In most real estate investing you make your money on the front-end, with your selection of property and your assessment of its traits and financial performance. RV parks are no different. So how can you buy an RV park in the smartest way possible, giving you the best chance of success with the least amount of risk? In this podcast we discuss the Top 3 Action Steps in successfully buying an RV park.
Episode 4: The Top 3 Action Steps To Being A Smarter RV Park Buyer Transcript
Welcome back to the RV Park Mastery Podcast. This is Frank Rolfe. Let's talk about something that everyone wants to do well at, and that's buying an RV park. But sometimes, they miss some of the most important items to having that be successful. We're going to title this the Three Action Steps to Being a Smarter RV Park Buyer. Now, we all know that when you buy any asset, the whole goal is to buy low and sell high. We know the basic things that you hear about on TV or in a book, but unfortunately, you have to get much more granular than that to really succeed at anything in today's world. And so, I want to go over three items that most people don't give a lot of time talking or reflecting on in the media. But in fact, we've found, over the last nearly 30 years of buying and operating RV parks, is an important skill to have. So, here they are, the three action steps to being a smarter RV park buyer.
Number one: think like a lender. Think about your exit strategy. Never buy an RV park that you cannot easily finance or easily sell down the road. That will always keep you out of trouble. Ross Perot, famous American businessmen that built up EDS and then sold as General motors years ago, was one of America's early billionaires. He learned this skill from his dad. What his dad would do is he would take him to swap meets and ranch events. They lived out on a ranch somewhere, and I think in Texas, and so, typically, people would go to these events and they would buy souvenirs and take them home. His dad gave a different angle on that. He told Ross Perot he would give him money and tell him he could buy anything he wanted there at the swap meet, but he had to sell it before they went home. And that would teach him all about business, and he could keep the profit.
So, he'd typically give Ross Perot a small amount of money, $5 or $10, which would occupy him throughout the day. But then, whatever he bought, he had to resell. Perot learned from this, the necessity of buying things which have an exit strategy. If he bought a pair of spurs from one vendor that he thought was a really good buy because he bought them for only $4, but he felt somebody else would pay him $10, he then got to put that to practice because at the end of the event, he had to go sell the spurs. If he only got $2 for the spurs, then he lost money. But if he got $10, he'd have even more money when he went to the next ranch swap meet. So, exit strategy is just as important today with you as it was with Ross Perot.
Now, what are the key reasons that you need an exit strategy even on the very first day you buy the RV park? Well, one thing is, none of us really know the future. You might buy that RV park and then only a week later, you may have a terrible health diagnosis or who knows what? So, you always have to imagine when you buy anything that at some point, you may need to sell it. But there's another reason, and that's because when you think exit strategy all the time, it goes all the way through on every decision you make so that you're always thinking the right way. Because when you want to sell that RV park years and years down the road, not immediately, probably, it will help you steer that property into just the right spot. Because when you think exit, you're going to be thinking like a lender, like what a bank wants.
Nobody buys RV parks for cash. Everyone buys them with debt. So, who's the boss when you buy things with debt? That's right, the bank is the boss because if you don't get a loan, you can't buy the RV park. So, you want to make sure that everything you do from beginning to end helps steer that RV park into just the right zone such that every lender will love it both today, and tomorrow, in a month, in a year, and 20 years from now. You want to stay in that zone. You don't want to go off in these RV parks that don't have an exit because the location is terrible, there's some other issue, or the thing floods every other year. That's going to kill you when it comes to exit. But also, it's going to kill you when it comes to ownership. Typically, things that don't have an exit strategy, there's a reason for that. No one wants to own them, and you probably shouldn't either.
The next item: be sure and put plenty of cushion in your budgets. Now, I know that everyone wants to buy as big a thing as they can humanly own. And we all have an ego and want to buy only things that are impressive at a cocktail party, but don't do that to yourself. Don't overstretch what you're doing, and don't put false expectations on yourself. If you're buying an RV park, even though mom and pop promises you and guarantees you you'll have X number of lots occupied per month throughout the year, don't run with that number. Give yourself some cushion. Maybe you build in the [inaudible 00:04:46] head 90% or 80% of what mom and pop did on the revenue side. But then on the expense side, once again, you've got to make sure that you give yourself plenty of reasonable cushion in those numbers.
Real things happen in real life. Things break, things like COVID occur. None of us can predict the future, but one thing's for sure. If you ratchet your numbers down too tight, it's a very, very tough position for you as a business person to succeed at. And you don't want to buy an RV park where you're already behind the eight ball when you buy it. You want to give yourself plenty of cushion. Now, you may say, "Well, I tried to do that on this RV park that I was looking at buying, but when I put the cushion in, I couldn't make the numbers all work." That may be a sign to you that maybe you should either not buy that or should renegotiate the price lower. We've always found that for the average person, they always missed their targets. Whenever they budget, they miss it. Why? Because they're kind of optimistic.
People don't normally think in terms of the worst-case scenario. They always think the best-case scenario. And if they're going to err, they always err, typically, to the good side because they're all excited about buying that RV park. They're all excited about all the great things they're going to do to improve it. So, they sell themselves on the idea, and sometimes, they can get themselves into trouble. So, just make sure when you're forecasting those budgets, whatever the budget may be for that property, that you've allocated a reasonable amount towards all those things in life that can go wrong. You never want to be so tight in your numbers that there's no wiggle room whatsoever. It's just tough to live life that way.
You would not want to drive your car around with four of the five lug nuts off each wheel with just enough gas that you might make it home if you're a lucky. No. Why would you do that to yourself? Cut yourself some slack. Prices can always be negotiated a little lower. There are different things you can do. You've got to make sure you've got adequate cushion. You do not want to box yourself into a corner. It's just not a good way to live. A lot of people listening to this want to buy an RV park to reduce their stress. They want to have an additional income stream. They may want to go out and self-manage the RV park. Don't add to your stress. Just make sure your budgets have plenty of cushion in them.
Finally, you've got to do great due diligence. People ask me, "What's the number one difference between people who are successful with RV parks and those who fail?" The answer will be, "Who did the great due diligence?" Because those are the people who always seem to win, and the people who do not, for the most part, typically fail. Now, that's been known all the way back since our country's founding in the 1700s. Ben Franklin once said that, "Diligence is the mother of good luck." What did Franklin mean by that? He simply meant that you improve your odds of success when you have checked out every possible thing that can go wrong and you know exactly what it is, how to mitigate it, and what plan B is if it does go wrong.
Now, if you buy an RV park and you don't do good due diligence, what will happen? Well, probably your revenue will not be what you expected. Your expenses will be higher than you thought. And there may be some other huge CapEx problems you never prepared for. Maybe your pool actually is broken. It needs massive repair. Maybe your roads need work. Maybe there's erosion over there at the lake that you've got to fix. Who knows what it may be? People who do great due diligence, they already know these factors going in. But people who do not do great due diligence, these things always befall them after they've purchased it. And that's, again, not where you want to be as a buyer.
You want to go ahead and buy a property, you want it to perform like you thought. You don't want to buy a property and all the time be reactive in nature. You want to be proactive. You want to identify those problems and fix them on the front end, right? You don't want to be reactive where all the time you're trying to run backwards, putting out fires of each thing that may pop up. Remember that due diligence basically is all about removing risk. That's really all it is. It's just a fancy name for those who don't like risk.
Now, none of us like risk, but we all take risk. Every day, when we pull out of our car, pull out of our driveway, we take risk. We could be in an accident. We could be hit by a drunk driver. Our car could break down and strand us. But we all know that you have to take some risks in life to advance. There's an old quote, "Behold the turtle. It only makes forward progress when it sticks its neck out." And so, I guess we're all a little bit like that turtle. But you don't need to take unnecessary risk. Normal risk is a part of life, but unnecessary risk is not. By unnecessary risk, I mean that you need to figure out on anything you do with that RV park, all the different ways things should go bad and make sure those will not happen on your watch.
And if there do have any risks out there, you need to identify the risk and what your plan B is to mitigate those so if anything should happen, you'll be in as good shape as you can be. I really honestly don't know anyone who's been in the industry for very long, who doesn't meet the profile of a non-risk-taker. Now, of course, life is filled with those who take risks, and many of those people are very, very lucky. Right? Down there in Las Vegas or near the casino near [inaudible 00:09:51], there's that one person to put $5 into whatever that gambling game is and won the jackpot. But there's a million people who put their money in and lost. And that's the problem is often in life, we only hear about the lucky people, people who succeeded against all odds.
But you don't want to be a lucky person. You want to make your luck. You don't want to be a gambler. When you buy that RV park, that should not be seen as you gambling with your investment money, with your future. That needs to be you making a good strategic plan, one in which you've identified every possible risk, and you know what they are, where you stand, and what plan B is if any of those should pop up. Again, this is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoy these three action steps to being a smarter RV park buyer, and we'll be back again real soon.