We saw this article in a popular magazine recently, bragging about the possibilities to earn 2% interest on your investments. Seriously? How in the world can you get anywhere with your finances at 2%? Let’s take this opportunity to review the basic numbers on a typical RV park deal, to compare them to the 2% available in most traditional investment options today.
The normal structure
Here’s how a typical RV park deal is structure. The cap rate is at least three points higher than the interest rate on the loan (6% interest rate and 9% cap rate). The loan is 80% loan-to-value (LTV). So here’s how the numbers look on a $500,000 RV park.
Purchase price: $500,000
Down payment: $100,000
Amount of loan: $400,000
Net Income (revenue minus expenses): $45,000
Interest on the loan at 6%: $24,000
Cash-on-cash return of 20%+
This leaves $21,000 of net income to service your down payment of $100,000, which is a 21% return on your capital. THAT’S TEN TIMES MORE THAN THE 2% IN THE AD. In other words, it would take you a decade to make as much with a traditional investment as it does with just one year of the RV park. And let’s also remember that you have to hit return levels about this high to actually create capital formation as you have to deduct inflation from your return level (which makes the 2% investment a negative return after even mild inflation).
And that does not include the increase in value
The above equation does not even include the appreciation in the value of the RV park itself – only the immediate cash flow. As you increase the net income of the RV park over time through greater occupancy, higher rents – or both – you increase the value of the asset in a significant way. For example, if you increased the net income of the RV park by $1,000 per month, the increase in value at a 9% cap rate would be $133,000 – that’s as much as the total amount you put into the deal.
And there are tax benefits
We’ve also left off any tax benefits to the RV park. That includes the ability to write-off depreciation, which may often allow you to avoid paying tax on some or all of your principal pay down each month on the loan. That’s something that the 2% investment never offers and is a significant consideration.
Then there’s the lifestyle enhancement
If you plan on self-managing the RV park, then it’s also worth noting that RV parks offer owners some of the most beautiful settings in the U.S. to call home. Many RV park owners find the lifestyle enhancement of being their own boss and enjoying the great outdoors to outweigh the financial gains. That 2% investment offers you no lifestyle impact whatsoever.
Conclusion
You will not get anywhere financially with 2% investments. You can earn ten times that much annually with an RV park and have many other financial and lifestyle benefits. The choice is yours. We think it’s an easy decision.