If you’ve been holding back on buying an RV Park due to high interest rates, you might want to rethink that position. In this RV Park Mastery podcast we’re going to explore the reasons why buying properties during times of high interest rates is often a blessing.
Episode 161: The Benefits Of High Interest Rates Transcript
You can't be in the RV park industry without hoping for lower rates, praying for rates to come down. Because the direction of interest rates has a lot to do with how real estate performs, because at the end of the day, most people have leverage on their RV park. And as a result, lower interest means lower payments on your mortgage. It also means a lower cap, which makes values go up. But people are sometimes confused as to whether you should try and buy RV parks when interest rates are low or if they are high. This is Frank Rolfe, the RV Park Mastery Podcast. We're going to unlock the mystery and tell you why buying RV parks when interest rates are high is actually the best idea.
Let me first off comment that everything we're about to discuss is based on the assumption that interest rates go up and down. Cycles are a big part of American economics. I was an economics major out at old Stanford University back in the '80s, and the first thing you noticed against all of your economic trends is that they always tend to go in cycles. History always seems to repeat itself. So as a result, when we talk about interest rates, we're assuming they will not remain at a constant.
So if you don't believe that, if you think that all cycles in American history are now over, the economy will stay just one way, interest rates will remain at just one certain percent in perpetuity, then probably what I'm about to say just doesn't make any sense at all. However, I think based on historical precedent, we have to assume that rates will continue to go up and down in cycles.
Now, assuming that we all assume that interest rates do in fact go up and down, let's first think what happens when you buy an RV park when rates are low versus when rates are high. When rates are low, assuming it's a cycle, the only thing you have to look forward to is higher rates, because they can't get any lower if you're buying at the low spot. And typically, in most cycles, those rates are going to tend to go up two, three points, maybe even more sometimes. So if you buy that RV park based on a good solid price, based on good economics, cap rates, you're going to be in trouble as those rates start to advance.
Because now, even though you bought that RV park at, let's say, a 5% cap rate, if interest rates start going up a year from now, that cap rate is at 6%, then it's at 7%, then it's at 8%, and you look pretty stupid because despite the fact maybe you've increased occupancy, despite that fact, the value is still lower than what you paid because the interest rate is punishing the values faster than you are improving it with occupancy or higher rates or cost cutting. However, if you buy that RV park when interest rates are at cyclical highs, then as those interest rates go down, you look like a genius.
Even if you've done nothing to improve occupancy, if you've done nothing to improve rents. So typically, for most people, you want to buy an RV park when rates are high. It just makes good, logical business sense. But there's more to the story than just that. You have an entire perception issue with sellers when interest rates are high. Because when interest rates are high, you clearly are going to have to pay less for the RV park, and they know this because they know that the interest rate on the loan is going to predicate what the cap rate can be.
So as a result, you'll be able to buy better deals on RV parks because values are suppressed because interest rates are higher, just as values would be higher if interest rates were lower. Another piece of the puzzle is the fact it's a good time to be able to negotiate for seller financing. Simply because you can't get the seller sometimes the price they want with a conventional loan. But you tell them if they'll carry the paper on a long-term basis, you can.
That's a very common feature of times when interest rates are high, is the advent of more seller financing becomes very present because people know they can't sell the park on conventional debt and get the price they want. You can even pitch to people the difference between a cash price and a terms price, with them typically accepting the terms deal because they are, in fact, going to get a much higher sales price.
Now, that's not even all of the benefits of buying when interest rates are high, because most people have this common misconception that that's not when you should buy RV parks, so the competition is, in fact, much lower. So when you add it together of the benefits, you'll be able to get a lower price, you'll be able to get more seller carry, and you'll look like a genius as interest rates decline. And for those reasons, buying RV parks when interest rates are high has always been a good idea. But now let's look at some examples of those historically, and let's turn the clock back to the Great Recession.
So roughly in 2007 and continue on in 2008, we had the subprime mortgage meltdown, which became known as the Great Recession. They like to give recessions different names. You had the dot-com recession before that, but this one was called the Great Recession. And as a result from the Great Recession, we saw interest rates start to decline, and they declined a lot. In fact, it was the largest interest rate decline in American history. Interest rates went down roughly around five points. That's almost twice the norm. And if you talk to people who owned RV parks during that adventure, they'll tell you, "Oh, it was wonderful, because I bought that RV park at this price, and as the rates went down, it kept going up and up in value. And then I was able to do a refinancing of the mobile home park, of the RV park, or RV mobile home park, at, again, a much lower interest rate, and that was the best time I ever had."
So that's the reality of what happens in those recessions. Now, I'm not sure that we will ever see anything quite like the Great Recession again, because that was the largest swing in interest rates in American history. But right now, if you assume America is going to go into another recession soon, and many people predict it will. In fact, many betting markets are now showing people assume about a 50% chance of America going into recession in 2027. And if that's true, if you go back to 1950 and average it, the typical interest rate decline is two or three points. But what that means is, to get a 20% cash-on-cash return with an RV park, you need a three-point spread between the cap rate and the interest rate.
If you assume we're going to go into a recession, then if you simply bought a mobile home park at the same rate on the cap rate of the existing interest rates, you would just sit on it. And as interest rates start to decline with the recession, next thing you know, you would have a 20% cash-on-cash return simply by sitting there and doing nothing.
And if you had a plan going into that to bolster and build a three-point spread between the interest rate and cap rate, then at the end of the move, you'd end up with a six-point spread, which is a phenomenal cash-on-cash return, easily in the 30s to as much as 40% return level. The bottom line is, the best time to buy an RV park is when rates are high, and at the same time, when rates are about to start their descent, thanks to a national recession. Which means, in short, this is a very good time to be buying RV parks. This is Frank Rolfe, the "RV Park Mastery Podcast." Hope you enjoyed this. Talk to you again soon.