There can be no question that interest rates are going to go up in the near future – they already have gone up roughly a point in the last several months. The key question is how high they will go, and what the impact will be on buying an RV park.
Expect a 1.5% rise in the near term
The cause of the current increase in interest rates is as a result of the tapering of “quantitative easing” – the government’s $85 billion per month of purchasing of bonds to keep rates low. This program cannot go on forever, and most economists agree that the net effect of the program has been to keep rates about 1.5% below where they should naturally be. So as quantitative easing ends, expect rates to rise to roughly 7% on bank debt. That means that the interest rate on the mortgage of an RV park will be at 7% in the near future.
Thereafter, it’s going to be based on inflation
As long as inflation remains low, bank interest rates may stay at around 7%. So the future of interest rates is not contingent solely upon quantitative easing, after that first 1.5% adjustment upward. Beyond that, it’s going to be dependent on any future interest rate increases by the Federal Government, probably as a result of battling inflation.
Only buy parks with room for improvement and at a low price
If you want to be truly protected from rising interest rates, then only buy RV parks that have built-in defenses in the form of the ability to push revenues significantly and a low purchase price to support. Who gets killed in higher interest rate environments are those that have purchased RV parks with little upside and at low cap rates. For example, if you buy an RV park at a 7% cap rate, and interest rates rise to 8%, then you are upside down in your RV park, and will not be able to refinancing it or sell it until times change. However, if you bought that RV park at a 11% cap rate, and then have raised the income even higher, you are pretty much immune to interest rate damage.
Remember that real estate does extremely well in inflationary times
Since inflation is what drives interest rates, then it’s important to remember that real estate performs the best in eras of high inflation. Why? Essentially, the value of your note is reduced by the escalating rents. Banks are the ones that get destroyed in such an environment, as they cannot do a darned thing to enhance the value of their note. The real estate owner, however, can raise rents with abandon.
Conclusion
You do not need to live in fear of interest rates. They follow very predictable paths. The key to happiness in an era of rising rates is to make sure that the RV park you buy has the additional firepower to thrive in that environment. Only buy RV parks at cheap prices, and with plenty of room to increase the net income. Boy Scouts advocate “be prepared” – and that’s a pretty good motto to live by.
