60 unit RV park for sale in Gatlinburg, TN?

Question

Potentially have an in to purchase a 60 unit RV park with 54 being long term yearly rentals, 6 being daily cabin rentals, looking for due diligence opinions. Gatlinburg, TN is huge in tourism obviously, so there's a waiting list at this park, 100% occupied in their long term rentals. In-laws live full time there and have been offered the option to buy the place and manage it, but they aren't interested. Currently they are on site maintenance and love it, while the owner's wife runs the office. Other than the obvious of rent rolls and expense sheets, what else should i be asking for reasonably to see if this is an option to buy? i have no experience in rentals yet, but if done right, this has the potential to give us immediate financial freedom. Classy park with older people, potential increase in rents 100% to market rent, 12 units could be added if the septic is expanded or turned into nightly camping rentals. Very excited about this potential passive income, what else should i be piecing together in this space?

Jack Martin · Answer

@Lawrence Gillett I just posted a response to a similar thread, so I will share that same guidance with you here:To properly value a park requires a fairly deep understanding of how they will operate, given all the potential variables. Some of those variables are the size of the park, number of vacant spaces, number of POHs, number of vacant POHs, number of MH spaces, number of RV spaces, the park amenities, the age of the park, underground infrastructure age and condition, park location, size of the market, value of SFR in the market, water or well, sewer or septic, other utility sources and whether or not they are direct billed, deferred maintenance, cost of management, and more. However, there is a basic "back of the napkin" evaluation that will usually tell you if the deal is worth a closer look. Similar to other commercial real estate, that formula is the NOI times a market cap rate. On a park, you can calculate the NOI by multiplying the number of spaces occupied by the lot rent, and then multiply by 12 months, subtract the expenses (can range from 35-50%, that % depending on the variables above). Once you have the NOI, divide the NOI by the market cap rate (in today's market conditions, the cap rate will likely land between 6% and 9%, depending on the market you are in. So if you are in a 7% cap rate market, you would divide the NOI by .07 and that would give you the value of the asset. That valuation will tell you if the price expectation from the seller is in range or not. If it is close, then it deserves a closer look. If it is way off, you will need to understand why. There are cases where other income from laundry, a C-store, a restaurant, or something like that deserves additional evaluation, so make sure not to punt before you understand additional income. Also, there are cases where the expenses will be higher, particularly in an RV park that has a large amenity package and daily RV traffic. As it relates to due diligence, we look at over 100 items during the inspection period, but again, many of those items require a fairly deep understanding of how the park will operate, given all the potential variables mentioned above. To highlight the basics of DD, we like to break those up into 4 areas: Financials, initial walkthrough, contractor inspections, and compliance. Review of the financials is easiest when the current owner has kept the books correctly, which is not often the case. But with experience, it is pretty easy to understand how the park should be running and see if what the seller has shared lines up. This is also where you can begin to see where there are operational inefficiencies, cost overruns, or areas where income can be improved. The initial walkthrough we do includes confirming the number of spaces, the general condition of the utilities at each space, the status of the home on each space (POH, TOH, vacant, RV, etc.) and the condition of the rest of the park and amenities (roads, clubhouse, office, pool, etc). We also sit down with the onsite manager and go through the financials related to their role of running the park (collecting rent, problem tenants, sales of homes, marketing efforts, recurring maintenance items, problem areas in the park infrastructure, etc) If we don't find any deal killers during our initial walkthrough, then it makes sense to schedule contractors to do formal inspections. The contractor inspections always include electrical, plumbing, and septic/sewer (to address the underground infrastructure) but also can include pool, home inspections, asphalt, and more, depending on the park. The goal is to always work with a contractor who is familiar with parks. That is not always easy to find, but trust me, it is worth making 100 calls to find the right contractor who works in the park space and understands them. When you meet with the contractors, make sure to understand what you have, what will be required to repair and maintain what you have, and what you should be budgeting for future capital improvements, if needed. The compliance portion of our DD includes everything related to city, county, and state compliance to continue to run the property as a park. That includes zoning, building, permits, sales tax, licensing, and more. In addition to that, we like to check with the police, fire, insurance, sex offender status, and anything that might affect the operations of the park. The goal is to avoid surprises, understand what challenges may be present, and what impact the results of inspections may have on our operations of the park. Alongside our inspections, we are putting together the strategy for the park, running our test marketing to understand the demand in the market, and creating the budget for the project. All the best, Jack

Jack Martin · Answer

It is not uncommon to see lower expenses if it is owned and operated by a seller who lives at the park and doesn't charge the park for their work. Consider an owner/operator who does all the maintenance, office management, capital improvements, and other ancillary duties related to the park and doesn't include those costs as expenses. But when you are evaluating a park as an investment and are planning to hire management, maintenance, vendors, contractors, to perform that work on the park, you will need to budget a higher expense ratio to account for that. I have owned and operated dozens of parks of all shapes and sizes and have never seen a park that could operate at 25% expense ratio. Like @Belinda Lopez stated above, the conservative number to use when underwriting is 50%. If the deal still looks good using that number, then it's worth pursing further.

Jack Martin · Answer

That guidance is aimed at a mobile home park, so keep that in mind. However, since you mentioned the RV park residents are mostly permanent, most of the guidance will apply. I own both RV and MH parks and although they are different animals, if the RV residents see their space as a permanent housing solution, then the operations will be quite similar. If the park has nightly and weekly space rentals, those will behave much differently and require a completely separate operational strategy.

Belinda Lopez · Answer

Great replies by Jack & Austin. Sounds like a great opportunity at the right price. I would be hesitant to keep the family on b/c they could be difficult to manage and even more difficult to evict if it ever came to that.We use a 50% expense ratio when doing our analysis as we find these Parks rarely account for their true expenses. See it all the time where the owner or Workampers hours are not counted and it can be extremely time intensive to manage a park if there are not good systems and maintenance schedules set up. We like to keep the existing management and access to the Owner for at least 2-3 months post-Closing so we have time to fully transition and get everything documented. A Park operations manual is a must for a new and especially an owner who has not owned or managed a Park before.Due diligence is your friend and document everything! Take photos of everything; including utilities, and the other items that may be included in the sale of the property. We had one Seller initially include about $20k in Park maintenance equipment in the sale (it was in the contract) and then a few weeks before Closing it all got "stolen" yet he didn't report it to the Police. We ended up passing on the Park.

Austin Neal · Answer

@Sean Reilly I disagree. I keep a database of all the parks I’ve reviewed and those I own. Typical expense ratio ranges from 40% (typically large parks) to 60% (typically small parks). There are a few outliers, but that’s the range in my experience. I wouldn’t underwrite a 25% expense ratio, especially on 60 space park.

Lawrence Gillett · Answer

I appreciate all the great responses guys! I was fairly brief in my first post, as im still just running on observations and not hard facts on the management of the park. My in-laws are involved in turnover cleaning service on the 6 cabins rented by the night and general handy man improvements. Maintenance is ran in an as available fashion from the owners. They have my in-laws as well as a few local handy men and trades they use around the park, as well as relying on equipment they own for other businesses ( bucket truck from tree trimming business, skid steer, trailers, construction equipment). I have no data on expenses yet, and approximated income. It's an RV campground, trailers are parked on a yearly lease, with the understanding they are not to stay longer than 3 weeks at a time physically at the RV. A dozen spots are cleared and utilities run but permits wont go through the township without expanding the septic system. The property isn't being actively listed, the owner's wife is just done managing it and the owner has offered to sell the park to my in-laws. I have expressed my interest and met the owner's wife, we have a good rapport. In-laws are coming the end of this week, so the first hurdle is selling them on being able to handle something like this.

Sean Reilly · Answer

yikes

Sean Reilly · Answer

never seen an RV park with 50% expenses. if you see that, huge value add and a good buying opportunity due to horrible managementrealistically 25% is the right number

Austin Neal · Answer

@Lawrence Gillett I’ll guide you through the whole process. Send me a DM if that’ll help you.