It would appear that interest rates are about to begin their descent after the fastest rise in 40 years. Beginning in 2022, Jerome Powell from the Fed decided to take the rates from 0.25% to 5.5%. However, that all appears about to turn and this will usher in some great advantages for RV Park investing. In this RV Park Mastery podcast we’re going to review what these benefits will be.
Episode 102: The Pending Power Of Lower Rates Transcript
Since 2022, our nation's been battling rising interest rates, but now the tide has turned. We're about to start seeing interest rates decline. And the question is, what is the impact going to be of declining rates on the RV park investing industry? This is Frank Rolfe, the RV Park Mastery Podcast. We're gonna explore what lower interest rates mean whether you're buying RV parks or already own one. So let's start off with one of most obvious observations from the lowering of interest rates. And that's that it's going to reduce debt cost. So if you're buying an RV park and the interest rate is declining, it means you'll pay less interest on your mortgage. And if you have an existing RV park when it comes up for renewal, again, you'll pay less. And if you have an existing RV park, as rates start to decline, you may wanna refinance that.
Everyone in real estate always likes lower rates. Nobody likes higher rates. So it's always a happy time when interest rates start to go down, much as we are about to start seeing. Also, as interest rates decline, we'll see cap rates also decline. And this is a huge issue whether you're buying an RV park or already own an RV park, because as those cap rates go down and the interest rates go down, what you see is a much greater buildup in your spread because debt is like a tool and at times where interest rates are declining, that tool helps you more than you can imagine. If you bought an RV park at a 10 cap right now and the interest rate on your debt was at eight, that two point spread would build you a 16% cash on cash return. But if interest rates dropped just one point from that, it would drive your return from 16% to 22%. Indeed, fortunes will be made with RV parks, some people who just happen to be lucky, not even smart, and bought RV parks at the start of the decline in the interest rates because the spread that builds from that will propel you to much higher yields than you probably had even originally planned.
Also, the reduction in interest rates is going to be a boom for the stock market. Now, the stock market's been waffling recently 'cause people can't get a handle on when those rates will go down. But pretty much every economist in America and abroad agree the rates are about to come down because we sense that America is about to start having a recession. At a stable stock market gives people a lot of confidence, have to remember that many RV users are retired and they look to their investments in how they're doing to give them an inclination of how much they want to go out on the road and be happy and have fun. And everyone is generally happier in the senior market when the stock market is stable or at least going up. Now also, as the interest rates decline, you'll see everything, all of the stress come away from such items as bank failures and the like, which again, justs gives people a more confident demeanor that makes them want to go out and use their assets more.
In this case, their one large asset that being the RV, the bottom line to it all is in the RV park industry almost everything gets better when rates go down. When rates go up, it puts a strain on loans, on buying on mom and pop's expectations of what they will get for their RV park, which are then dashed because with the increase in the cap rates, they can't get the price say once one liked. But as the rates decline, you reach a whole different atmosphere. Everything gets better, everything gets easier, it's much easier to get loans, it's much easier to get mom and pop the price that they seek. It's much easier for the phone to ring with new reservations and everything just seems to enter the confines of what would appear to be a happy movie with nothing but nice, happy smiles and good things going on.
Now, how do I know this? Because I owned RV parks during the great recession. I owned RV parks during the year 2000 recession. That one was called.com. And I've been through two cycles of when rates go down and when rates go down. That is a wonderful time to be buying if you buy any RV park today that you can just cover the debt and sit there and through no effort of your own let the rates go down. The value of that RV park skyrockets simply because the cap rates mirror interest rates and as one goes down, the other follows suit. And that's where a lot of your value is created. Since 2022 in buying RV parks, it was more of a challenge. It was much harder to get a bank loan. It was much harder to come up with a price that mom and pop would agree to, and all you could use as the way to be happy looking forward back in 2022 was by increasing occupancy and rents. Now you have the additional injection of the fact that you can simply own and profit without increasing occupancy and without increasing rents simply by letting values go up as the interest rates decline. Now, when are they gonna decline? Nobody knows for sure. All we know is the US has had a recession about every seven years approximately, yet we have not had one now in 14 years.
So we are definitely due for one and most of the economic factors, and remember that a recession is defined as two negative quarters of negative GDP, the factors that we will know within the quarters when they're in decline, all those alarm sirens are going off now. So we're pretty certain that if the current quarter we end is not negative GDP, it's coming up pretty soon. And then there's a simple fact that most all recessions have occurred at about this moment in the transfers of presidential terms. So all of the planets appear to be aligned right now to have all of the factors fall into place to make the interest rates go down and when the interest rates go down, buying and owning RV parks will be a very good position to be in. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.