RV Park Investing Newsletter

In August 1861, President Lincoln signed into law America’s first income tax. It was a 3% tax on incomes over $800 per year, and was supposed to fund the war effort. Of course, it grew into something far greater and more onerous. So how do income taxes fare on RV park investments? There are, in fact, some tax benefits from RV park investing. One is that two of the biggest states for RV parks – Texas and Florida – have no state income tax (which is important if you plan on living in or near your property). Another is the fact that depreciation – that IRS item that allows you to recoup the reduction in value as a property ages – often shelters some or all of the principal portion of your mortgage payment. And don’t forget that the “cash out” portion of a refinancing is not taxable, as it is still a debt. But one of the biggest tax angles of owning an RV park is that “quality of life” is still not a part of the tax code. Having a happy, fulfilling, active life is not a taxable event. And that’s the greatest tax hedge of all.

Driving down the highway recently, I was suddenly jarred by the sight of a water tower that was about to fall over. I saw it from miles back, and thought I was about to see history in the making. Instead, it turned out to be an attention-getting sign for a development. So why did this simple leaning water tower make for such an impactful sign?

The eye gravitates towards something that is not aligned

We all grow up with a sense of balance and can spot things at the wrong angles nearly immediately. We know two basic directions well: horizontal lines and vertical lines. When things are not as our brain believes they should be, we are sent a message from the brain that says “something here in not right”. As a result, anything you do that is not straight will gain immediately attention from the viewer.

The sense of danger

As in the case of this water tower, an extra dimension was established of pending danger, in order to get the viewers to take even further notice. That’s the same thing that makes the leaning Tower of Pisa such a visited site – people just can’t come to grips with the fact that it might fall over at any moment. So you can even garner more attention if you can attach your leaning item to something of danger.

But don’t take it too far

A while back an advertiser on a billboard wanted to get attention, so they put a dummy up on the sign that looked like it was hanging on for dear life, and then had the ladder laying at the bottom of the sign to make it look like it had collapsed. The sign got a ton of attention, but it was mostly drivers calling 911 to alert the police that somebody was falling off a billboard. Ultimately the sign had to come down, and the publicity was negative.

Objects are relatively inexpensive – or not

Often, the objects that “lean” can be relatively inexpensive, such as a flag pole or a windmill. The famous landmark in Amarillo that is made up of ten Cadillacs buried at angles in the ground really didn’t cost that much to create. If you erected five flagpoles that are all at an extreme – but identical – angle, you could get a ton of visibility on a very limited budget.

Conclusion

When building signs or structures to get attention for your RV park, don’t always assume that they have to be straight. Sometimes an angle can produce even greater attention.

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This is an article in the 573 magazine, which is a specialty publication for southeast Missouri. It was part of an article about “glamping” which stands for “glamour camping”, and is a new business model in which RV park owners rent out nightly classic RVs that have been remodeled and filled with thematic furniture and fittings. This is an alternative to the “park model” rentals that many RV parks now include. Of course, one advantage of “glamping” for RV park owners is the fact that you can buy a classic travel trailer for as little as $500 and then spend $5,000 fully restoring it, as opposed to $40,000 or more for a park model. Do we see a lot of demand out there for this phenomenon? We’re certainly seeing more articles about it, typically accompanied by photo spreads. The good news is that, since it’s not very expensive, you can test it in your market before making a commitment.

This is a piece of land on Interstate 55 south of St. Louis. It was purchased by someone who wanted to develop into a pad site for a gas station. They invested their life savings into it, and paid a huge amount to get it flattened into a usable lot. However, while doing the dirt work, they hit a little black cable. It turned out to be the fiber optic cable that connects America. Had they hit it, the penalty would have been $1 million per hour in lost phone revenue. The good news is that they didn’t cut it. But the bad news is that it can’t be moved and, as a result, the property can’t be used. This resulted in the owner going bankrupt and the site never looking much different than what you see here. The buyer was simply not familiar with the concept of “due diligence”. They had no idea that there was a phone cable running through the property. So how do you avoid these type of risks?

Listen to Ben Franklin

Ben Franklin, who was one of the fathers of the U.S., once said “diligence is the mother of good luck”. What he meant was that the best way to make sure that your investment is a winner is to take all the risk off the table. And that process is called “due diligence”. Due Diligence is all about ensuring that stated revenues and costs are correct, as well as making sure that there are no issues that would hamper your utilization of the property.

The dangers that can lurk unseen

A big part of successful due diligence involves searching for unknowns that can hurt your business. These include issues that don’t meet the eye, such as the fiber-optic cable shown in the photo. But it can also include such things as environmental pollution and flood plain. Using a scientific process, you take the playbook of all known issues that can effect an RV park and you simply work backwards, testing and affirming each item.

It also means analyzing those risks

While due diligence is all about finding the risks, that information is of no value unless you can assess its net effect. For example, if an RV park is in a designated floodplain area, what you need to know is how many spaces are affected, how deep the water will get, and how often that might occur. If you simply decline every RV park that has an issue, you’ll probably never by one, and that’s called a “deal killer” mindset. “Deal killer” buyers never do as well as “deal maker” buyers. A “deal maker” looks for the opportunity and tries to find strategies to mitigate risk.

Great due diligence should point to the correct answer

Sam Zell, who has been the largest owner of office buildings, apartments and mobile home parks in the U.S., has an easy axiom for his decisions. If the deal has little risk and high reward, he buys it. If it has high risk and low reward, he never buys it. And everything in between he thinks about. When you do great due diligence, the answer to “should I buy this RV park” is simple to make.

Conclusion

OPerforming due diligence is an essential skill that all RV park buyers must attain. Diligence is what takes risk off the table and gives you peace of mind that you’ve made the right decision to proceed.

So you’re looking at an RV park for sale, and you’re interested in making an offer on it. As part of that process, you have to produce a written contract for the seller to sign. So where do you begin to approach the RV park contract?

Must have an examination and financing contingency

Any RV park contract must contain a due diligence and financing contingency. Typically, the due diligence period lasts for 30 days, and the financing for 30 or 60 days (60 is preferable). This allows you to examine every part of the deal to make sure that it can deliver as expected and, after the diligence period ends, locate a bank and complete the loan and, if that fails, cancel the deal and get your earnest money back. You should never enter into any contract that does not allow for due diligence and financing and, failing that, return of your earnest money.

Diligence period must be long enough to allow for third party reports

Let’s say that the seller says “I won’t give you 30 days of diligence, but I’ll give you 3 days”. Can that work? Typically not. Although you can shorten your diligence window in certain circumstances, remember that you have to obtain at least one third-party report during this time: the Phase I Environmental report. This is the analysis that gives you assurance that the property has no environmental pollution – an essential item for any buyer. Since you have no control over the time frame involved, you would need to coordinate your diligence – at a bare minimum – with the time required to get this completed by the environmental engineer.

Must be non-recourse on the part of the buyer

You should never sign any real estate contract that requires “specific performance” on the part of the buyer. “Specific performance” means that if you fail to drop the deal during the required time in diligence and financing, you are then required to buy the property, even if you don’t want it. It’s a crazy concept that any buyer would ever agree to such a thing – so make sure you never do. That’s not to say that the contract should not contain “specific performance” on the part of the seller. They must have specific performance. Without it, they could walk away from the deal at any time up until the minute of closing.

Must be at a price at least around 20% of what you are willing to pay

We get asked all the time “should I negotiate the deal hard on the front end, or during due diligence?” While there’s no right or wrong answer to that, we have found that it’s really hard to renegotiate a contract down more than 20% once you have it under contract. So if you are trying to buy at RV park and the seller wants twice what you think it’s worth, then you should hold off tying it up under contract, because your ability to get a 50% price reduction later is remote. In those cases, just keep calling the seller periodically to see if they have changed their mind and lowered their price.

Must be easy to sell to

When working with an RV park owner, it’s important to be “easy to sell to” which basically means that you give the seller no reason not to like and work with you. For example, if you tell the owner that you will come by the property at 1 PM, you better get there at 12:30 and sit in your car, as being late would make the seller think “I don’t think I can trust this person” or “this person does not think I’m important”. You should always consider the seller a VIP, and be very careful about their interests.

Don’t underestimate “bonding”

“Bonding” is the relationship between the seller and buyer which evolves and often propels a deal into an arena where it’s not all about money. Since many deals can hit one or two bumps during diligence and financing, having a good relationship with the seller is essential. So how do you “bond” with a seller. Spend time with them, either by phone or in-person. Our favorite opening line “so how did you come to own this RV park?” The answer can take hours, and don’t rush the seller at all. Not only is “bonding” extremely important, but you can also learn a great deal about the property – and the RV park business – through such sessions.

Focus on the win/win

We are firm believers in “win/win” deal making, which means only engaging in transactions in which the buyer and seller walk away happy. When you are devoted to this style of living, the seller becomes more of a client or family member and you forge an even stronger bond. Watch out for the seller’s interests and they will reciprocate. For those who prefer “win/lose” negotiating (where the buyer thinks that they got the best deal possible at the expense of the seller) we would remind you that most RV park owners have no debt and a cash-flowing business, so they are rarely willing to be pushed around.

Don’t be afraid to renegotiate when necessary

All that being said, you have to remember that the price you pay for the RV park determines its future success or failure, and being nice does not mean being shy on pushing for the price you need. If there are material changes in the way the park will perform that are detected in diligence, then you should ask for a price reduction that is proportionally similar. If you strive for a “win/win” deal, then don’t let the seller take advantage of you because “win/win” is a two-way street, and you can’t do all the work. The seller has to participate in being reasonable.

Conclusion

Putting together a successful contract for an RV park is all about giving yourself sufficient “outs” in case you need them, avoiding legal traps, forging a bond with the seller, and re-negotiating when necessary.

The Good Sam Club is the largest organization of RV owners in the world. It is focused upon promoting the RV industry in a positive format, and to save members money through club-endorsed benefits and services.  It was founded in 1966 by Art Rouse, founder of TL Enterprises, a California-based publishing company responsible for Trailer Life magazine  and MotorHome magazine. Good Sam Club is based in Englewood, Colorado. The organization is currently owned by the Good Sam Enterprises, which also owns Camping World, Coast to Coast Resorts, Trailer Life Publications, MotorHome Publications and the Good Sam RV Travel Guide & Campground Directory. The organization also offers additional services such as roadside assistance, RV insurance and RV extended warranties. Perhaps the biggest driver of membership is the roughly 10% discount that all members receive from their stay at all participating RV parks. The current number of members is around 1.7 million, the largest membership of any group in the RV industry.