It’s a generally valid observation that much of what looks too good on the surface turns out to be much worse in reality. If you’re thinking that RV park investing fits this bill, then there are two problems: 1) you are being unrealistic on this investing option and 2) you are not paying enough attention to the risks associated with buying the wrong RV park. RV park investing – like all real estate sectors – has good and bad attributes. But there are some unique advantages to RV parks that really are as good as they appear, and that’s the focus of this RV Park Mastery podcast.
Episode 37: Is RV Park Investing Too Good To Be True? Transcript
Is RV park investing too good to be true? Only if you don't know what you're doing. This is Frank Rolfe, the RV Park Mastery Podcast. We're going to talk about bashing through some of the myths people have about RV park investing, people who think that it's easy, and it's simply got to be a trick to it something wrong with it. So let's just break it down scientifically into the pile of good things, versus the things that are bad, just so we get a fair read on the concept of buying and operating RV parks.
Well, first, let's start with the good things about RV park investing. Number one, it's a pretty much fact you can buy RV parks from the original moms and pops. And because of that one single item, that you're not buying it typically from professional investors or operators, allows you to get in on the ground floor low prices. Moms and pops typically not only are not running them at full capacity, but they also don't really push for top dollar. When they want to retire, when they want to stop owning that RV park, they typically cut deals that are pretty attractive. And that's just simply a fact.
Number two RV parks can often offer seller financing. Why? Because the moms and pops own them free and clear. So as a result when they want to sell, often, they'll choose to seller finance and for good reason. Because right now if they sell for cash and put it in the bank, what are they going to get, maybe 1% in a CD, if they're lucky. However, the seller finance with you, they might get four or five, even 6%. That is like six years of income versus what they can get in a bank, if they sold for cash. So it's the fact that seller financing is very much on the table when you invest in RV parks.
Number three, often with an RV park through better marketing, through really understanding the Internet, and how to gain visibility on Google search of RV parks in the area. And just generally having new enthusiasm and getting out in the marketplace, and letting people know you really want their business and getting really high quality social media reviews, you can change and increase the revenue component of an RV park pretty dramatically and pretty quickly. Unlike a lot of other real estate sectors where there's a lot of capital cost to get the revenue up, in the case of RV parks, those pads are already there. Every night when they sit empty, that's just lost money. It wouldn't cost you anything to have someone come in and take it. In that regard is kind of like a hotel. Only unlike hotels, which post COVID don't do well at all, the RV park demand has only gone up.
Number four very, very attractive cap rates. That's because banks and most everyone to get into RV parks because it's different. It's not as well established as apartments, they demand a higher cap rate. The good news on that is that it's a higher cap rate. Typically RV parks trade for about two points higher cap rate than most other real estate sectors. Now that higher cap rate is a component of risk. Because since the industry is newer and less understood, banks like to feel like they've got a bigger cushion in the event you don't do as well as you think. But the trick is if you can harness that two point differential and not have any problems operating, then you've hit a home run. Because you're two points ahead of pretty much anything else you could have invested your money in.
Next RV parks offer financing outside of the realm of seller financing that is still pretty darn attractive. You've got SBA loans, you don't find SBA loans on much of anything in the world of real estate, and also bank financing available. A lot of banks have been very impressed with the way that RVs have performed. And as a result, they have no problem making that RV park loan. Finally, one thing which is absolute fact, you can go on Google and search for as many articles as you want, RV sales in America have never been stronger. And as a result, RV park occupancy has never been stronger. Now there's a lot of reasons for that. I dwell them on past podcasts but just to go over the high points. Number one, 10,000 baby boomers per day retiring, and a good portion of those are going to retire and travel America in an RV. This is very well established based on sales. Number two, Millennials are now very strongly embracing the RV culture. The like being small, they like being outdoors. They like hanging with friends and family. They like outdoor activities. So you have both of the largest tranches of population in the United States both interested in RVs and RV parks at this same time.
And then of course, don't forget the impact of COVID. It only started in March of '20, but man has it changed the playing field. Hotels across America are in foreclosure, they can't even open their doors, you can't go in without a mask. Meanwhile, all those people who used to go to hotels, many of them are now in RVs. RV usage has never been higher. We're told by the government that being outdoors is healthy for you. And it's also a safe hedge against COVID. So as a result, you've never seen more people wanting to get into that RV park.
Now, those are all the good points about RV parks. But this is the problem. Some people only hear the good things I just said, but fail to hear the bad. And as a result, they then think, well, this must all be too good to be true, because surely there are some bad things. Well, of course, there are some bad things, let's go over the bad things as well. Number one, at the end of the day, an RV park is very much a business. And a business requires good management. You can never hope to have a successful restaurant if no one did a good job of cooking the food, or cleaning it, or even showing up to open it up during regular business hours. You'd be bankrupt really, really fast. So an RV park is not necessarily a passive form of investment. It does require very good oversight. And it does require very, very good management.
Next, it's essential for an RV park to get the demand that we've talked about, it must be a good location. A weak location is never going to be successful with an RV park. There's no way to get around it. You might be able to make a self storage work in a terrible location, if possible. You went out to the customer and got their goods and brought them into your storage or you stored business files. But the problem with RV parks is you don't have any way to offset the bad location. If you're in an area of America that no one wants to go to, if your location can't be found, if the road your location is too dangerous to pass, then your RV park simply will not work.
Next, of course, you can't overpay. You have to know what the pricing is on the RV park. And to do that you have to have a good mastery of understanding the revenue and the realistic expenses to come up with what's called the EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization, essentially true net income, and then apply a cap rate to that net income to see whether that deal works or not. Only a fool would rely simply on what a broker tells them, or what a seller tells them, because of course, they're not in your best interests. As we all know, even appraisals can be flawed. So you yourself must have that mastery of the numbers so that you don't overpay.
Also, you'll need to be able to obtain and retain a loan. If you are not bankable as an individual, if you have very poor credit score and no capital, you need to focus on deals that are seller financed. With seller financing, there's no screening, there's no board, there's nobody who has to bother you as far as what you're doing. So as a result, you're already approved. If the seller likes you you're approved. But if you go to have to do it with the bank, you're going to have to meet some minimum thresholds. You can't just walk into a bank and say, "Hey, I want to buy Forest Pines RV Park," and have the bank say, "Oh, okay. When do you want to come by and get the check?" There's more to it than that. And after you borrow the money, you have to make sure that you abide by what you promised the bank. You've got to make sure you meet all of your covenants, that you're able to make your payments on time. Your financials look kind of sort of what you told them. You've got to make sure that not only can you get the loan, but you can keep on getting that loan. Most loans don't go to full maturity in the RV park industry. Most of them have a balloon, you have to make sure that when the balloon comes due that you can pay it off.
Finally, you've got to be able to do great due diligence. Benjamin Franklin once said that diligence is the mother of good luck, he was completely correct. If you can't do good due diligence on an RV park, you will never succeed, because there will always be something out there to trip you up, something you never expected. If you know the dangers with any RV park, you can try and mitigate those dangers. But the key is you have to know what the dangers are. The bottom line is that RV parks are not too good to be true. If you think they're too good to be true, it's because you're not acknowledging the bad parts of the industry. At the same time, if you think that RV parks are no good, you're not rationalizing or embracing the good parts of the industry.
The bottom line is that RV parks are like any other real estate sector with one exception. RV parks are much better positioned based on a post COVID America. They're also better positioned based on all of the mega trends in America. Don't take my word for it, Google up. Look at RV sales and also look at RV park occupancy. And what are you going to see? You're going to see the RV park industry is very, very healthy. There are many good deals out there that you can do. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.