Getting a loan is stressful, and many borrowers put it off too long. In this RV Park Mastery podcast we’re going to discuss the correct timetable to finding a new loan when your current one is expiring. Since real estate requires leverage to maximize return, it’s important that we all understand and respect the lending system and how to approach it in a smart manner.
Episode 28: When Should You Start Refinancing? Transcript
Timing is everything and with RV park ownership one of the most important items you have to give yourself plenty of advanced time and preparation is in refinancing your debt. This is Frank Rolfe, the RV Park Mastery Podcast series. We're going to be talking all about when you should start refinancing. This is a topic that always scares me when people find my number online and call me, and they say, "I'm having trouble getting a new loan for my RV park." I'll say, "How much time do you have?" And they'll say, "Oh, it comes up in about a week." All right, we all know that's wrong. You would not start the refinancing process with that short a time schedule, so how do you do it correctly?
Let's first start off talking about what I mean by refinancing. Typically, when you buy an RV park you have to get a loan. Very few people ever buy real estate for cash and they shouldn't because your return is much lower if you use cash. So if you have that bank loan, then the question is how long does the term go? The bank gives you an interest rate and amortization length, but typically the term of the loan is shorter than the amortization length. Most RV parks there's a 25 year amortization. That means if you made your payments every month for 25 years, you would own it free and clear. But most RV park loans are only five or ten years in duration. So if it takes 25 years to go ahead and pay it off and the bank loan is only five years, you'll have to do five of those bank loans to get that full 25 year term in before it is 100% yours.
So you have to first, when you're getting that bank loan, try and get the longest term you humanly can. Try and get 10 years if you can. Try not to get 5 years because I want to do it as few times as I can. I don't want to be doing refinancing of my loan over and over. It's stressful, there's costs in it, there's risk involved. So rule one, let's try not to do that many refinancings.
Now, that being said, obviously you're probably going to have to do at least a couple. Even if you get a 10 year term, assuming you don't sell the RV park, you'll have to do that 10 year term and another 10 year term, and then a final 5 year term before that thing is fully paid off. So you'll never be able to get away with this topic using any form of traditional bank debt. Now, I know a few people who have been able to be lucky enough with a small town bank that didn't know any better to put it on a fully amortizing loan just like they do a single family mortgage, but that is so insanely rare. So for everybody else, what we're talking about, this topic should be of importance to you.
So if you have a loan and it does expire on a certain date, when should you start the action of trying to find a new loan? I would say you'd want to start, definitely start in earnest at full velocity, one year before expiration. So if my loan ended in May of 2025 I would hit the ground running in May of 2024. Now why would I give one year head start? Gosh, that sounds like a lot. Well here's what is at issue. We don't really know when these loans come up what is going on in the lending marketplace. Maybe we're in some type of economic recession or depression like the year 2008, and there may be fewer banks out there making a loan. They may take longer than it normally takes. The other issue is if I can't get a loan for whatever reason, I want plenty of time to resell that RV park. I don't want to lose all the value I've created in owning it and managing it properly. I refuse to lose that, so if I can't get a loan I am going to get that thing sold. So if I start a year ahead, it gives me say six months to get the loan, and failing that another six months to get it sold.
Now you're going to say gosh, now that I really think about that six months to get it sold, that's really not a lot of time. You're right. So let's move it back even farther. It would not be imprudent to start your refinancing program not one year ahead but even two years ahead. Now the problem is if you go too far then you're going to start refinancing the day you start the loan, so that's probably not going to work. But on a 10 year loan there'd be nothing wrong with seriously looking at starting the process anywhere from two years to 18 months ahead, and definitely, at an absolute minimum, a year ahead.
So what can I do to better influence having the easiest route to refinancing? The main item is be a good borrower. That's the key to refinancing. So do all the things they want you to do. Keep the property in good condition. Keep good computerized records. Be the kind of person you would want to make a loan for. I tell people all the time think like a banker. When you really consider that real estate is all about debt and all about lending, then who should we all emulate as an owner? We all need to emulate our banker. We need to do exactly what the banker wants of us because when we do that we won't have any problem with the banking world. We'll have everything exactly as they like. You want nothing but a happy lender, and that will give us a happy refinancing. Remember more than likely the person who will do the refinancing on your RV park is that existing lender. So the last thing you'd want to do is have that lender not like you or respect you because more than likely that is the person who is going to give you that new loan.
Also don't forget as refinancing approaches you have to ask yourself a couple more questions. Do I really want to keep this property or do I want to sell it? Because if you're going to sell it the most natural time to do it would be as your loan winds down. That means you'd have no prepayment penalties and you haven't taken the effort to go get a new loan yet. Also, most people when they do refinancing they put in that little extra effort in capital improvement such as roads to get it as attractive as they can for the refi process. Well that's also the exact same best position for you to sell it. So often, the best time of all time to sell your RV park is the very time that you're thinking of getting that new bank loan.
Also the question comes should you change the type of lending that you're doing. If you've had a bank loan on that property since inception but you've got it looking really nice and really improved the revenues and the net income, maybe it's time to take that next step to try and move that loan into conduit, also known as CMBS, commercial mortgage backed security debt. The benefit of the conduit loan is you'll get a low fixed rate, 10 year nonrecourse loan. It's one of the most attractive debt objects you can possibly put on an RV park. Sometimes it's a multi stage process to get there. When you first buy the property from mom and pop it's not in the right condition, it doesn't have the right numbers to allow you to get conduit debt. So many people start off with seller financing or bank debt on the property. As they gradually improve the properties performance, they move into the realm of being able to do a conduit loan. Conduit is very, very attractive debt so before you just kind of fall into the same rut of that bank loan coming up, you might consider maybe I should change over from the bank loan to that conduit loan. A conduit loan is kind of like entering a club.
When you have that conduit loan you'll find it's very, very easy, much easier we have found, to refinance that conduit loan than it was a bank loan because only the best properties are vetted and approved for conduit debt. So once you've made that, once you've been able to join that club of debt with your property, you're kind of blessed by many lenders who are impressed that you simply qualified for it to begin with. The natural progression for many RV parks is simply to go from seller debt to bank debt, to conduit debt or from bank debt to conduit debt. Now with this note coming up, maybe this is the time to make that move.
Also, remember even if you give yourself plenty of time it's possible things in the world are going not well. We've all just gone through the whole pandemic issue with COVID 19 and in recent times we had the great recession of 2007-2008. So remember that you want to grab debt while it's there, while you can get it. So when you start off that process, even if you started several years ahead, if lending was very strong, you had people contacting you wanting to give you a loan, maybe you should grab it now while it's right there and good for the taking. Because none of us can really look that far into the future.
If for any reason when your loan comes due you hit the worst time in American history, bigger than the Great Depression, it doesn't mean the end of the world there if you aggressively work it. Many banks if the customer is having trouble refinancing will do what's called "lend and pretend," which means they'll extend the loan on longer and let you keep making the normal payments. So you can still fight your way out of problems even then. But many times the issue is all about the timing. Give yourself plenty of head start whenever you need to refinance a loan on an RV park. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.