One of the hallmarks of great leaders is the ability to discern between what is significant and what is trivial. So what about RV parks is important and what is more minor? That’s the topic of this RV Park Mastery podcast. We’re going to not only go over these items but what the impact would be and how to figure these out in due diligence.
Episode 51: Significant Vs. Trivial Transcript
There's a lot of factors when deciding whether or not to buy an RV park. And often what separates the really good buyers from those not quite so good, is the difference between being able to discern what is significant and what is trivial. This is Frank Rolfe, The RV Park Mastery Podcast, we're gonna talk about just that one item, figuring out what is really, really important to this deal working out and separating that completely from those things that aren't that important at the initial buying decision. So let's break it up into those two categories, what is there about an RV park that's very, very significant? And then what is there that is in fact just kind of trivial? Let's start off with the location. Now, we all know that real estate is all about location, location, location, and RV parks are certainly no different.
So, we know that successful RV park locations have to offer a range of items, they have to be located near where people want to go, they need to have easy access from the road, they need to have good visibility, and these are all things that you can figure out pretty much yourself using your gut instinct, but additionally through really thorough market comps. Look at all the other RV parks in the area. Look at their occupancy. Get a general idea, "Is this somewhere where I would want to own an RV park or not?" We all know the current trend for RV users is to go to places where they can stay a longer time with more to do. We call these destinations. We also know with current trends and the price of gasoline, people are a little less enthused about what are called overnighter locations. So, when you look at a location, figure out whether or not this is in the strong part, the mega trend, more of a destination than it is the losing frequency of option, which is the overnighter location.
But location is extremely important, you will not do well with an RV park unless you have a good location. Next on the significant side are financials, and these are the financials required for financing. We all know that banks are very risk-averse, they do not like to have the ability to lose their capital. There's an old saying that before you can have return on capital, you must have return of capital, and that's kind of the mantra of most bankers, so they're not gonna do your deal if you do not have good financials, financial strong enough that you can get a loan. So, if your financials will not allow an appraiser to appraise the property at a level big enough for you to get financing, then your deal will never work. So, the financials, as far as the financials that can be used by banks and by appraisers are very significant. Number three, How much CapEx does the property really need? Because if you're buying a park for $500,000 and it needs $300,000 of CapEx, you're really paying $800,000.
So those CapEx items and the related budget are very, very important. If the CapEx is the same as the price you're paying, well then the cap rate you're really binded at is half of where you thought you were. And don't forget that those CapEx items, unless you can build that into your loan, those will have to come out of pocket. So, a significant item for any buyer is the size of the CapEx needed after closing. A fourth item that's very significant is your permit and or license. You cannot operate a property that is illegal, you can't finance it, you can't sell it down the road, you might even be sued for doing so. So, as a result, you have to have all necessary permits and licenses. You cannot buy something where one of these is missing, mom-and-pop may tell you, "Well, I know I don't have it, but you can get it later." No, you can get it now, prior to closing. Never put yourself in a position where you have to go out and get some type of permit or license after you are already the owner of the property, because if it doesn't go your way, then you would lose the property.
5th, the financial projections after purchase. So, now we're back to budgeting again, the financials needed to get financing are very, very important, but also very important is how are things gonna work out after closing? Every RV park buyer needs to know their best case, worst case, and realistic case. The best is just that, what would happen if everything went your way? The realistic is somewhere between the best and the worst, where some things go your way, but maybe not as much as you would like. And then your worst case would be if just everything went wrong, you don't hit your occupancy target, you end up spending more money on things such as labor than you'd hoped. And you wanna make sure in the worst case scenario that you can survive it, you can still cover the mortgage, even under the worst case position. Some banks, in fact, will be doing their own worst case analysis of your deal, doing what they call stress testing it.
They'll often say, "Well, you know what, let's look at the financials from the prior owner, and let's assume that my borrower can't even do a good job as the old owner, even though they think they can do better." And they may say, "Let's just take 10% off of the net income or 10% off the revenue and see what would happen to the loan." It's not necessarily a bad thing to have the bank work with you in this manner and stress the deal, because it will just give you greater peace of mind that it will all work out. Now, here are some of the trivial items. Number one, the current financials other than required for banking, because you are going to, immediately following closing, you're gonna try and sell, sell, sell and cut, cut, cut much more aggressively than mom-and-pop did. So, even though their net income in a given year was $40,000 and you have a plan to increase that to $80,000, well, the fact that they hit 40 really doesn't much matter post-closing.
As long as it was enough for you to get your loan, from that point forward, their financial performance really isn't that important. We look at financials all the time from mom-and-pops, and you have to scratch your head and say, How can they do this badly? It's got a good location. You would think you would have much higher occupancy and how come this labor cost is so high? And of course, the answer is because they're not running it properly, so as a result, those financials they've been doing, those should not reflect your future performance. Next in the trivial section are cosmetic property condition issues. We all know we can solve many of the hideous things you find is some poorly RV parks, simply with a lawnmower and a paint brush. So, there's many, many things that you can fix from an appearance perspective.
Now, that doesn't mean that those things which are costly fall under just this cosmetic issue. Those are the important significant ones, those expensive CapEx items. But in many RV parks, a lot of what's holding them back from a property condition appearance perspective is really relatively not that expensive to fix. Next, marketing. Why is that? Well, because mom-and-pops marketing will be out the window as soon as you close. You're hopefully gonna bring it up to standard, modern internet marketing, you'll have Google presence, you'll have SEO, people will find you online, they'll go to a great looking website, and they'll see really, really strong social media reviews. And all of the ills of mom-and-pop who never did any internet marketing will be forever forgotten. So, the marketing that you inherit, it doesn't matter much when you're gonna ditch it on day one.
So, current marketing is for the most part, trivial, unless it's really, really good. If it's really good, then it may not be trivial, you may in fact embrace it and go on with it, but that's about a one in a million that you ever see that today. Normally mom-and-pop only was working on old-fashioned marketing plans and programs, putting little brochures at tourist stops, things like that. And while those still are important to do, those are not really what drives sales today. Finally in the trivial category is bad management, why is that? 'Cause you're going to go ahead and change out your management at closing. Whether the plan is to self-manage or passively manage, you're certainly going to have a new management team, there's definitely a new sheriff coming to town. So, as a result, whatever mom-and-pop was doing with their management style, well, it just doesn't matter much going forward, and it falls again under the range of trivial. If you add it all together, what does it all mean? It means the significant things in an RV park are just those you can't fix.
You can't fix location, you can't fix if you don't have a permit or license, you can't fix the financials you have day one, as far as a bank giving you a loan, you can't fix the financials after closing if you run them wrong or have the wrong assumptions, it'll never work out. And then you can't fix those large property CapEx numbers without using those in your budgets and planning accordingly. And then the trivial items are all things that you can fix, you can fix current financials other than those required for banking, because you're going to go and run the business entirely differently. You can fix cosmetic property conditions, you can fix poor marketing, and you can fix bad management by simply replacing the manager and/or bringing new management systems into play. The bottom line to it all is, it's not that hard to do a good job of buying RV parks, if you'll simply separate the significant items from the trivial. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.