Americans love hitting the open road. And what better way to do it than in an RV (recreational vehicle)! Although in the past many RVers were retirees and summer vacationers, an increasing number of Americans have embraced RVing as an everyday way of life. As RVing becomes more popular, the number of RV parks continues to grow across the country.
Whether visiting natural wonders like lakes, rivers, and mountains or simply passing through on the way to another destination, vacationers enjoy the convenience of RV parks. In this post, we look at the nuts and bolts of RV park investments; the perks investors enjoy and the pitfalls you might encounter along the way.
RV Park Investments
Even if you don’t own an RV, investing in an RV park can be a lucrative financial decision. Here are 4 reasons to invest in an RV park:
- Currently, RV sales are strong. The industry took a massive hit with the 2008 recession but has seen exponential growth in the past decade. In 2017, manufacturers shipped 504,600 units, an all-time high. What’s more, the retail value of these RV shipments topped $20 billion. Though the industry has seen a marginal decline in units sold since 2017, more Americans than ever now own an RV.
- Campground industry giant Kampgrounds of America (KOA) reports that the company is continuing to grow after close to 60 years of operating RV parks.
- Furthermore, RV park returns on investment are excellent (More on this topic below).
- Lastly, RV parks have very little infrastructure and facilities to maintain compared to your average investment property such as retail or office buildings.
RV Park Return on Investment (ROI)
Generally, RV parks offer a higher ROI than many other types of commercial properties. According to most sources, you could expect anywhere from a 10% to 20% return on your initial RV park investment. As a result, investors who are hoping to maximize their investment dollars should consider RV park investment a lucrative option.
One way to ensure a high ROI is to look for RV parks that already have existing amenities in place. Modern RVers demand such amenities as swimming pools, sports facilities, wifi, fitness centers, and dog parks. Be certain to look for properties with existing infrastructure in good condition (water, electrical, etc). This way, you won’t need to spend money upfront developing the RV park or improving the infrastructure. Eliminating unnecessary costs will further increase the RV park return on investment. Also, as is the case with any investment, be sure to visit the property in person prior to making a commitment.
RV Park Capitalization Rate (Cap Rate)
One method to discern whether an RV park investment is worth your time and money is to calculate your capitalization rate, or Cap Rate. In general, this simple formula indicates a property’s value. Specifically, it is the percentage of annual return (a.k.a. ROI or return on investment) you might earn from the cash purchase of an RV park.
Below is the Cap Rate formula:
Capitalization Rate = Net Operating Income (NOI) / Current Market Value
However, before you can calculate an RV park capitalization rate, you need to know the RV park’s NOI (Net Operating Income). If you’re not familiar with NOI, this is the amount a commercial property owner has left after paying Operating Expenses from the RV park’s Gross Income. Operating expenses are things like taxes, insurance, and maintenance costs. This is represented in a formula:
NOI = Gross Income – Operating Expenses
Once you learn the RV park’s NOI, you can then calculate the RV park capitalization rate. And the Cap Rate will give you an idea of the property’s value.
To make this formula more concrete, imagine you buy an RV park for $1 million. Whenever people stay at your RV park, they pay rent, which is also known as your Gross Income. However, maintaining the property takes money, which is your Operating Expenses. The Operating Expenses are paid with the funds from the Gross Income. Your NOI is the remainder after the expenses. For the sake of simplicity, let’s say your annual NOI is $100,000. We can then plug this number into the Cap Rate formula:
$100,000 / $1,000,000 = 0.10 (10%)
According to this example, this RV park’s Cap Rate would be 10%. Essentially, your NOI would cover one-tenth of the property value’s total cost.
Undoubtedly, calculating your possible Cap Rate is a simple and helpful way to judge an RV park’s potential ROI on a cash purchase. However, be aware that Cap Rate is only a surface-level calculation. Additional research and due diligence are necessary before buying an RV park.
Other Considerations for RV Park Investments
On top of everything outlined above, there are also several important factors to remember when investing in an RV park. First, when you purchase an RV park, you must make sure you have competent on-site management. As is the case with any investment property, having less than top-notch management will negatively impact your investment.
What’s more, people need to know about your RV park. Without customers, your RV park investment will suffer. Therefore, you need a solid advertising and marketing strategy to make people aware of the RV park. Even though word of mouth goes a long way, you also need key marketing strategy in place to ensure the best possible return on your investment.
To have a successful RV park, you’ll need marketing options like a responsive mobile website, targeted ads, social media marketing, and email marketing.
Pros and Cons of Owning an RV Park
Owning an RV park has many advantages. More Americans than ever own RVs, so there’s already a built-in base of customers. Purchasing an RV park means you’re getting in on an already growing market (with even more potential for growth in the coming decade). On top of that, RV parks tend to offer higher yields to owners that other commercial property investments. As stated above, investors can expect a 10% to 20% return on investment. Lastly, as an RV park owner, you’re providing a great spot for people to relax and enjoy leisure time.
At the same time, owning and RV park does come with some disadvantages. For starters, an RV park is actually part of the hospitality industry. This means you’re not just investing in commercial real estate; you’re investing in an industry that requires special skills. If you do choose to operate the property yourself, then doing so profitably requires a significant investment of time. If you don’t plan to operate it yourself, then you need a skilled and experienced management team. Without a quality on-site management team, your investment will suffer.
Making Smart Investments
Undoubtedly, RVing is an excellent way to escape the daily grind and see the country. With an RV, you can travel the open road without worrying about where you’ll stay or where you’ll eat. RVers only need a safe place to park each night. With RV travel constantly growing in popularity, RV parks are a very smart commercial real estate investment.
If you want to diversify your commercial real estate portfolio and also get a better return on your investment, consider investing in an RV park. But before you buy, make sure you consider the RV park’s location, amenities, and size.
RV parks need much less attention and overall maintenance than other types of commercial real estate investments, making them an excellent option for today’s real estate investors.