RV Park Investing Newsletter

Easter is just around the corner. And one of the great traditions of this holiday is the “Easter Egg Hunt”. In many ways, this activity is similar to finding an RV park to buy. The more potential deals you can horde to examine, the greater the odds of finding what you’re looking for. And opening the plastic eggs and seeing what’s inside is similar to due diligence – you never know if it’s good or bad until you get into the books, permits, market study, etc. And then the fun of eating the candy is like the fun you have getting the net income from the successful RV park. So have a happy Easter! And don’t forget your egg hunting skills when it comes to finding RV parks to buy.

This is a common notice in most hotel rooms today. And it’s very annoying as it is completely insincere and misleading. Hotels give you this notice for the simple reason that they do not want to wash your towels unless they absolutely have to, as it costs time, water and electricity. So what’s the real impact of conservation and RV parks, and what should you do about it?

Understand where your utilities go

Conservation is defined as “preservation of the natural environment”. So what things do RV parks take from the natural environment? Pretty simple: water, sewer, electricity and gas. But before you can conserve utilities, you need to know where these utilities go and what they’re used for. In most RV parks, the primary uses of utilities are for 1) drinking water 2) sanitation 3) showers 4) laundry 5) pool and other amenities 6) lighting. OK, so what’s the next step?

Calculate the scientific impact of your and your customers’ behavior

Once you know what utilities are involved in each activity, you can now build a chart of their usage and the approximate impact of changing behavior in the park. For example, if you know the ten security lights cost $1,200 per month in electricity, and they are on 12 hours per day, then the cost per light per hour is 17 cents. If you were to turn the lights on an hour later, and shut them off an hour earlier, each day, then the impact would be $100 per month. But is that really a good idea, just to save $100 per month? What if somebody tripped and fell because the lights were off? That could wipe out five years of the savings in legal costs! When you really analyze what the costs are and what the benefits are, you will soon learn that the key item to watch over is water/sewer. That’s the 800 pound gorilla.

Focus on the key drivers of profitability

So how do you reduce the water/usage in an RV park. Well, you can’t ask the customers not to go to the bathroom, or wash their hands, or take a shower. If you do, they certainly won’t be back. The person who really needs to get conservation minded is you, the park owner. We have found that you need to stay proactively on top of your water system daily. Some RV park owners go so far as to read the meter weekly to watch for usage aberrations that would indicate main line leaks. Because the most important killer in utility costs in any RV park are line leaks. We have seen single leaks that increase the water/sewer bill by $5,000 per month. If you stay on top of that item, you’ll be a better operator than an RV park owner that counts every minute of every lightbulb, and tries to figure out if you can light the pool table with 40 watt bulbs instead of 60 watt.

Don’t insult anyone’s intelligence

And don’t put up little signs that say “please don’t turn on the lights inside your RV after 10 pm to conserve our natural resources”. That’s stupid and everyone knows it. You might as well put up a sign that says “please do not wash the miniature golf balls so as to conserve water”. There is nothing more annoying than false conservation. And it’s a turn off to customers.

Conclusion

It is commendable to try to preserve our natural resources. However, it is nonsense to put a large focus on this issue in most RV parks. The only one who needs to conserve is you, and that means proactively staying on top of your water system.

Everywhere you look these days – from this page in a coffee table book (shown above) to Town & Country Magazine and the Neiman Marcus Christmas Catalog – you will find the Airstream trailer. This icon of the RV industry seems at home in everything from McMansion garages to Yosemite. So how did Airstream become the darling of the American RV public?

A unique product

It is a little known fact that the Airstream was designed by Hawley Bowlus, the designer of Charles Lindbergh’s Spirit of St. Louis. It has a distinctive rounded aluminum body, which has been a hallmark since 1936. In fact, Airstream is the oldest continually manufactured travel trailer in the world. You can spot an Airstream trailer from a mile away, and the name is something that almost every American can identify. There is really only one Airstream, and there are only about 2,000 manufactured per year.

Clever marketing

In the early 1950s, Airstream company founder Wally Byam began leading groups of owners on travels to many portions of the world, where the towed trailers were quite remarkable. Photos taken of the trailers in front of many famous tourist sites were common. This promoted a mystique which surrounded Airstreams and persists to this day.The Wally Byam Caravan Club was formed during a RV rally in 1955. Club members join together for one large International Rally each summer (which by club rules always includes the dates of July 1 and July 4), and hundreds of smaller local rallies are held coast-to-coast by "units" (chapters). Restoration of older models is a passion shared by many. Airstream has a cult following around the world. Even NASA utilizes Airstream as the standard way to transport astronauts to the Launchpad, and they have been used to quarantine returning astronauts who walked on the moon on Apollo 11.

Classic design

When you have a design that has remained unchanged for nearly 80 years, you have to consider it a classic. Some rank the Airstream along with the Porsche as a timeless design that only looks better with age. In a world of “disposable” products and designs that look out of date rapidly, the Airstream has triumphed where no other RV has succeeded.

Conclusion

The Airstream trailer is an American classic. You will find the in nearly RV park in the U.S., and they look great wherever you find them. While there is only one Spirit of St. Louis, there are thousands of Airstreams on the road and in RV parks today. And now you know the story.

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That’s a photo of my money clip that I carry around – it’s an old binder clip that I started using ten years ago when my Tiffany silver money clip broke in half. Like most people, I hate losing money, and I hate getting ripped off. So to make sure that does not happen to you when buying an RV park, it is essential that you fully understand the way to measure and price RV parks using a “cap rate”, and understanding what that number value means to your investment.

What they are

A “cap rate” is short for “capitalization rate”, which basically means the rate of return on an investment of capital. The formula is a fraction: the net income from the property on top of the total cost of the property (debt and equity: the total sales price including any capital improvements you will make day one). For example, a property that generates a net income of $100,000 per year, and costs $1 million to purchase, has a cap rate of $100,000 divided by $1,000,000 which equals 10%. Cap rates have been the standard measure of a property’s rate of return for decades.

What they mean

The “cap rate” reflects the expected return on a property, and an thereby be used to rank properties by rate of return – to use them as a sorting mechanism. For example, if you will only deploy capital at a 9% cap rate or better, then there’s no point at looking at deals at 7% cap rates. This saves the buyer a lot of time. Similarly, you can model out the numbers for your investment based on a desired cap rate, and then go on the hunt for the cap rate that makes those numbers possible. Essentially, the cap rate is almost like the star system that hotels use – if you want a 4-star hotel, then you don’t look at the 3-star, but you are ecstatic when you get a 5-star for that same price. Once you have set your cap rate goal, anything that scores higher than your goal is even better.

Their impact on pricing and profit

Getting the cap rate wrong can be a disaster for your investment. If the going market cap rate is 10% and you buy at 9%, then you just overpaid by 10%. On a $500,000 RV park, that means you just lost $50,000. Even a small fraction of a percent means huge money. The moral is that you have to know the cap rates inside out for both the market as well as the property you are buying. The biggest mistakes we’ve seen on the part of RV park buyers has been to 1) buy at too low a cap rate 2) not take into account the additional capital needed to do capital repairs to the RV park, thereby not calculating the correct cap rate on the front end 3) failure to verify the income and expenses in due diligence, so as to pay too much for a property that has a lower cap rate than anticipated.

Equally important – and seldom discussed – is the concept of “spread

While cap rates are extremely important, there is another factor that is little discussed or understood, but is just as important to your investment success. And that’s a concept called “the spread”. This is not a discussion of cream cheese or peanut butter. “The spread” refers to the difference between the cap rate and the interest rate paid on the loan for the RV park. Since real estate is normally leveraged by a ratio of 5 to 1 (20% down), the “spread” between the cap rate and the interest rate on the loan is what really generates your “cash-on-cash” return on your down payment. For example, if you buy an RV park at a 10% cap rate and finance it with a loan at 6%, you have a “spread” of 4 points. A 4 point spread will yield about a 25% cash-on-cash return. Some people get confused and think that the cap rate is what they will get on their money. While that’s true if you pay all cash, that’s not true at all if you utilize leverage. So the real trick to having a high yield on your money is the “spread” as much as it’s the “cap rate”. And right now, the spreads are the highest that they’ve ever been in the RV park industry.

Future thoughts

RV park cap rates are at extremely attractive levels of 9% to 10% on average, Meanwhile, the “spread” is also the most attractive it has been in decades, thanks to some of the lowest interest rates in U.S. history. The bottom line is that it’s a great time to buy RV parks. So bone up on the cap rates and start making offers!