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.
Webster's defines creativity as the use of the imagination or original ideas. Now, for many RV Park deals right now to succeed, to forge them, you have to use creativity. This is Frank Rolfe with the RV Park Mastery podcast. We're talking all about creativity in a strange America today where interest rates have risen so far, so fast over five points in merely 18 months, never seen before, except almost a half century ago, and a time with so many turmoil and unusual world events.
So you've got the war in Ukraine, the war in Israel. You've got all kinds of problems seemingly everywhere, whether it's oil prices, inflation, the potential for stagflation and all of these events are alarming. They disturb people. They scare people, they scare sellers, they scare buyers, they scare bankers. But through all of these circumstances, there is one shiny light, and it has the ability to still forge good deals using good old American creativity. So how can you get creative with RV Parks to put deals together or even to make deals that you already have a little better?
Well, let's delve into that. Let's first start with creative deal making and what that really means. It means figuring out ways to pay more than you normally would for that RV Park, or figuring out ways to mitigate the risk better in that RV Park. And generally, it means achieving that win-win objective where both buyers and sellers are both happy, but using new creative thought. And when you think about the structuring of creativity with RV Parks, more than likely, the first thing you think of is seller financing. Because when you have seller financing, you are then able to circumvent regular banking and as we all know, bankers like to fit things into nicely confined boxes. But often doing so takes all of the creativity out of it. So how can you achieve creativity with seller financing? Well, the first thing is, with seller financing, you're able to reduce down your potential down payment. If you're looking at an RV Park that needs some work, mom and pop kind of let it go and needs some definite improvement in certain areas, having a lower down payment makes that possible 'cause you're able to apply your cash to making the changes and the repairs as opposed to it strictly as a down payment. So that's one way that seller financing can help you in as much as it can reduce your down payment. The second item is, seller financing can reduce the interest rate.
Right now, a big battle with many RV Parks is mom and pop want a price that is more commensurate with where things were back in the first part of 2022 and not in line with these new interest rates, which can be as high as 7% or 8%. If the seller is willing to carry the financing at a reduced rate, maybe at a rate of 4% or 5%, it makes the deal that couldn't work under a bank structure suddenly doable. So another feature is simply that mom and pop through seller financing can reduce the rate down, which helps you better achieve their price. But also, another option with the seller and debt is for the seller to carry a second to help offset your debt payment if you use a bank. So sometimes the seller, the way they structure debt and capital can also help you on a traditional bank loan. Now, not all banks will allow the seller to carry a second to cover your down payment, but some of them will. Because all they care about is the loan-to-value ratio or LTV, and they don't really care how that was established. Speaking of bank debt, one issue with creativity on bank debt is the ability to do an SBA loan. That's a long been a bell weather for many people to get into the industry is the SBA, small business administration lending is extremely attractive.
It's also still around even in tough times because the whole point of that lending is to create opportunity to create jobs, to create businesses and that's still there in good times or bad times. Another way to get creative when it comes to an RV Park that's not hitting numbers, not doing what it's supposed to do, is to do a master lease with option. Now, what's a master lease with option? In a master lease with option, you take over full control of the RV Park but you have a set price in which you are allowed to buy it at any time, at any place later, over a given period of time, maybe three years or five years time. So that's yet another way that you are able to make it happen, to go ahead and take over the RV Park and make it worth more so that you can buy it at the price mom and pop have by actually actively improving its operation. Number one way that normally works is to take an RV Park that has very, very poor social media and internet marketing, and to change that so now suddenly you're doing a good job of that, which makes sales rise, which makes the price that mom and pop wanted possible.
Another way to get creative with deals is to maybe stretch in certain areas that you feel confident you can succeed in, where you pay a little bit more on the front end, knowing you can make it back quickly. And again, this is typically most apparent in situations where you've got parks where mom and pop never kept up with new technology and as a result have no search engine optimization, you can't really find them online at all, and when they do have customers, they don't do a very good job of convincing them to stay there or to get positive social media reviews. Another way you can make a drastic change to an RV Park overnight, is to increase the rates to market slightly. So if the going rate is $30 a night, and mom and pop are charging $20, another step in the right direction which you could impose quickly would be to maybe go to $25 initially, which is a big boost, over 20% of what they were charging, and this money you could easily get because no one's going to balk because you're still the cheapest RV Park in town, but that you can actually get going immediately. And so sometimes if you look at where that RV Park could be, almost immediately after your take over, you could put some of those numbers in to the general net income as part of deriving what it's actually worth.
The bottom line on creativity with RV Parks is you gotta think a little outside the box. Some moms and pops want a certain price, they missed the train, they should have sold back no later than the first quarter of 2022 before Jerome Powell went nuts with his interest rate journey, but now, if they missed that opportunity, it doesn't mean deals can't be struck. Deals still get forged all the time despite these circumstances, but they do so using creativity. And one more thought I would throw to you is more than likely we've reached the pinnacle of the rates. It appears that the fed is maybe pausing or ending rate increases due to all these terrible problems in America right now, and the fact we're surely going into a recession, maybe even a depression, none of us really know. But more than likely, the way the fed combats recessions and depressions is to drop interest rates, typically by two points or more during the recession, which means the interest rates of today will probably be two points lower maybe even as early as next year or the year following.
If you buy an RV Park right now based on these creative methods to get your foot in the door, when those rates go down, you'll look like a genius because cap rates follow interest rate. And if cap rates decline two points along with interest rates, overnight based on whatever price you pay, you'll have a huge gain, you'll look magnificently smart on paper, even if you didn't do anything, simply because valuations will shift overnight and any RV Park that was purchased will be worth more as the cap rates and the interest rates decline.
This is Frank Rolfe for the RV Park Mastery podcast. I hope you enjoyed this. Talk to you again soon.