RV parks come in a wide variety of sizes to fit every budget and goal, but which is the right size for you? In this RV Park Mastery podcast we’re going to examine how the size of the RV park impacts your investment and how to come up with the matrix of considerations to help you make that decision.
Episode 54: Big, Small And Everything In-Between Transcript
There are all kinds of RV parks out there, big, small, and everything in between, but which is the right size for you. This is Frank Rolfe, the RV Park Mastery Podcast. We're going to review in depth all of the different factors to help you make a decision on the size of RV park you should be seeking.
First off, we all know there are three types of RV parks: Over nighter destination, and extended stay. Overnighter is an RV park in which people basically park for a night or two while they're driving from their home to their destination. And the destination RV Park is the one where they're heading to. So RV users typically spend much longer time in the destination than they do when they're stopping overnight spots. The average RV is on the road about two weeks of the year, and destination RV parks, they capture most of that occupancy. And then you have extended stay RV parks, these are ones in which people stay for very long periods of times, even potentially a lifetime.
And then we also know that RV parks come in seasonal, RV parks which are open only during one period of the year. In northern sectors this would only be open during the summer months, and in southern sectors, often most of the clients are there only in the winter months, versus those which are open year-round. But let's just focus on one attribute we didn't mention, and that's just size. So what are the considerations when trying to figure out the correct size for an RV park?
Well, the first item is financing. Everyone buys RV parks with debt, very few people ever write a check in cash to buy the RV park, and the size of the deal is going to predicate the type of financing that's available. On smaller deals, deals typically under a million dollars, your only source of financing will come through a bank or a mom and pop seller. There are also SBA programs available on many of the larger, yet more mid-sized properties. But the more sophisticated lending, the kind in which you can use an actual loan broker to obtain for you, such as CMBS conduit lending, your deal would have to be at least a million dollars or greater to tap into those options. So size does have an impact on financing.
Now, it's not always that big an impact. Mom and pops offer great loan terms, their debt is always non-recourse, so we love mom and pop lending, and we've been very successful over the years with traditional bank financing. But when you go... When you try and find another item out there that's very attractive in the world of debt, it is at CMBS conduit lending because it's non-recourse and it's typically 10-year term fixed rate. So if you wanted that 10-year fixed rate, non-recourse debt, then the size would tell you you'd have to be at least a million dollars or more.
Next, you have liquidity. Now, liquidity simply means can you when you want sell that RV park off, and the answer is to have liquidity, there are certain size considerations there too. Most people buying an RV park, wanna buy something substantial enough to warrant their time and energy and investment. If you buy a really small RV park, it will be much harder to sell that down the road than if you buy a larger one, and that's simply supply and demand. There's many more players looking for larger RV parks than looking for smaller ones.
Remember that an RV park's value is based as a function of its net income. Most people wanna buy an RV park with enough net income that when they ultimately pay it off, it's a significant part of their retirement planning. So the average American is trying to hit probably with an RV park at least an income of 50 to 100,000 dollars a year, and so once again, that takes you back to typically the larger the deal, potentially the better amount of liquidity. Also, more of your corporate buyers, institutional players, they always wanna buy the larger properties. So size will also have an impact on liquidity, but again, that's not the most important attribute possibly, because liquidity is something you may not need, you may hold that property 'til the end of time. So buying something simply trying to maximize your ability to sell it the next day, that's probably not the most important consideration but it's still something to ponder.
Then you have management. This is a big deal to a lot of people, because they want an RV park large enough that it provides for professional management. So how big do you have to be to do that? Well, again, it's going to all tie back to net income and what you can afford. If you want a manager on an RV park, a professional full-time manager, that's probably gonna cost you 30 or 40,000 dollars a year, so to make that a reasonable function of the revenue you'll have to have a much larger property. But other people buy RV parks that are very small, and they may use as the manager just someone who lives nearby, lives in the park, maybe they just use some kind of work camper who's just there seasonally.
But if you wanna have a management team that's there all the time, so that you have very little involvement, then once again, you'd want to buy an RV park that's big enough to warrant having that professional management. Now, if you wanna hire someone professionally to manage for you, you're gonna have to buy an RV park with a monthly revenue of probably at least $25,000 a month, So that's a pretty big RV park. If you're talking a revenue of $300,000 a year after costs, you're probably talking 180,000 net income, that's probably about a two million dollar property or so. So if you're looking for something that allows you to have third-party management or professional management that you'd have very little input, then you have to buy something that's going to be, well, well over a million dollars. So, if not having any personal stake in the management is important to you, you would have to shoot for something bigger.
But then you have the problem of diversification of risk, because some people become so obsessed with management synergy that they lose track of the simple fact of diversity. What I mean by that is, if you were to go out and buy a two million RV park, is that superior from a risk diversification perspective, as having two one million dollar RV parks, and is that better than having four $500,000 RV parks that are spread out? This has been an issue for RV park buyers since the beginning. The question basically is, are you better spreading, hedging your risk among a number of properties or putting all your eggs in one basket? Now what's long been answered in the stock market, Warren Buffet, if he were here, will tell you, "Oh no, you wanna diversify, you don't wanna bet everything on one item." But that's what happens with most RV park buyers, they tend to buy the largest RV park they can afford and in so doing, they put everything, they go all in, all the chips on that RV park, but that's not always the smartest strategy.
If you had two RV parks, they had the same revenue, same expense, same net income as the one, yes, it would be harder to manage that obviously, because instead of having just one property, now you have two. However, if anything happens to one of those properties, let's say there's a weather event, a fire, whatever the case may be, let's just say there's highway construction that hampers people to get off at your exit, then you've still got the stability of the one asset that is untouched, and you can probably still scrape through, if you have it all just on one and your mortgage payment is too high, well, that might really, really hurt. So another item on size is just the concept of diversification, and its opposing force, which is management synergy.
Then there's another option based on management, which is self-managing. Many people buy RV parks because their goal, their desire is to manage it themselves. They wanna live in it. Often mom and pops have houses that are built next door or even inside the RV park, and their goal is to live in and operate that RV park 'til the end of time, sometimes as a retirement plan and sometimes just as a replacement for their day job. If that is your goal, you need to figure out how much money you would have to have to live comfortably, and then figure out what size RV park can provide that. You couldn't buy a tiny RV park and self-manage and live in it if it only has the ability to pay you $10,000 a year, that probably won't work. But the question is, how much money would you need to have assuming your housing is paid for by the RV park to have a happy, prosperous and comfortable life? And again, that will also tie back to size.
The bottom line to it is perhaps the most important choice of RV park size comes down to one simple rule, and that is how big is that really great RV park deal? We have found over the years it's far more important to focus on buying just great deals regardless of size, then targeting one certain size limitation. If you cast a big net, an open mind to look at all sizes of RV parks, then you are likely to find the best economic deals. I would personally much rather have a portfolio of two smaller fantastic RV parks, than one larger average one, and I think you would agree. The bottom line to it all is that size is a very big consideration when buying an RV park. They come in all kinds of shapes and sizes, and the key is to pick what works best for you. This is Frank Rolfe of the RV Park Mastery Podcast. I hope you enjoyed this. Talk you again soon.