Once you’ve owned your RV park for a while, invariably you will receive a call or letter from someone wanting to buy it from you for more than you paid. Should you take the money? Is there another option? In this RV Park Mastery podcast we’re going to explore the reasons to sell versus hold on as well as the difference between selling and refinancing your RV park.
Episode 98: Should You Sell Or Refinance? Transcript
You bought your RV park correctly, you did great due diligence, you found a lender. You got in there and you've been running it exactly as you should. Revenue is up, expenses are contained, net income is growing. And then out of nowhere, you get an offer to sell. Should you sell? Should you keep it? Should you refinance it? This is Frank Rolfe for the RV Park Mastery Podcast. We're gonna explore that issue, the issue of when it's time to call it a day to sell the property, and some of the alternatives. Now, why would you want to sell a perfectly good, fully operational RV park anyway? Well, Warren Buffett wrote his letter to the shareholders years ago. He talked about a little retail strip center he owned right across from New York University.
And he said in his letter that every time someone throws out a price to him to buy that little shopping center, he has to decide whether he would pay that amount himself or not. And if the answer is he wouldn't pay that much for the retail center, then he should sell it. Because if he didn't sell it, he would in fact be buying it back at that price. That's one great way to look at it. So as an RV park owner, you have to remain completely fluid. And every time someone makes you an offer, you need to think to yourself, "Is that more than I would pay for the property?" And if the answer is yes, well, then it may finally have come time that you need to very seriously look at selling the property. Every asset has the correct time to own it. There's always a correct time to buy it and a correct time to sell it. There's nothing in the world that has ever gotten better forever, perpetually.
All things ultimately come to an end. All things ultimately go into a state of decline. Even the Egyptians, when they were building the mighty pyramids, who thought this would last till the end of eternity, today, they're often buried under sand, hard to even find, because there was a moment, in fact, when that asset was very, very important and when it lost most of its luster. However, many RV park owners don't know that there actually is another alternative to selling their RV park. Now, that alternative is what is called doing a refinancing or a cash out refinancing. So how does that work? We all know what selling an asset means, but what does a cash out refinancing mean? Well, to do a cash out refinancing, typically you have to get the RV park's net income up 50% higher than where it was when you bought it.
That's not a huge jump in many RV parks. Perhaps mom and pop were not doing any internet marketing, so you're bringing forth the modern world, bringing in the internet. Suddenly, the phone is ringing more, you're getting more reservations, more customers, more revenue coming in. Other times, it's just all about cost containment, because mom and pop were not running the business properly. But nevertheless, when you get up 50% in net income of what you had, if the RV park was making $50,000 a year and now suddenly making $75,000 a year, you reach a level in which, at the refinance at 70% loan to value, is going to get your debt paid off, the mortgage you already had, and the return of the money that you put into the deal. So you could literally, under this business model, buy RV parks, run them, refinance, get your money back, and then buy another one, because you still own the asset.
Now, to do it properly, that debt must be non-recourse, which means the only lender out there who will do that is what was called a conduit lender, also known as CMBS, Commercial Mortgage-Backed Security. That's right, the same folks who destroyed the housing market back in 2007, 2008. But we're not talking about that great recessionary force, we're talking about commercial real estate here. Conduit lenders are always non-recourse debt. They don't have recourse. And there's no point in doing a cash out refi in the absence of non-recourse, because it doesn't really get you anywhere. Now, non-recourse debt is debt in which, if you don't pay back the bank, there's not a thing they can do about it. All they can do is take the asset, but they can't come after you for any deficiency. So it's a very safe, protected zone.
And if you do a cash out refi on a non-recourse basis, the worst that will happen is that you effectively lose the asset, but you have all your money back. Now, the big part of the decision between selling the RV park and doing a cash out refinancing is what you think of the future. Now, if you sell something, you get 100 cents on the dollar of what the person pays. But when you do a cash out refinancing, you only get 70% of the value. So it's a big swing. It's about a third difference between selling it based on value and refinancing based on value. And the reason you would take that haircut, take that 30% off, is because you truly believe that that asset will continue to grow in importance and revenue and net income, and you don't wanna lose that future potential. So what you're trying to do is you're trying to still own the asset and hedge your risk and get your money out, but you don't want to give it up.
You really like the location, you think it has a really great future. However, if you don't think that, if you are concerned the future is not as bright, that maybe there's other RV parks being built, or maybe the destination that draws people might be on the decline, then you should sell, because you don't wanna wait it out. You don't wanna see if you can harness that last third of value, 10 years into the future. Instead, you wanna go ahead and take that profit now and get out of there before that net income declines. And remember that a conduit loan, the non-recourse type of lending we're talking about, is a 10-year commitment. We're not talking a short-term thing here. So you have to really think hard about where things will land 10 years from now.
Is the market going to be that much better? Is the net income of the property going to rise that much higher? Because 10 years is really long. That's two and a half presidential terms. That's a decade. And lots of things can change within the span of a decade, so you have to really do some significant soul-searching. Now, none of us really know the future, right? None of us really have that crystal ball. I know in the Back to the Future movie franchise, he did, but in reality, none of us have that power. So you'll have to just put on your best educated guess as to whether you think that property will keep progressing in value into the future or not. And you may be wrong. But it's a great position to be in, whether you sell at a profit right now or you do a cash-out refinancing and then maybe later sell at a profit, because none of us really know.
There was a developer of malls back in Dallas, when I lived in Dallas, named Raymond Nasher. Raymond Nasher ended up owning two very different malls in North Texas. He owned a mall called North Park, which had the highest sales per square foot of any mall in the United States at that time, and then he owned another mall out in Tyler, Texas that was a total disaster. And he didn't know when he built both malls which the winner would be. He had a strong sense one of them would, but he once told somebody, "I've built these two malls. I'm very, very confident the mall in Tyler will do really well. But I'm really concerned about this one called North Park." Couldn't have been more wrong, but that's how life goes. None of us really know the answer. So you can't kick yourself if you don't pick the right choice. The key is to celebrate the fact you've done such a great job with your RV park that the value has gone up enough that you have this option. That's the true goal of anyone in the RV park business, is to grow the net income and grow the value, and how you harness that in the end is entirely a personal decision. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.