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.
Have you ever talked to a broker of an RV Park and they've said, Oh, that offer you're making is ridiculous. This RV Park is worth at least twice that much. Or have you ever talked to the owner, a mom and pop owner of an RV Park, and they throw out a price to you that might be a 4% cap rate or a 5% cap rate? And when you say, Gosh, that's way, way too high, they say, No, no, that's the right price. You're crazy. You don't know what you're talking about. This is Frank Rolfe, the RV Park Mastery Podcast. We're gonna be talking all about who's crazy and who's not crazy, and give you some kind of sanity check to make sure that when you're out there talking to these brokers and these moms and pops, you fully realize and embrace the fact that you're the smart one and they're not.
Now, let's first start off with, these are income properties and income properties tie to math. So if you wanna talk about products that we don't know the real value of, you have to look at other things, intrinsic things like artwork for example. You see a Monet painting sell for $3 million or $4 million and you say, Well gosh, how does it worth that much? Well, it's all very subjective. It's because someone thought the painting was worth that much. Or they say, Oh, well I think this painting will be hugely valuable in the future. But it doesn't tie to anything. It doesn't tie to any amount of income. It's just what people think that it is. Mark Cuban once said that things are only worth what people think they're worth. Now, Mark Cuban is not in the income property business, or he would know that what he said was wrong.
Because in the case of RV parks, the value of the RV Park is built on mathematical formulas of net income. Now, what is that number? Let's just for example, take the concept when people say a 10 cap. The 10 cap is a 10% return of that net income on the value. And a cap rate is just a fraction. It's just a net income over the price of the RV Park. So if an RV Park makes a $100,000 a year, the top part of the fraction, and it costs a million dollars a lower part of the fraction, you divide the upper by the lower, what do you get? 0.1. And 0.1 means it's a 10% return. And with RV parks, 10% return is pretty typical. That's kind of a minimum target a lot of RV Park buyers have. But that means I can come up with the value of any RV Park based on those constraints by just taking my net income and multiplying that by 10.
In RV Park therefore, that makes $50,000 a year, would be worth half a million dollars and one that makes $200,000 a year would be worth $2 million. But you can see there's a correlation between the income and the value. So that's what makes RV parks unique in the world of valuations against lots of other assets, is it's just based on math. So the first question is, when you're talking to mom and pop and you're throwing out numbers, is who's tying it to the math? If you say, Here's what the net income would be or what the net income is times 10, this would be the value. They can't dispute that. That's just set in stone. That's what any bank or any appraiser is going to go by. They're gonna go buy net income and they're gonna apply some ratio in the form of a cap rate or on the loan, a debt coverage ratio, but it all ties back. In the world of income properties, two plus two equals four, two plus two does not equal nine. So when the seller tries to tell you that two plus two equals nine, you have to push back and say, no, it doesn't, never have, never will. It has to be based on the math.
Now also, when mom and pop try and tell you, No, no, you're wrong in the valuation, it's worth far more because you see, we're gonna add these extra, extra spaces on, or we think you could really increase the occupancy if you work the internet, because we don't do the internet. Here's a problem with that argument because any increase in that income that needs to fall to you as the buyer. Not to them as the seller. So if I'm gonna go out there and start running ads and get a good presence on the internet and I start increasing the flow of customers in the door, who should get the benefit of that? Mom and pop who never did such a thing? No, that should go to you. All the enhancements, all the improvements you make on a property, those are all yours. You did it. Mom and pop didn't, so why would you pay them for that? It just makes no sense when mom and pop tell you and try and convince you that you're crazy, not giving them the value for what you would be doing for your work, your strategy. If you start giving away your profit, well then why are you even buying the RV Park? If you're gonna price it in such a manner that all the good things you do simply make it where you can rationalize buying it, that doesn't make any sense at all.
Now, when you go out to get a loan on an RV Park, unless mom and pop carries, remember, you'll have a couple more hurdles. You're gonna have an appraiser and you're gonna have a lender. An appraiser and a lender, they only look at the downside in life. They're very negative people. It's good they're negative 'cause you don't wanna get yourself in trouble and they don't get any part of the upside, that's the problem. See, if you're a lender, the best you could hope for in life is getting your capital back and your interest, that's it. You don't get any portion of anything where you beat the budget. There's no upside to a lender. So consequently, when mom and pop say, Oh, well you could do all these many things to increase the net income, you can't sell the lender on that. They're not gonna buy off on that, not for a minute. So when mom and pop or the broker try and tell you, oh no, you could pay this extra amount. No, you can't. You cannot pay that extra amount and you can't pay the extra amount 'cause no one will stand behind that. Absolutely nobody.
So here, what do you do then when you're talking to moms and pops and brokers and they're crazy, the prices are crazy? Well, the first thing you do is to try and work with them. Say to them things like, Here's how I run the numbers. Here's what I come up with. Here's what I've been told valuations are. Here's what the banker told me. So where am I going wrong? It's called being inclusive. Show mom and pop their errors. Show the broker how you're coming up with the valuation. You can learn a lot when you do that. When you show mom and pop in a happy, friendly, inclusive manner, Okay, when I put in all the real costs because you're not having a high enough cost for insurance or property tax, and when I stick all those in, I only come up with $60,000 of net income, and that might make the deal worth $600,000, but you're asking $900,000.
See what they say, because they may well say, Oh, I never thought about that. You're right. If I sold that to you for $900,000, this is what the tax would be. Or, oh, I see, you're right, I probably don't carry enough insurance. Instead of a $250,000 liability limit, I probably need more like $1 million or $2 million. And you'll see if the seller can then be morphed into someone who isn't crazy. So often, you can educate them and they respond favorably. And you may not get your price, but you may get at least a price somewhere between what they were asking and what you think the price should be. Also, remember that with many sellers today and many brokers, one solution is just for them to carry the paper. Many sellers feel like they missed the boat because they did not sell prior to the end of Q1, 2022, and that's when Jerome Powell, the Fed went crazy and started raising rates like there was no tomorrow.
Interest rates went up, as we all know, the fed's rate went up five points between Q1 2022 and now the fastest, highest amount it's ever gone up in the past 40 years. But they can still get those prices, the old price. But to get there, they'll have to carry the paper. So if the problem is that mom and pop or the broker are stuck on this price because that's what they could've got and gosh they refused to take any less, then say, Okay, I have a solution then. If that is the price in that set in stone, here's what we'll do. You carry the financing. Because if they'll carry the financing back at the old interest rate of prior to Jerome Powell's big move, they wanna carry the paper at 4% interest, not the 8% you'll be paying today, well then you can pay significantly more.
Now if you go that route, make sure that they carry that loan for a long time. Fully amortizing would be good. A 25 or 30 year fully amortizing loan might be appropriate, but if they can't go that long, they have to hold it at least for 10 years or so, long enough for you to catch up on your income on the property and long enough for interest rates to go back down. The interest rates will never go back down as low as they were. They're probably never gonna go back down to the days of your back when you could get bank loans at often 4%. But I do think you'll see bank loans ultimately stabilizing about two points lower than they are today if you can just wait it out another two, three years. But seller financing is one way that many people are getting RV Park deals done today you couldn't normally get done. It does give the ability to often meet the seller or the broker's crazy price.
Also, it does you a world of good when working with a broker just to say to the broker, Okay, what would it take to get this deal done? Because you and I both know this price is wrong and you'll be shocked how many brokers when you approach it that way, will then say, Okay, yeah, I know the price is crazy, but I had to tell them we'd ask this price just to get my foot in the door just to get the listing. But they'll then tell you what the price will be and you may find the price that really they already know in their heart of hearts it's gonna go for, is actually much closer to your price. The bottom line is, you're not crazy. When you talk to brokers, when you talk to moms and pops and they throw out crazy high prices, they're crazy. It's their problem, but it's your job then to get that corrected to see if you can get that price down to a reasonable level. This is Frank Rolfe, the RV Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.