RV park owners often have the wrong numbers in their payroll category – and it can be a big cost that can skew the numbers either more or less attractive than they actually should be. In this RV Park Mastery podcast we’re going to review what should and shouldn’t be in the P&L regarding labor cost and why so many moms and pops get this number wrong.
Episode 47: Understanding Payroll Transcript
Barbra Streisand once said that people who need people are the luckiest people in the world, but that's not always the case when it comes to trying to maximize your RV parks net income. This is Frank Rolfe, the RV Park Mastery podcast. We're gonna talk about understanding payroll. It's one of the biggest line items on any RV parks financial statement. So let's just start from the beginning, who do you really need on your team? What payroll do you really need with an RV park? Again, this is very broad brush, every RV park is clearly completely different. In general, you know you have to have at least one person. And that's the manager. Why do I need a manager? Well, you have to have a manager because somebody has to accept the rent. Someone has to maintain law and order and watch over such items as property condition and customer satisfaction, so we knew... We knew we have to have one person. Now, I was in an RV park once it was on the honor system, strange idea, you basically put money in a slot on the honor system, 'cause there was no active manager on duty, but if you really think about that that's so inefficient. I'm sure people were cheating, I'm sure that problems popped up from time to time, and went unnoticed since you didn't know who to talk to, they probably had water leaking, things broken, who knows what happens, so I'm not really sure that's smart. I know you need to have at least that one person, and that's the manager.
If you have a really large RV park where the manager is very actually talking to different people and checking on things, in fact, you might need an assistant manager. This will be the person who mans the desk when the regular manager is out on property. This is the person who mans the desk when the regular manager is maybe sick, has an emergency, has to go on a vacation. So there's another person you might need, underline the word might. And then there's a third person that you might, underline the word might need, and that's a maintenance person. If your Park has a lot of amenities, if it has a pool, and shuffle board and volleyball and all these different items to maintain and you got your regular mowing that you need to do, then that might be a third person. But you sure don't need a team of eight or 10 or 12.
Some of these RV parks have massive amounts of staff, and it's very hard to make sense of it. One good way to bring that to a head would be to do a time sheet, to see what people do. Do a time sheet for a week and see what they're doing, and then see if it's really worthwhile duties that they are doing. Or if you couldn't cut down on the people and still get to save the amount that's done. Before you even begin that process one question would be, how long do I need them for? Is this a seasonal property or is this year-round? So if it's a seasonal property, then clearly you're not gonna need people year-round if you're closed six months of the year. But if it is year-round, payroll will be a lot more important to you and it will also be a lot more expensive.
There's a lot of rules to follow when it comes to people and hiring and managing and firing people today. America has become endlessly more sophisticated in the desire to create litigation and other problems for anyone who dares to hire another American. So what do you have to worry about? Well, one would be minimum wage, if you're going to pay whoever you're hiring at your RV park to do a task, you have to make sure that when you get done with it, that you pay them at least a minimum amount per hour required in your state. So you've gotta have a good handle on the minimum wage law, that's a really important one, and then you have to understand all of the Federal and State Laws regarding just employees in general.
What do you have to do? Do I have to put up a poster somewhere? You probably do. Are there steps I have to take before I can fire someone? Yeah, probably so. Are there dispute resolution requirements? Yes, I'm sure there probably are. So you need to know all of these laws. Don't even think about hiring somebody till you know what the rules of engagement are. Also, you have to decide whether this person will be salaried or hourly. In most states, there's a minimum amount you can pay, and if you don't reach that threshold, they cannot be salaried, but simply hourly. So understand the laws in your state between hourly and salary, and also make sure you have the proper insurance for the liability risk of having someone just even one person can definitely be a time bomb of liability if that person is not working in your best interest or that of the RV park. So make sure you have all the correct insurances on that person, such things as workman's comp and liability, and even EPLI. Ask your agent what you need to make sure you have the right amount of insurance to go with that.
Now, what percent of revenue should your payroll be with an RV park? Well, it's a wide range. In general, it's typically around 5% to 10% of gross, that's pretty normal, and we know the expense rate of an RV park is typically around 40% to 50%, so if the expense rate is 40% to 50% and the payroll is 5% to 10%, it's very clearly a big, big part of the cost factor of that RV park. So it definitely is worthy of a lot of focus. Don't just say, "Oh, well, you know what the heck the RV park's doing well." Well, let's think about that for a moment, every dollar you're paying that person when it comes time to sell or refinance an RV park, that'll be probably about a 10 for one based on the cap rate. So if I have someone, I don't really need them and they cost $20,000 a year, well, that's probably gonna cost you about $200,000 or more of value when you sell or refinance. So even the lowliest employee, you really gotta think, do I really need that person? 'Cause the impact here is more than just what you pay them, there's a whole bigger judgment day coming when you refi or you sell it. And payroll is often a really big opportunity in many RV parks, why? Well, because a lot of moms and pops over the years, they start hiring their friends and their relatives literally, and they have these people that hang around on payroll, but they don't actually contribute to the business, they often don't even have a role, and frequently they don't even show up.
It's just basically dead weight. Now mom and pop may be okay paying these people because they think, well, I have to subsidize them anyway, and at least this way I can kind of write it off. But you are not in that position, these are not your friends and family members. So if you walk into an RV park and it's got a huge percentage of the revenue on payroll, 20%, 30%, you should know on the front end that that is gonna be part of your turnaround program, here is something where you can really impart some serious value. And one thing that's really positive when you have payroll issues, when you're buying the RV park is you can fix it immediately. This is not something that takes years to enact, this is not something with some kind of a large CapEx cost to reap the harvest later, in this case, based on your laws, and again, you have to know the laws, but following the law to the letter, and if you get rid of these people that will definitely really enhance your bottom line.
I've seen some amazingly large payrolls of some RV parks, hundreds of thousands of dollars, people were completely not needed, and all the new buyer had to do is simply let those people go. So don't look at a big payroll as necessarily a negative, it may be an opportunity for you. It may be your chance to actually heighten the net income nearly immediately, you know it takes time to improve NOI in other categories. If you wanna increase your rent, well, you've gotta go ahead and get your market comps and it'll only be enacted on the new customers, let's say, maybe you have some others that are legacy customers, you do that more slowly. If you wanna increase the overall occupancy, you have to run ads and there's maybe a delay factor to that, but when it comes to cutting cost, payroll is definitely one that delivers immediate gratification.
So you really need to look at it, you need to really put a pessimist viewpoint on anyone in that RV park and say, do I really need this person? And if the answer is, well, I kinda need that role, the other question would be, is this really the best person for that job? And can I get someone at less cost? Because again, this is your opportunity to really, really enhance your bottom line. Don't continue on with bad practices by the mom and pop owner. Sometimes what happens with moms and pops are when they first built or bought the RV park, they've tried really hard to maximize the net income, but over the years, they lost their way or maybe their priority simply changed. Maybe a lot of the payroll editions that they have were done at their own convenience because they wanted to go on frequent vacations or it's friends and family members that they were trying to help. But don't continue on thinking, well, this is the way they've done it, I don't wanna rattle things, I wanna go ahead and just keep going like it is, 'cause it's just so smooth. It's not really fair to you as an investor, the whole point of being an investor is to maximize that asset, not just selfishly, but you wanna go ahead and make that asset the best it can be in all regards, best in property condition, best in customer satisfaction and yes, best in profitability.
It only makes sense. That's why you bought it, you're an investor. And investing should be important to you, and having people around on payroll that don't need to be there or who are too highly overpaid, it's just not a great thing. One final item on payroll is a lot of people who buy RV parks, they buy them and realize that one of the benefits of owning it is they can actually make themselves the manager. They can self-manage that RV park. Many of the largest RV parks in America are self-managed. There's certainly nothing wrong with that, this may be another chance to really boost your profitability by making yourself the only employee and by saving that cost it can make all the difference in the world. This is Frank Rolfe, the RV Park Mastery podcast. Hope you enjoyed this and talk to you again soon.