Between Hurricane Ian and the Federal Reserve it’s easy to get paralyzed by fear when looking at any RV Park deal – or even simply going to the grocery store. But life must go on. In this RV Park Mastery podcast we’re going to review decision-making techniques to help reduce your stress and to make better decisions possible on when deals should – or should not – be pursued.
Episode 64: Freedom From Fear Transcript
When you turn on the news today, it's hard not to get depressed. Things are going just awful in America, there's really nothing good to say. And from all those terrible things you see, it's easy to get filled with fear, and typically fear leads to inaction. This is Frank Rolfe the RV Park Mastery podcast. I want to go over some basic skills to help you reduce your fear levels to make good decisions that aren't founded reactionary based on things that you're worried about, but more proactively on things you can do to better your position.
Now, what causes fear to begin with? Well, we all fear things. Some of us fear things more than others, some people are extremely risk-averse, others have a high tolerance for risk. But when you fear, typically what you fear is you fear an outcome that you didn't expect. So then in battling fear, what you have to do is you have to have a better handle on what those outcomes are and think about those strategically and scientifically. Look at your car, for example. Every time you get in your car and you turn it on and you back out out of the driveway, being very careful not to hit a pedestrian or something behind you, you're already, the minute you turn the key, filled with some degree of concern. Will the car start? Will the car go into reverse? Can I get out of my driveway without striking something? Will the car then shift back into a forward motion? Do my brakes work? Do my tires have enough air in them?
And the only way we can get over these many problems is to do a little proactive planning. Making sure our oil changes have been done on time, look at our tires to make sure they've got the right air in them, buy a car that you think probably has a reasonably good job of being able to run and stop and start again. So if you look at only the worst case scenario though, if you say, "Well, if I back up my car and I hit a pedestrian, I'll be sued. Or if I'm back up my car and I hit a tree, I'll destroy my car." If you can't put any scientific thought behind what you're doing, well, you'll be too worried to ever drive your car again. And if you can't drive your car again, well, then you probably can't get to work or get to the store, get to school, or much of anything. So we all have to take some risks in life. However, you wanna take intelligent risk. You wanna think through what you're doing, you wanna understand what the outcomes are, and you wanna mitigate your position on that, then that's how we basically all drive cars. The same is true when you look at RV Park deals.
You wanna go ahead and think through scientifically what could happen? What's my worst case scenario? How can I mitigate that? So let's go over some of the techniques that I have found over the years make me happier, give me more freedom from fear when looking at deals. So the first thing is on any deal that you look at, you've gotta do a worst case, best case, realistic case scenario. So what you do is, you don't just look at the deal in one light, but instead you look at that in three different dimensions. The worst that would happen with it, the best that could happen with it, and then somewhere between those two, which we call the realistic case.
So if I'm looking at an RV Park and it's located in some spot in the state of Texas, for example, what do I know as far as my worst case? Well, I know what the current occupancy is, and so I can then say, if it's a turnaround deal, well, what if I can't ever improve the occupancy? What if I can't ever get the rents up? Then what would happen to me? Well, that's your worst case scenario. So you wanna know based on the inability to hit your targets, what would happen. Now, some banks take it to another level. Their worst case scenario at some banks is to take an additional 10% off the revenue. Those lenders call that stress testing, it's not really a bad idea, but your worst case is just that, it's the worst thing that you think could happen. So as far as economic performance, the worst case is about as bad as you think it could be.
And the key question then is, under the worst case scenario, what would happen? Could you survive it? Could you cover the negative? Would there be a negative? And if the answer is no, I can't really handle it. I wouldn't be able to survive my worst case scenario, then you probably shouldn't buy the property because worst cases do occur. Look at Hurricane Ian from just a couple of weeks ago, it was a worst case situation. People on that side of Florida rarely get a hurricane. Many people have forgot that hurricane could ever even hit over there, but their worst nightmares came true and it did hit. In many cases, it destroyed all their property.
That's the worst case scenario in full effect. So we have to assume in life, sometimes terrible things do happen. Could you survive the worst case scenario with your RV Park? Now, the best case is the opposite side of that pendulum, it's what would happen if everything worked perfectly. So typically that would be you increase the occupancy, you increase your total revenue and everything goes perfectly. Great, we know that will be good, so don't need to think a whole lot about that in my opinion.
And then you have the realistic case, that's probably what is going to happen. Just as when I back my car out of the driveway, I probably will get to my destination, and we'll get home just fine, but I wanna see how that works out. What do those numbers look like? And if the answer is, well, I can survive the worst case, and I would be happy with the realistic case and ecstatic with the best case, well, that is the right construction to buy the RV Park. That means you've got all your bases covered. That gives you some degree of freedom from fear because you know that you can handle the worse that they can throw at you and you have a reasonable shot at getting a really good outcome and a little bit of a shot of a fantastic outcome. And we call that concept worst case, best case, realistic case. But then there's another way to look at an RV Park deal. This is a way that was pioneered by Sam Zell. If you don't know the name Sam Zell, Zell is the number one real estate investor of all-time, largest owner of office buildings, largest owner of retail, retail, I'm sorry. Office buildings, apartments and Mobile Home Parks.
So what does Zell do? Well, Zell follows the same mantra over and over again. And his mantra is very, very simple. He looks always at risk versus reward. Now, what does that mean? What is risk versus reward? That means that he wants to see that if he takes risk, he gets a correspondingly a large amount of reward based on the risk. So his theory is, never buy a deal that has high risk and low reward, always buy a deal that has low risk and high reward, and then ponder very carefully those deals that have high risk and high reward. But the concept is, there has to be an equal measure. If you're gonna take a lot of risk, then you have to have a big pay day. And if you're not gonna take hardly any risk, then that deal is definitely worth doing. But if you're gonna do to deal with lots of risk and very, very low amount of profit in the end, you would never want to do that.
Every RV Park deal you look at somewhat falls into that matrix. And the key is trying to figure out, is it a healthy balance? If you're looking at an RV park that's in a great location, all the financials are good, everything's perfect, and it has a really good outcome, if you buy it, you're very, very happy with the realistic and best case scenario, that's the deal you're definitely gonna wanna buy. But if you looked at a deal that's extremely risky, it's in terrible location, very little occupancy, very low revenue, other issues, flood plain issues, utility issues. If that deal can't make you a ton of money, you would never wanna touch it. And that formula has kept Sam Zell out of trouble for almost a half a century of real estate investing because he follows it to the T. He has on the back of his business card. And so you need to have a healthy measure of risk versus reward.
Another item you need, just like your car, is you gotta have a plan B. You gotta figure out how to mitigate your risks. Some risks can be mitigated and others cannot. So what are some risk that you can mitigate? Well, for example, I can mitigate a lot of risk just based on insurance. For a lot of people with Hurricane Ian, even though their homes might have been blown down, they still won't lose everything because they had insurance for it. So their worst case scenario is gonna be they may have lost some of their personal mementos, some of their clothes, but in the end, they get a brand new house. So a lot of times you can mitigate with insurance. That being the case, look on your RV Park at all the various forms of insurance you can carry and make sure you have them and enough of them to pay for whatever bad thing might occur. That's one way to mitigate. Another way to mitigate is to think of what the plan B is in the event of a problem.
If you have an RV Park, for example, that's in a hurricane area, what is your plan in case a hurricane starts to head your way? Do you go ahead and ask all the customers the leave? Do you bat down the hatches? Do you put plywood over all the windows of the office club house? What do you do exactly? Have lots of those plan Bs at the ready because that way you'll feel that you're prepared. That'll give you the freedom from fear because you'll know the playbook in any instance. A lot of things that happened with RV Parks that happened bad could have been prevented. They could have been mitigated on the front end or they could have been insured around.
And once again, that's going to give you much greater confidence in those deals that those are deals that were worth doing. The bottom line is, if you take any RV Park deal in America, I don't care where it is or how big it is or how small it is, and you really analyze it with the sole goal of trying to reduce your fear and concerns, that is achievable. All you have to do is break it down like a scientist, put on your white lab coat and look at that from a very objective manner. Don't just look at every deal emotionally. Don't just look at every deal as though it's more of a book report. There shouldn't be any enthusiasm in there, nor there should be an inherent negativity. All you wanna do is break down the components, figure out your worst case, your best case, your realistic case, look at your risk versus reward ratio, figure out what you can do to mitigate your risk and what you can do to ensure around it. And the bottom line is, on any deal that you take these tips and you analyze using those filters, you'll be able to make a good decision and a decision that is free from fear. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.