RV Park owners have the benefit of getting paid twice: once with monthly cash flow and then a second time with appreciation in value. So how does this occur and how can you estimate your rate of return with this knowledge? In this RV Park Mastery podcast we’re going to explore why RV Park owners get paid twice and what this means for your investment success.
Episode 90: Understanding How You Get Paid Twice Transcript
How would you like to get paid twice? Of course you would. Everyone would like to get paid not once, but two times. And it happens with RV Park owners all the time. This is Frank Rolfe for the RV Park Mastery Podcast. We're going to talk about how RV Park owners typically always get paid twice. Now, the first time an RV Park owner gets paid is on regular monthly cash flow. You have your revenue coming in. You have your bills going out the door. You pay your mortgage payment and whatever that's left over goes to you as the RV Park owner. It's pretty simple math. If you bring in $20,000 in that given month in revenue and your total costs are $10,000 between expenses and the mortgage, then you'd net pocket $10,000 a month.
So that's pretty great and everything. But yet that's not the whole story, because when you are an RV Park owner, you get paid a second time. And typically that's upon the final sale based on the appreciation in the value of the RV Park. Now, how much could that be? Well, it's just a function of net income because an RV Park is an income property, so its value is based strictly on income. A while back, Mark Cuban said that the value of things is just what we perceive them to be, and he could not be more wrong because Mark Cuban works in a world of things that don't really have any value that's tied to actual performance. Case in point, his professional basketball team, they don't make any money. They never made any money.
I lived in Dallas back when he bought them, when he bought the Mavericks. He bought them from Ross Perot Jr. Perot Jr. Had paid $100 million for them from the original owner, and everyone thought at the time he was an idiot and would never get his money back. But no, he found a greater fool in Mark Cuban. Cuban paid him, I think, $200 million for it, even though it had never made any money as long as it had been owned. It was strictly an ego purchase and nothing more. And then recently, Cuban sold a portion of the team at a value I think of around a billion, which went to prove that not only is there a fool born every day, but additionally, many assets in America are not actually tied to income. Your home, you live in, your single family home. If you were to look at that as an income property, would it possibly be worth what you pay? The answer is no. Houses traditionally are not based on income property value, not based on how much income they can produce, but instead based more upon the ego concept of what the pride of ownership might be. But in the RV Park business, that's not the way it works. Everything is based on the cold, hard facts of money that is created. And with RV parks, traditionally, when you buy the RV Park, the whole goal is to improve that stream of income and you improve it by raising rates, increasing occupancy and containing cost.
This is a very simple formula. Not a lot of moving parts. It's not like some professional football team's playbook. No, it's pretty, pretty simple. And if you follow those simple mandates, traditionally, the value of the RV Park will rise. How much will it rise? Well, if you were just to increase the NOI of that RV Park by about 10% each year, which isn't much, then the value would double in seven years. Why seven years? That's what it would be with compounding. If you can't do it on a compounded basis, all right, it would take you 10 years to then double the net income. And by doubling the net income, we double the value of the RV Park.
Now, what does that do to your final number, though? Let's say that all along, as long as you were running the RV Park, your cash on cash return was 20%. What happens when you get paid twice? What do you get in that second leg? Well, based on the estimate I just said, that would increase your value, your total return on that property by another 10%. Instead of doing 20% per year, you would have averaged 30%. Now, how do you come up with that final value of an RV Park many years into the future? Well, it does take some degree of math and planning. You're going to have to model out what you think that the income will be all those years into the future as you do a better job perpetually of grooming the marketing and increasing occupancy and increasing rates and controlling costs.
But there's another part to it. I've got to come up with a cap rate at the end, because again, these are income properties. So I have to come up with some number I can use as a cap rate to define the value of that stream of income many years into the future. Now, what should that be? There's many schools of thought on that, because none of us really can predict the future. None of us know the general direction of interest rates. We can't second guess at the moment Jerome Powell or whoever comes after him. And we don't know what the appetite will be for owning RV parks that far into the future. We can't really guesstimate, really a lot of variables, but we do know some things. Things seem to be bracketed in America when it comes to such items as interest rates and cap rates.
We've seen the lowest interest rates in American history coming out of the Great Recession. And recently we've seen the highest interest rates in the last 40 years. You have to go all the way back to Ronald Reagan to see interest rates higher than they are currently. So if we were bracket between those two extremes, what does it tell you? It tells you probably the future of bank interest rates is going to be a range that will run probably from around five to, you know, eight or nine percent, even. That's kind of the range. And so since cap rates are a function of interest rates, then that means assuming you have to have a cap rate that's higher than the interest rate. We're looking probably at cap rates on RV parks, it would be on the low end seven and on the high end as much as 10 or 12.
Now, if you model it using that ending cap rate and laying out all of the good things you plan on doing both with revenue and expenses and see what you've got, you're probably going to see a progression of value in the RV Park. And once you're able to come up with that final number, less the amount that you pay, take that profit and divide by through that how many years of ownership that you had.
Now, some of you may say, well, I don't plan on ever selling my RV Park. I plan on holding it forever. I'm even thinking of just relocating there and self-managing it. Well, that's fine. Nobody says you have to. But in that case, it doesn't mean the appreciation goes away. And when all of us talk about our rate of return on RV parks, you can't really say the final rate of return until it is ultimately sold because you cannot take into account that second leg, that second payment. It's not fair. If I said, yes, I own an RV Park, it's doing gangbusters, it's making 22% cash on cash return and I still own it. Well, that's not the end of the movie.
And you have to remember that. You can't forget that. You have to be honest with yourself on that. You have to be proud of that potential to say, well, you know, it's done great so far, but we don't really know the final return until the end. And if, in fact, you never sell that RV Park and you end up leaving it to your heirs and dying with it. Well, then maybe at some point they'll know the actual final answer, but it won't be known by you. All that you'll be known is that you do get paid that second time and getting paid twice is really a very magical part of RV Park investing. This is Frank Rolfe, the RV Park Mastery podcast. Hope you enjoyed this. Talk to you again soon.