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Welcome to the RV Park Mastery Podcast, where you will learn the correct way to identify, evaluate, negotiate, perform due diligence on, renegotiate, finance, turn-around and operate RV parks. Your host is the 5th largest owner of RV and mobile home parks in the United States, Frank Rolfe.
I've never had one, but I have seen videos and descriptions from people who have of what they undergo when there's a medical stress test done. They'll affix an oxygen mask to them, they'll put them on a treadmill; they'll put different wires on their chest to listen to their heart, lungs, other vital organs; and they'll have them walk or even run to see what happens, what the signals say. Because the doctors are trying to figure out how far they can press their body before bad things occur, perhaps a heart attack or a stroke. And in many ways, when you're buying an RV park, you need to stick an oxygen mask on it and get it on a treadmill and put wires on it to see what would happen in the event of bad things. This is Frank Rolfe with the RV Park Mastery Podcast. We're gonna talk about doing a stress test on an RV park you're looking at buying.
And let me first say that it's always important when you're looking at any asset—I don't care if it's an RV park or a car or whatever you're looking at—that you always remain skeptical. You never get emotionally involved in any purchase of anything until you've gotten the facts and the stats. And with an RV park, while it can be very exciting to contemplate buying it, getting that additional stream of income, those are all admirable things. But we all have to keep our white scientific coats on because we don't want to buy something if it's not gonna work for our own purposes. And therefore, you can't remain the continual optimist. You have to put a little pessimism. You have to put on your doubter's hat when looking at many RV parks. And you've gotta do a very good stress test if you really want to play it safe, that your park can weather the storm, no matter what that may be.
So, how do you do it then? Because I think we all would agree that typically on any RV park you're gonna buy, we'd like to know what happens in those what-if scenarios. So, when you're doing a stress test on an RV park, you can't just go put it on a treadmill. What you're going to stress test are those financials. You're gonna look at all of the different scenarios of revenue coming in and costs going out, and you're gonna manipulate those for your own devices to see what happens if certain things should occur.
Now, every RV park has its own list of key risk. Normally it revolves around revenue, but there are other things that could happen. You may be in a floodplain. You may be concerned about the property tax being adjusted, particularly if you're down in Texas. There's other concerns you have beyond occupancy. And all of these things, to really be comfortable, we need to stress test. So first we're gonna make a list of all the things of concern. Normally the things of concern will certainly start off with revenue. Mom and Pop have an average of 65% occupancy, but let's say things don't go well from the start. Let's say that the occupancy declines to 50%, 40%. What happens to the numbers? And then let's make things worse. Let's say the occupancy declines to 50%, but at the same time, property tax and insurance and utilities all rise 10% or 20%. Can you cover the mortgage now? What will the park look like when you go to sell it at the end of the movie? How do those things look on paper to you?
Remember that a lot of smart buyers use a three-part scenario: good case, bad case, realistic case. And what we're trying to achieve here is a fairly reasonable worst-case scenario by looking into our deepest fears, like a horror movie. Someone's gonna open the door in the old basement. What could be the worst things behind the door? Jason with a knife out of a horror movie? A snake? What are the options? That's what we're trying to figure out because that's the only way we can go through life knowing if we open the door, that we are ready to handle whatever there is. So you have to look with a list of all of your key risk items. And then you have to reasonably, like a scientist in a white lab coat, say, "Okay, well, if the floodplain came through and I have 20 lots I can no longer use, what happens to me?"
But at the same time, we have to be fair on the stress test. I could kill off any human on a stress test by changing the treadmill to a four-minute mile. Most Americans could never survive that; many Olympians couldn't for longer than a very short period of time. So you have to be reasonable in your negativity. So on the floodplain example, you might say, "Okay, well, let's assume I have the flood. I can't use those lots, but yet I can use them again when the water goes down. But I'll have to take into account the CapEx to get those electrical lines repaired. Let me put those into my numbers."
But you can't go full-on worst case. You can't say, "Every time I drive my car out of the driveway, I'm very likely to crash into a tree, be hit by a truck, car could explode." No, that's a little extreme. Those really are, although that's definitely putting your negative hat on, that's probably overkill. But you need to look at these items and say, "Okay, what is the net effect?" And then you gotta look back and say, "Okay, what was I trying to achieve to begin with? Why am I being so negative? Why am I stress testing the deal?" Because we're trying to figure out what it can reveal, what it can tell us about the property and how safe that property is.
The late Sam Zell was the largest owner of mobile home and RV parks in history. Probably that record will probably always stand. And he had a very simple motto in life. If you ever read his book called "Am I Being Too Subtle?"—it's a wonderful book—and he'll talk about the way he looks at everything. And the way he looked at everything was he was always looking for risk, how to mitigate risk, and always asking himself if the return was high enough to handle the risk. He would tell people who worked there, if a deal has low risk and high reward, always buy it. High risk and low reward, never buy it. And the only thing worthy of knocking on his door and discussing was high risk versus high reward.
And that's what we're trying to tell on the RV park when we stress test it is, is it too dangerous to be worth the amount of money you're paying? And what that ultimately leads you to with your stress test then is, should you renegotiate the price or the terms? Because if the RV park is of enough interest to you at this point in the movie that you're gonna do a stress-test analysis on it, clearly everything else looks pretty good. The location, the permit, all the key items, those must be favorable or you wouldn't even be considering making the purchase.
So at this point, what we're trying to do is simply to realize in a worst-case scenario, but also in the best case and realistic case, does this meet all of our investing objectives? And you'll also learn from doing this exercise what you really need to fear versus not fear. Because you'll soon realize that there are some things that have a lot greater bearing on the financials than others. Because as a good owner, you need to know what the key risks are so you know what to focus on mitigating. And as a human, and none of us like stress, you also have to know when bad things occur if that's a huge issue or not.
Stress testing is a wonderful idea. Many of your best lenders all engage in stress testing behind the scenes. They don't tell you about it often, but they do it. And I would urge anyone looking to buy an RV park to definitely perform a stress test on any RV park you buy. This is Frank Rolfe with the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.