The turn-around plan to maximize most RV parks is to increase occupancy and rents. But there’s another component that more and more RV park owners are considering. In this RV Park Mastery podcast we’re going to address the issue of physically expanding the number of lots in your RV park. These expansions can be very profitable, but also come with some pitfalls that must be considered.
Episode 48: Growing Your Business – Literally Transcript
Growing the income on an RV park is typically thought to be increasing occupancy and increasing rents, or maybe what you're gonna do is cut some costs and adopt all kinds of new, more professional business practices that mom and pop are lacking. But this is Frank Rolfe, the RV Park Mastery Podcast, we're gonna talk about a different way to grow the income of an RV park, and that's simply through expansion. Now, how does expansion work exactly with an RV park? Well, as you can guess, essentially, you're gonna be adding lots on to the existing RV park. So the first thing you'll need to do in expansion is you'll need land.
Now, some RV parks have a footprint that's not been fully developed. But typically, that's not the case. So when you're gonna develop and expand an RV park, the first thing you have to see is if there actually is contiguous land that you can build out, maybe vacant land on one of the three sides, with the fourth side being the road itself. And if there is land available there, then there is a potential to expand. The next thing you have to do is you gotta figure out if you can obtain whatever permits are required to expand. Check with your city, your county, even your state to make sure that there's nothing that will preclude you from adding some more lots on. Then you've gotta figure out exactly how you're gonna do it, how are you gonna expand the streets, how are you gonna expand your utility structure to meet all the requirements to build those extra lots. And of course, you have to budget for it.
You're looking at the cost to expand an RV park, typically to build each lot will run you somewhere around $10,000 to $15,000 of space. Now, what are the benefits to doing RV park expansion? Well, the first thing is that you are just adding a wing on to the successful motel, as Conrad Hilton used to say. So if your existing RV park is doing well, and you got the occupancy to warrant it, then why wouldn't you add more spaces if you can? You're not betting the farm in doing so, you're just taking in a successful business and an in on a little extra space, no different than a restaurant that adds on a bigger dining room. Also remember, you already have all of your most basic costs covered from the existing RV park, so it's not really an enormous gamble there, you're not adding on any staff, you're not doing anything that you don't already have within the budget of your existing RV park, you're just tacking on additional revenue, and of course, that's very efficient because now you can take that manager and other staff and spread them over more lots, you're also gonna make a property much more valuable down the road when you go to sell or refinance.
There's no question that there's a premium paid for larger properties, more so than smaller. So it makes a world of good sense if your property is doing well to add the expansion, if for no other reason to get you to a lower cap rate and a bigger dollar price down the road. And if you really think about it, what you're doing when you expand an RV park is you're arbitraging the value of the land surrounding you, which really is not that valuable, probably per acre. And then the differential between that vacant land and the value of a successful RV park on that vacant land, you can harness a lot of value doing that. If you look at what the price for land is in areas where most RV parks exist, it's not that expensive. But if you look at the value of the RV park lot as a finished product against the raw land cost and the cost to develop, it's very lucrative indeed.
And that's not to say there aren't risks in expanding RV parks, the first risk you have to know is you have a big problem with lending because very few banks out there want to do expansions, they like already finished income properties, a very measurable and demonstrated revenues and expenses and net income, that gives them affiliate of comfort. Remember the banks, they don't get any upside in your RV park, all they get is hopefully their capital back and interest, so they aren't really big gamblers. And when you wanna do an expansion is the ultimate gamble, you're gonna take some materials, raw land and some utility pipes and some asphalt, and you're gonna turn that into something of value, and to a bank, that's very scary.
So lending is tough when you do an expansion. You will find very few lenders out there that are gonna go ahead and do a construction loan. Now, when you do a construction loan, remember, the big problem with that is that at some point you've gotta convert that to permanent financing, so you have yet another hurdle, not only the hurdle to get the construction loan, but then you have the hurdle to go ahead and get the permanent financing to pay the construction loan off. And construction loans typically have very short fuses on them, so lending can be a real problem. And if you can't get lending, again, it's really hard to come up with the capital because it's expensive to do an RV park expansion. If it costs you 15,000 space to build each space, and you wanna do a 20 space expansion, well, that's $300,000. That's a lot of money. And remember, you can't really leverage that $300,000 in many RV parks in cash down would buy you $1.5 million RV park. So you then have to wonder to yourself, is this really smart of me to do this expansion if I can't get lending and if I have to do that of all cash, maybe instead, you'd be better off just buying an existing RV park with that money.
Another part of expansions a few people know or think about, but I know first hand is a terrifying risk of just when you build things. I don't personally enjoy building or construction at all, chasing after contractors, worrying about if the plans have been properly followed, I find all these things to be miserably pressuring, so if you're not into stress, you will not like the stress that comes with expanding the RV park. If you think your home renovation was bad, then just try that RV park expansion. And then equally scary is just a great unknown of permitting and what happens or what the city and the state and then the county will do to you if down the road when you go to finally get your plans approved and get the thing built, what if they maybe say, "Oh wait, don't you remember? You missed that." So the stress of building expansions is definitely a negative, and of course, the worst case scenario would be if you really did something completely wrong and had to redo it. If you laid your water lines wrong or put in your power system incorrectly and had to do it again, well that might just be absolutely crushing to you financially.
So it's not as though expansions are easy or simple. Well the thing about expansions are they are enormously profitable and they are something that many people don't necessarily think about when they look to buy an RV park. Possibly you can find an RV park that's relatively small at a really good price, and part of your whole turnaround plan is to expand it. Now, how could you figure that out without taking the risk and buying the RV park in the front end, well, you'd have to do exceptional due diligence. But if you have a due diligence provision, it would be possible to go to the neighboring property owner and put that land under contract as well. That way at least, you know you control it. And you can do a track while you're doing the due diligence on the RV park, doing the due diligence on building out the expansion. There's certainly nothing wrong with that. I've had many, many properties that part of the attractiveness to it was the ability to actually expand the size. So it's not only something you can do post-fact, after you own the RV park and you say, "Hey, I think I'm gonna expand it." It can be pre-planned as part of the acquisition process to find properties that have the ability for expansion.
The bottom line to it, all that every RV park owner, every single one in America should seriously think if they are successful with their existing property of what they might be able to do with an expansion. It doesn't work for every RV park. You may not have contiguous land, you may be unable to get the permit, you may just not have the desire to do it, but sampling that everyone should definitely research because it may be a very smart decision for many owners. This is Frank Rolfe, the RV Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.