RV Park for Sale by Owner in Arizona – Evaluate This Deal

[JC Keen]

This post pertains to an RV park for sale by owner in Southern Arizona, for which I just finished writing an article – RV Park for Sale by Owner in Arizona. In the article I touched on things like past and current occupancy, opportunities for improvement, etc. However, I saved the evaluation part for this forum.

I’ll try to keep things simple, for those trying to learn how these things work. The reality is to do a proper evaluation the buyer needs to get a hold of the Profit and Loss (P&L) statement, needs to understand every single line item, and needs to make the necessary adjustments.

Here are some of the basic formulas we need to be familiar with:
Annual Revenue = Number of Spaces * Monthly Rent
Net Operating Income (NOI) = Revenue – Expenses
Capitalization Rate = Net Operating Income / RV Park Price
Cash on Cash Return (COC) = NOI (After Debt Service) / Down Payment

Basic Assumptions
Number of Spaces = 35
From the aerial images in the article we can see occupancy ranging from about 31 spaces to about 40. I used 35 spaces in my calculations. However, one of the top action items for a keen investor would be to increase occupancy immediately. For now, we’ll ignore that opportunity and stick with 35 spaces.

Monthly Rental Rate = $300
As discussed in the article, the current owner used to charge $300 per month. He lowered the rent temporarily after negotiating with a contractor that was looking to house several workers. In my opinion, the market can easily support $300 per month. And I believe a higher rate is possible, assuming some park improvements can be implemented.

Expense Ratio = 50%
Using an expense ration is a big oversimplification. In reality investors must go through the exercise of understanding all the expenses. However, a 50% ratio is not unreasonable for a park like this. And the seller assured me 50% is too high. One thing to note is the electric bill can be very high. However, this bill is typically offset by electric bill revenue. In theory these two numbers should be a wash.

Purchase Price = $700K
The first time I contacted the owner his asking price was $700K. When I visited with him months later he indicated he was thinking his price should probably go up. He mentioned that more people are looking at RV living due to COVID. I don’t disagree with him, but I thought $700K was too high.

Down Payment = 25%
The owner indicated he is willing to provide seller financing. I am assuming that this means favorable terms for a buyer. In addition, a keen investor could work with the seller and a bank lender to work something out with an even lower down payment amount.

Interest Rate = 5%
Again, I am assuming favorable terms for a buyer. With interest rates being down in the current market, 5% is probably on the conservative side.

Now that we have the formulas and the basic assumptions, here is the math:

Evaluation – Assumptions 1

Is this a good deal?
A Cap Rate of 9% feels to low to me for an RV park that needs work. The best thing to do to determine whether or not this is a good cap rate is to figure out what similar properties are selling for in the area. Another point of reference can be looking at other RV parks for sale. Loopnet.com is the first place I look at when doing this type of research.
31% COC is hard to beat. The key ingredient here is we are assuming somewhat favorable owner financing terms.

Now, let’s have a little more fun, by changing a couple of the assumptions. Let’s say the expense ration really is lower and call it 45%. And let’s say the buyer and seller come to an agreement at a price of $600K.
Here is the math for this option:

Evaluation – Assumptions 2

Is this a good deal?
It certainly is better than the prior deal. Again, part of the question is what is a reasonable cap rate for the area. And likewise, what terms will make this a win-win deal for both parties.

Please don’t hesitate to ask questions and participate. My hope is that we this forum can become a useful place for keen investors to exchange ideas.

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