Once you have set your goals in buying an RV Park it’s essential that you never relax those standards. In this RV Park Mastery podcast we’re going to explore the correct way to derive your target metrics and then the essential reasons you must never change those, regardless of events.
Episode 131: Never Relax Your Standards! Transcript
I read a lot of biographies, just about every business biography I can find. And the ones that make me cringe, the ones I'm most disappointed in, are those in which someone starts off with a great idea and they have a certain criteria they're going to hit. And then they start relaxing their criteria. If you've read a lot of Warren Buffett biographies, as I have, I was kind of disappointed in the later things, because early Buffett was very strict. He had this metric, this methodology on things he would invest in. They had a certain price-to-earnings ratio and a certain book value, and he did tons of research on them. And it was those early investments that made Berkshire Hathaway what it is today, and there weren't that many companies he did it in. He did Coca-Cola, and he did Geico, and he was very strict on these. But in later years, he got kind of sloppy. One thing which always sticks in my mind is the fact in the early books, he hated private aircraft. He would not even invest in companies where the CEO used a private plane. Under the argument, it was a stupid waste of shareholder money.
Yet in later years, he not only had no problem with private planes, but even started a company to lease private planes to executives. This is Frank Rolfe, the RV Park Mastery Podcast. We're going to talk about why I hate it when people relax their standards, when they alter their criteria, and why that's a really, really bad thing for you to do. Now, why do people do it? Why do people go in saying, I want to buy an RV park, and it has to have these attributes, it has to make this much money, it has to be this cap rate? Why do they stop? Why do they do that? Why do some people buy a successful RV park, but every RV park they buy after that first one is a little less good than that first one? Well, there's multiple reasons for that. One big reason is that they just get lazy. I kind of think that may be what happened with Buffett over time, to be honest with you, because it takes a lot of work to research and to find all those deals that meet those tough metrics. So sometimes people just let it slide a little, just say, oh, well, you know, what the heck? I guess I don't have to have this rate of return. I guess I could accept something lower. So that's a problem. And another time problem is time. They get in this time pressure to find something, and since they can't find it quickly or easily, they lower their standards so they can find something at a greater rate of speed. You see this particularly with people doing 1031 exchanges where they're selling some other real estate asset to buy an RV park. And, of course, you have a very short time fuse when you do a 1031. And so often, because they're so desperate to meet the time frame, they'll relax their standards and buy something that's not good just so they can say, oh, yep, I got that replacement property within that amount of time. Not a good idea. Not a good success story. You basically sold something at a profit, and then you ruined the profit trying to beat the clock to buy something else. Another way people relax their criteria is they never really understood or were firm on their criteria to begin with. Because when you're out there buying RV parks, you have brokers and sellers constantly trying to pressure you and convince you that your metrics are incorrect.
You said you wanted to buy something at no less than a 10 cap, and they say, oh, 10 caps, that's so old-fashioned. That's not what it is anymore. No, you can buy something at a 7. And, of course, they tell you they want to convince you to pay more for their property, clearly. So don't be duped by that. You've got to have a firm resolve. You have to say, no, I'm not going to do that. Right? And here's the problem when you start relaxing your standards. Obviously, the big macro problem is you stop making as much money. And you can get yourself in a real bind. These are some of the things I see people all the time relaxing. Number one, the spreads between interest rate and cap rate. And that's what creates the golden yield everyone seeks of 20% cash-on-cash return. It's a three point spread between the interest rate on the loan and the cap rate on the deal. That's assuming about 70% or 80% leverage. And if you start accepting lower spreads, you're not going to have anywhere near the same cash-on-cash return.
So if you want to live the dream and hit 20%, you're not going to make it on a one-point spread. So you're going to have very serious financial problems right there. Another thing they do is they're not realistic on cap X. They don't really think through, nor do they even want to accept the real fact that over time you're going to have to repair things like the office and the store, and you're going to have to do things with the dump station, you're going to have to redo the roads, et cetera. And that's really going to come back to bite you when those things do pop up. So there's another big issue you've got. Another thing is when people kind of play a game of hot potato. They know the property has problems, they know it needs CapEx work, but they think, oh well, I'll just run it for five years, it won't break down in that amount of time, and then I'll worry about the water well for the next fire. Yeah, yeah, that's it. They're going to be stuck with the failed water well. I'll avoid that issue.
Let me tell you from experience, that's not how it actually works. If that water well is not working very good, and somebody tells you that who is in the water well business, and you say, well, I bet I can just put it together with duct tape and baling wire and make it for a few years, it's probably going to fail, oh, I don't know, probably the first week that you buy the RV park. That's what I've seen out there in doing this for 30 years. So basically, that's again, it's a bad issue. When these things blow up like that, you don't have any way to maneuver. You have any bank financing, you've run out of your money, you're in trouble. So relaxing your standards can really, really cause you a whole lot of problems. So then how do we not relax our goals? How do we stay firm in what we're trying to find? How do we stay lead pipe cinched right on track with all of the attributes of the RV park? Well, number one, you've got to understand what you're doing enough to set rigid guidelines. You're never going to be able to say, oh, yeah, well, here's my plan if you don't know what the plan is.
So educate yourself on what the guidelines should be and make sure they're realistic. If you set artificially crazy high guidelines, you'll never be able to buy anything. I've had people call me and say, hey, I can't find an RV park. I'll say, well, what are you looking for? Well, I want to buy something like a 15 cap. I don't think you're going to find many RV parks out there at a 15 cap. That's too high. You might find something like at a 10 or a 12, but a 15 is ridiculous. So you've got to set good guidelines, fair guidelines, realistic ones, and then make them rigid because you know what you're talking about. And you have to understand why those are important, why those things cannot be moved, why those goalposts can't be altered, because if they alter them, you're not going to be able to hit your financial targets. You've also got to be patient. Probably the number one reason I've seen people over the last several decades relax their guidelines is simply they lose their patience. They want to buy an RV park, and they want to buy it now. Gosh darn it. They want to replace their day job, and they'll just take anything at this point.
They haven't found what they're looking for. Don't do that to yourself. Be patient. You only want to buy really, really, really great deals. You don't want to buy average or mediocre or even worse, bad ones. Also, never listen to those other folks who are always trying to convince you because they have motives that are not in your self-interest to make stupid decisions. Brokers are often nice people, but let's be honest, they want you to buy the deal. They'll do anything to get you to buy the deal. And you don't want to really do that, right? That's what we're talking about here. So don't listen to the brokers when they try and get you to relax your standards. And certainly never listen to the seller because they always want you to relax their standards so you'll pay too much for the property. Finally, you have to have the self-respect to demand only great deals. You have to say to yourself, you know what? I'm not going to buy an RV park if I cannot hit these certain metrics, period. And stand up for yourself. And when people say, oh no, that's not realistic. Come on, man. You say, no, that's completely realistic and I am not going to vary from that one iota. Because if you hang in there, if you stick with it, if you keep looking for the stuff that's the good stuff, you always end up finding it. But when you relax your standards, that's when you get on the path to doom. This is Frank Rolfe of the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.