if your worst nightmares occurred, still cover the debt? Could you make financial sense of your investment of going forward if bad things happened? Now, if you could look at that and say, "Yeah, I could survive the worst case. In my worst-case scenario, I could probably cover the mortgage, but I probably couldn't pay myself almost anything. I could probably take that amenity over there, and I could probably delay doing that for a year or so. Or I could have my cousin, Tom, come over and help me fix that myself."
And so if you say, "Well, the worst case is survivable," well, then you're probably going to be okay, because you're probably never going to hit the worst-case scenario. What's important is that you analyze that because that helps you alleviate your fear. See, a lot of times when people look at RV parks and say, "Well, I need to set aside this much money or that much money for a rainy day, what they're really saying is, "I don't really know exactly what I'm doing. I don't really trust myself." So how do you then regain the trust? Well, you regain the trust through work and effort and strategy and smart decision-making. You do outstanding due diligence on the money coming in and the money coming out. You do outstanding due diligence on all of the physical attributes of the RV park. And then you top it all off by doing outstanding work in modeling where things would be on a best-case and a realistic and a worst-case scenario.
Once you've completed all that, suddenly a lot of your fears will go away, because you're going to find a lot of people on the subject of safety cushions, it's really all mental. This is Frank Rolfe, the RV Park Mastery Podcast, just urging you to put in the effort, put in the work, do the due diligence, eradicate your fears, and that will put you in a much better position to come to an agreeable price with that RV park seller. Talk to you again soon.