RV Park Investing Newsletter

Yes, Thanksgiving is right around the corner. For many Americans, it’s one of the best holidays because it is not highly commercialized and has a great message. And that message is giving thanks to all of our blessings that transpired over the year. In the RV park business, we have much to be thankful for in 2018. We’re thankful that we’re in the exact right spot based on megatrends of demand. With 10,000 Baby Boomers retiring per day and extremely high levels of interest in RVs from Millennials, we’re harvesting demand from both ends of the age spectrum. That’s resulted in the highest level of RV sales in U.S. history. We’re also thankful for steady, low interest rates and an extremely positive reception by the lending community. We also give thanks for the fact that we can still buy RV parks from the Greatest Generation and Silent Generation – the very people that built America and most of the RV park inventory. This group continues to offer reasonable pricing and often seller financing. We’re thankful for living in the U.S. and having freedoms that no other country offers, as well as a positive “can-do” spirit and a heritage of success. But most of all we’re thankful for you, our extended RV park family that enjoys exchanging truthful commentary and helpful tips on the best sector of real estate.

Have a Happy Thanksgiving!

The word “investment” is defined as “the process of investing money for profit or material result”. And RV park investing is no different. Your success or failure is counted in dollars and cents, as well as ratios to define your results. So here are the key metrics or terms in RV park investing that you need to know.

EBITDA

This term stands for “Earnings Before Interest, Taxes, Depreciation and Amortization”. But what does that mean? It essentially means the net income of the property before your mortgage, depreciation write-offs and your personal taxes. It does not mean that you do not include the property tax for the RV park. The word “Amortization” is the one that throws off most people, and that word means the principal portion of your mortgage payment (as opposed to interest portion). When somebody says “my RV park has an EBITDA of $84,000 per year” that means that the true net income of the property is $84,000.

Cap Rate

The “Cap Rate” of an RV park is best thought of as a fraction: the EBITDA of the property over the total cost of the property. For example, if the property has an EBITDA of $84,000 per year, and a total cost of $1 million, then the Cap Rate is $84,000 divided by $1 million = 8.4%. Cap rates are a basic measure of comparison between RV parks, and commonly used by buyers to quickly sort those deals that fit personal financial objectives. For example, an RV park buyer may say “I only buy deals with 10% cap rates or better” and that is used as a sorter of available deals. The danger in sorting strictly by cap rates, however, is that many of these ratios can be immediately impacted by better management, and you may lose out on many great deals. We have bought RV parks at 5% cap rates and then doubled those returns quickly by improving occupancy – all the time buying the property at a fraction of its value based on good management.

Spread

This term represents the difference between the Cap Rate on the deal and the interest rate of the mortgage. In general, a 3-point spread will lead to 20% Cash-on-Cash returns (see definition below) which is a standard goal of most RV park buyers. For example, if you buy an RV park at a 9% Cap Rate and obtain a mortgage at 6% interest, then you have a 3-point spread. With interest rates probably heading up one more point under the Federal Reserve, it’s important to buy right now with a healthy Spread to accommodate one more point of increase. Other times, you can easily increase the Spread with higher occupancy, higher rents, or lower operating costs.

Cash-on-Cash

“Cash-on-Cash” represents the ratio of return on your down-payment (which is typically a range of 10% to 30% of purchase price). For example, let’s assume you put down $200,000 on that $1 million mobile home park with an $84,000 EBITDA. Your mortgage interest rate is 5.4% on the $800,000 loan. So here’s how you calculate the Cash-on-Cash return. Your interest on the loan is $43,200. So your Cash-on-Cash return is EBITDA $84,000 minus $43,200 = $40,800 divided by $200,000 down payment = 20.4%. That’s pretty impressive, given the fact that the Cash-on-Cash return on a CD at the bank is currently 2% (basically ten times better).

Cash-Flow

This number represents what cash flow you have after paying the mortgage. It’s different than Cash-on-Cash because your principal pay-down of the mortgage is still counted as income (although some people call it “enforced savings” since you don’t get it back until you pay off the mortgage). Given the above example, the Cash Flow would be the EBITDA less the interest on the note = $40,800 then lowered by the principal portion of the note (estimate $26,000) = $14,800. While this is still an impressive return on your $200,000 down payment (7.4%) it’s a reflection of what money you have to put in your pocket as opposed to the total net profit. Under Cash-on-Cash definition, you are banking that $26,000 per year.

Conclusion

Just as baseball has its own terminology such as RBI, RV parks have their own basis for comparison between deals and results. If you want to be a successful RV park investor, it’s important that you understand these basic terms and their meaning.

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The “motorhome” began in 1910, when the Pierce-Arrow motor company introduced their “Touring Landau” model. It was designed with the camper in mind—providing cargo compartments for camping equipment and an on-board toilet. In the 1920s, creative individuals began to convert panel trucks into camping vehicles. These "house-cars" were patterned after airplanes and yachts. The collective create force of RV design had to take a brief hiatus during World War II, as all RV production was halted and would not resume until the 1950s. However, this was not all bad, as automotive engineering advanced during the war and when production began again, the new concept was to graft advanced trailer design onto an existing truck or bus chassis.

The name “motorhome” was coined by inventor Raymond Frank. In 1958 Frank began building a motorhome so his family could take vacations to Florida in style. His 27-foot motorhome, mounted on a Dodge chassis, became the envy of fellow campers, who asked if Frank to build them one too. By 1961, Raymond Frank had sold seven motorhomes, and decided to open Frank Motor Homes, Inc. With his stylish design and solid manufacturing quality, the company flourished.

But Frank was not alone in his forward thinking. A peer by the name of John Hanson also started building his own motorhomes in 1958 under the name Winnebago. In ten years, Winnebago had grown to over $3 million in annual sales. While Winnebago was the market leader and entire industry had been born and, in 1969, a total of 23,100 motorhomes were sold. Today there are nearly three times more units sold annually, and motorhomes range in cost from under $100,000 to over $2 million. But it all began with a few guys who wanted a new way to travel and had the vision to make that possible.

When your RV park deal exceeds $1 million in size, then you need a capital markets consultant to help you find and select the right lender. And nobody is better at that function than M.J. Vukovich with Belleweather. He literally grew up in the business and understands all aspects of what your goals are. He prepares the loan packages, meets with the banks and negotiates the best offers. You select the loan and he then manages the entire process for you until completion. It’s not only less stress for you, but he can obtain better rates and loan lengths than you can. We use MJ on all of our larger loans and you will be extremely happy with the results.

For a free consultation, contact MJ at (612) 335-7740 and let him tell you what he can do for your property, or email him at [email protected]. We’ve been using him for years, and his expertise is unparalleled.

Being in the RV park business, we drive all the time. And it’s remarkable just how different America is from coast-to-coast. That includes one of the staples of our on-the-road diet: McDonalds Sweet Tea. There are three distinct differences in this fast-food concoction, that are directly related to your geography.

Southern extremely sweet

McDonalds puts extra sugar in their Sweet Tea in the south, due to customer preferences. We’re not sure how much sugar each cup contains, but if you try to reconstruct the mixture yourself with a regular cup of tea you may have trouble finding enough bags of sugar.

Midwestern sweet

This is the style we are most accustomed to. It’s sweet but not over-the-top like the southern variety. The sugar content is reduced but not eliminated, and it’s a taste you can replicate on your own if they accidentally give you a cup of standard tea. At around 400 calories, it’s not the end of the road for your diet (but not exactly a good idea).

Northern “what’s sweet tea?”

One of the strange occasions of travel in northern states is when you pull into the drive-thru and ask for Sweet Tea only to be told “what’s that?”. Apparently, the whole concept of Sweet Tea ends somewhere in the Midwest. We’re not sure if it’s a taste issue (who doesn’t like sugar?) or maybe the fact that the franchise owners are too cheap to buy the sweetener.

Conclusion

If you drive around America enough, you can tell where you are blindfolded if you are given a cup of Sweet Tea from McDonalds. And it reinforces the fact that our country is so large that we have cultural differences even in iced tea from coast-to-coast.

Nobody buys an RV park with cash. They all get loans. In fact, leverage is one of the great strengths of real estate investing, as it allows you to amplify your returns and buy properties that are far larger than you could buy with cash. But before you go out and get a loan, there are some important basic terms to understand.

Recourse vs. Non-recourse

If you default on a loan, the bank takes it back and sells the RV park at auction. If it does not sell for as much as your existing loan, the amount left over is a loss for the bank. If you have a “recourse” loan, the bank can come after you personally for that loss. However, if you have a “non-recourse” loan, the bank has no right to come after you at all. As a result, non-recourse is the preferred method of borrowing money, as the most you can lose on any deal is your down payment.

Fixed rate vs. Variable

The interest rate on a loan comes in two different varieties. The first type is “fixed rate” which means that the interest rate does not go up or down for the entire length of the loan. The other option is “variable rate” in which the interest rate is constantly changing as it’s tied to the Federal Funds rate or some other vehicle. In times of increasing interest rates, fixed rates are preferable, and in times of decreasing rates, variable rates are superior. It’s important to note that variable rates are often lower because banks charge a premium for fixed rates because they can’t adjust them.

Loan term

This is the length of time until the loan comes due. For example, a loan with a 5-year term means that you have to pay it off in full in 60 months (this is typically called a “balloon” and is completed via refinancing). The loan length has nothing to do with the amortization, however there are loans that have a loan length that is identical to the amortization length (for example a 30-year home mortgage). Traditionally, the longer the loan term the better.

Amortization

The “amortization” period is the total length of the loan from day one to pay-off. For example, a 25-year amortization (which is pretty standard for RV parks) means that the property will be free and clear of all debt with timely payments every month for 25 years. It’s rare to see amortization lengths over 30 years for RV parks, but you should also avoid any loan in which the amortization is less than around 20 years.

Assumable

When a note is “assumable” that means that you can assign it to the next buyer. The advantage of this is that it makes it easier to sell an RV park if the lending is already in the bag. The downside is often that, assuming you sell the RV park for more than you paid for it, the loan-to-value (LTV) will be too low under the assumption.

Conclusion

There are the basic terms you need to know when obtaining an RV park loan. Since lending is an important part of buying RV parks it’s important to spend some time understanding these terms and how they can affect your loan.

Camping World is one of the market leaders in the RV industry, but it’s really a story of random luck.

Camping World began as a small store inside Beech Bend Park in 1966. Beech Bend Park is one of the largest campgrounds in the U.S. and is adjacent to an amusement park outside of Bowling Green, Kentucky. The whole idea for the store began from campers who needed a place to buy supplies Campers at the park were requesting a store where they could buy supplies. While the store was not unique or remarkable, it was a random bit of luck that created Camping World. You see, the owner kept a detailed list of every customer who ever came in (including their mailing address) and that giant list became the backbone of the company’s mail-order division when that form of marketing became important. In fact, it was the profits from the mail-order division that effectively paid for all of Camping World’s expansion.

Meanwhile, Marcus Lemonis – the current CEO and owner of Camping World – was an orphan in Beirut, Lebanon that was adopted by a couple in Miami, Florida. His adopted grandfather owned some Chevrolet dealerships in the U.S. and was a personal friend of Chrysler CEO Lee Iacocca. Iacocca had an interest in building a large RV service industry, and chose Lemonis as the person to head those millions of dollars of investments.

What are the odds of all of this happening? About as high as winning Powerball. But that’s the way life works.