Americans love hitting the open road. And what better way to do it than in a recreational vehicle (RV)? Although in the past many RVers were retirees and summer vacationers, increasing number of Americans have embraced RVing as an every-day way of life. As RVing has become more and more popular over the past few decades, the number of RV parks has also grown.
Whether visiting natural wonders like lakes, rivers, and mountains or are simply passing through on the way to their destination, people enjoy residing at RV parks. In the post, we look at the nuts and bolts of RV park investments, talk about perks, and warn you about some of the pitfalls or RV park ownership.
RV Park Investments
Without purchasing an RV park is a lucrative decision. To give you confidence in this choice, here are the top 4 Reasons to Invest in RV Parks:
- Currently, RV sales are strong with RV makers producing record numbers of trailers and motorhomes. In 2017, manufacturers shipped 504,600 units, an all-time high. What’s more, the retail value of these RV shipments topped $20 billion.
- 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 parks offer excellent returns (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 investing in an RV park.
One great way to make sure you get a good ROI is to look for RV parks with existing amenities that modern RVers demand such as swimming pools, sports facilities, wifi, fitness centers, and dog parks. Be certain to look for properties with existing infrastructure (water, electrical, etc) that is in good condition. This way, you won’t need to spend money upfront developing the RV park or improving the infrastructure. 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 learn whether an RV park investment is worth your time and money is by calculating 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 Cap Rate, you need to know the RV park’s NOI (Net Operating Income). If you’re not familiar with NOI, it is what 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, then you can also learn the Cap 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.
Making Smart Investments
Without a doubt, RVing is a great way to escape the daily grind. With an RV, people can travel the country without having to worry about where they’ll stay or where they’ll eat. Their main concern is where they’ll park the RV. Due to growing popularity in RV travel, RV parks have become a smart commercial real estate investment.
If you’re looking to diversify your commercial real estate portfolio while also getting a better return on your investment, consider RV parks. As stated above, these commercial properties require less overall maintenance than other types of investment properties. Be sure to consider the location, amenities, and size before you purchase an RV park.