Warren Buffett is the most successful stock investor in American history. And, as an RV Park owner you can easily match and beat his performance metrics. In this RV Park Mastery podcast we’re going to explore the legacy of the “Oracle of Omaha” and why it’s not that hard to beat his rate-of-return with this unique real estate sector.
Episode 111: How To Beat Warren Buffett Transcript
We all know who Warren Buffett is, we know that Warren Buffett, also called The Oracle of Omaha, is the most successful stock investor in American history. He has grown a magnificently gigantic portfolio over years in which the stock market was flat or even declined, and yet nevertheless he pushed forward and amassed the greatest levels rate of return gains ever. This is Frank Rolfe with the RV Park Mastery Podcast. I'm here to tell you why you can match or beat Warren Buffett with any old RV park.
Let's first explore what Buffett did exactly. Buffett's claim to fame is he was able to do an above market level of return year over year for decades, and the magic number that he used to create all of this wealth was a return on investment of 19.8% per year. So imagine if you went to the CD today and it's paying 4%, imagine a CD paying 19.8%. Pretty impressive, huh. But that is what he hit year after year after year. Now, 19.8% is impressive, but in the world of RV parks, it's not that difficult to attain. Why is that? Well, because in real estate we have an inherent leverage, and that leverage is called the spread, and the spread is the differential between the interest rate on your loan and the cap rate.
So if you want to hit a one-point spread on an RV park, so assume that you buy it at a cap rate at 9% and the interest rate on your loan at 8%, that one point spread will get you about a 10% cash on cash return, about half the level that Warren Buffett hits. Now, if you've got a two-point spread, so in that same example, you borrow the money at 8% and you buy it at a 10% cap rate, that two-point spread will get you to about 15% or 16%, very impressive, but still not Warren Buffett's level. But a three-point spread, if you financed it at an 8% interest rate, and bought it at 11% cap rate, that three-point spread is going to get you greater than 20%. So you would beat Warren Buffett theoretically if you could just obtain a three-point spread.
Now, how likely is it that you can do that? Well, the answer is very likely, because most of the RV parks you're going to buy are going to be based on a business model flourished by my mom and pop, which is not running on all eight cylinders, more like four cylinders like a defective engine. Typically you can greatly enhance revenue by increasing occupancy and raising your rates, and you can typically also find ways to contain costs and get rid of a lot of wasteful spending. So the bottom line is, most RV parks that people buy from the original mom and pop have massive room for improvement. So that's reason number one. Reason number two is, most RV parks you can often get even superior financing rates the way you can capture on the open market with a lender, because often mom and pop they themselves will carry the paper, so we have two levels of attack to help forge an even greater spread than that one or two points you start off life with. Even parks that are at three point spreads can still advance further. Then they can start really outstripping Warren Buffett's numbers.
Now, there's one other item that you need to know, and that is simply that there's one more level of return we didn't mention, and that is the enhancement of the value of the RV park when you ultimately sell it. So when everything I discussed here, three-point spread beating Buffets 19.8, it would launch you into a 20% cash on cash return with the three-point spread, there's one other item we didn't even tack on yet. And that is what happens when you go to sell the RV park down the road and it's gone up in value, 'cause you have to then add that going backwards to the beginning, that's an additional rate of return that you had. Let's assume, for example, you bought the RV park at a three-point spread and you kept grooming it and pushing the rents and everything else, and let's assume you sell that seven years later for a million dollar gain, well, you have to take that million dollar gain and then you have to look at the rate of return that created that million dollar gain as well as the cash on cash return that you had all the way along.
So let's just model that. Let's assume that that million dollars was obtained over, let's say a 10-year period, that's gonna boost your rate of return up probably one more point on your spread. So now you're way, way outstripping anything that Warren Buffet did. Now you might say, "Well, why doesn't Warren Buffett do real estate then? If real estate's so great, if you can do as good as he does with a single RV Park, why the heck isn't he doing it?" Well, Warren Buffett has talked about that extensively over the years, because Buffett got into business as someone who acquired businesses, but he's not set up as a real estate investment trust, so he doesn't dabble in real estate because they're not structured to do real estate investing. REITs are the vehicle for real estate investing, not what he set up with Berkshire Hathaway. However, he does do real estate investing himself on his own, he's written many articles to his shareholders regarding a shopping center he owns in New York, across some New York university.
And he, in fact, he's bought other things beyond that, so he does do real estate on the side personally, but they just can't do it through Berkshire Hathaway. Now, that's not to say that Berkshire Hathaway has done a poor job. They've done a tremendous job. They've been geniuses on buying stocks in such companies as Apple and railroad shares and insurance, and they own GEICO, but could they have also amassed the same level of return in real estate? Yeah, they probably could have. If they'd picked the right sector, and if they'd stuck with the program and focused on real estate, I'm sure Buffett would be just as good in real estate as he ever was in stocks and business.
However, also remember with RV parks there's one other interesting wrinkle that we need to explore, and that is that any return you have, including those at Berkshire Hathaway, is based on how much capital you put in. So when Buffett was doing this 19.8% annualized, that was based on the amount of capital that was put into Berkshire Hathaway. But in the world of RV parks, you can often get away with even having no capital in it. How's it possible? Number one, if you have a deal with a mom and pop who really wants out and doesn't mind carrying the paper, you could do a zero-down deal. We infact have done 12 zero-down deals over the last 30 years. When you do a zero-down deal, your return is infinite. But another option is to do a cash-out refinancing. If you're able to build up the value of the property at least 50% more than what you paid, then you could do a cash-out refinancing at 70% loan to value and get all your money back. So once again, your return is infinite. So in that way, with a single RV park, you might really, really trounce Buffett's performance, because if you have almost nothing in the RV park, you're gonna have an incredibly high level of return, as high as infinite.
Now, there's definitely more to life than money, and RV parks also have a lot of benefits in that regard. Many people find the RV park industry fun, they find it entertaining. Some like to live in their RV parks. But when it comes to money, it's based on Math, Math has cold hard metrics. If you wanna hit what Buffett has done over the years, you'll have to hit 19.8%, but the good news is with an RV park, you can. This is Frank Rolfe with The RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.