How Big is Too Big for my First Deal?

Question

My husband and I have been sitting on too much cash. Between a few bonuses at work and then I received a severance package after which I quickly found another, higher paying job - we have close to $300k cash and approximately $5k in "extra" income each month from our salaried jobs after expenses. We want to invest ~$200k but we're beginners in this area!

We have a friend and local realtor who knew our situation and reached out about the following scenario:

RV Park in neighboring city (~45 min drive)

100% Occupancy currently (we're in oil and gas and West Texas is booming)

Sitting on 20 acres but only 8 acres are used for the 52 spot RV park (so room to expand or add revenue stream)

All infrastructure in place including city water, cable & wifi, laundry facilities, home for the property manager, and an engineered, permitted septic. Built in 2013.

Manager in place and desires to continue with new owner

List price: $1,050,000

Average rent after looking at their books for the last 2 years: $450/spot

Average vacancy over the last 2 years: 15%

Right now, this thing at full capacity is flowing close to $10,000 per month! It all just seems too good to be true! ?Someone smack some sense in to me, please! I know you have to bet big to win big... but am I just nuts? What are the major risks other than our oil patch crashing, my husband and I losing our jobs and being in a million dollars worth of debt?? haha

Guy Gimenez · Answer

1.  The oil industry ebbs and flows...that stated 15% vacancy could quickly become 75%...can you weather that storm for a period of months to a year or more?

2.  What is your experience with running a business?

3.  What happens if the manager decides to quit overnight...are you ready to run the park from 45 minutes away while also working a full-time job?

4.  There are often two sets of books in these types of businesses because tenants often pay in cash which is not reported. Better do some serious due diligence with a CPA, attorney, etc. reviewing every aspect.

5.  Play big as long as you can afford to lose big without losing sleep. There IS indeed such a thing as going too big on a first deal and in my nearly two decades of investing I have personally had friends and family pay a serious financial price for not recognizing the risks of such an "all-in" plan.

Demetrios Mustakas · Answer

@Arica Gonzales

Dan Wallace · Answer

Arica

I live in Colorado and it may be similar to where you are in that properties are so overvalued currently that it may be very underwhelming what you get for $1MM.

For your questions, there may be some recourse if it would be proven the financials you were given were intentionally fraudulent. The problem with internally prepared financials is that they are notoriously inaccurate. I have financed a number of commercial projects and businesses over the years and I hate internally prepared financials. What I have found is that tax returns are far more accurate. Generally speaking, very few people lie on their tax returns...high.

Using an NPV calculation to value a commercial real estate investment may be helpful. NPV calculations are used in valuing commercial property under the income approach to value. Commercial properties can be viewed as a stream of cash flows but unlike a normal NPV calculation, the assumption of liquidating the asset at some future point is not normally included in valuing the project. Commercial properties are based on the income approach to value (as well as the sales and cost approach to value) and viewed similarly to an annuity with an applicable CAP rate, vacancy, expenses, etc.

Hopefully, you find a better investment.

Arica Gonzales · Answer

After touring the place, it just felt really underwhelming for a MILLION dollars. After a little soul searching, we agreed that it was too foreign of an investment. While the place has really sound infrastructure, too much of our money would be going against a loan, any upgrades or re-investing would be tough.

I don't know when we may ever have $200k sitting around to make a BIG investment like this ever again, but we just can't seem to reach a level of comfort with this particular deal. So we'll keep searching.

A couple interesting questions came up while evaluating this deal though:

1. Are the P&L sheets a business provides REQUIRED to be as accurate as reasonably possible? I know a lot is done in cash at RV parks, but would the seller be held liable if it was discovered they they lied on those sheets?

2. When evaluating a deal like the one I mentioned above, is an NPV calculation appropriate? NPV is how I frame so much for my W4 job in terms of economics... but I was struggling to determine the appropriate term length & discount rate to evaluate an RV park...

Thanks in advance,

Arica

Michael Hayworth · Answer

"Too big" on your first deal is really a question of how much can you afford to lose, or have tied up unprofitably, if something goes wrong. It sounds like you're in a good financial situation, so this doesn't sound too big to me. If the $200K was all your savings in the world, and you didn't have a job that was generating enough for you to save more, I might feel differently.

So a few thoughts:

1) There are going to be things you don't know, and expenses you haven't counted on.

2) It won't go as well as your initial projections. But it may still go very well.

3) RV parks are cash cows, from what I understand. But there are far fewer investors for those than for SFR. So you may have less competition.

4) Can you get financed for it? Have you talked to a bank already?

5) As you noted, this is very tied to the success of oil & gas. If that dries up again as it did a few years ago, your occupancy may go way down.

I have a friend in Big Spring who built one RV Park, ran it for awhile, sold it, and is now building another one. If you'd like, you can DM me your contact info and I'll see if he'd be willing to have a conversation about it, help you look at the numbers with an experienced eye.

Good luck!

Pat G. · Answer

@Arica Gonzales Awesome job on saving up capital and then turning to real estate. I would agree with @Dan Wallace and @Bill E.  get some more education or find a mentor who has done this before. There is no such thing as "too big" first deal or not.

I would do some due diligence with the city planning and zoning departments to see that the other acres can in fact be used. Now you say RV, I don't want to assume but did you me mean mobile home park? I would search Google and find others that teach about RV parks and take their courses of enroll in their coaching programs.

But first, you have to decide are RV parks going to be your vehicle for investing, meaning is that an area of interest for you and your husband to get into or is it just the first thing that crossed your path that you could invest in. RV/mobile home parks are businesses, you have to think about that. Secondly, are you just wanting to be passive with your investing - give your money to a sponsor and they do all the work.

A lot to think about, good luck and keep reaching for the stars!!

Dan Wallace · Answer

Unless you have experience owning and operating an RV park, I would think you would be better suited to a less special-purpose project such as an office/retail/industrial property. An RV park with future expansion seems very speculative for someone just looking to invest.

How Big is Too Big for my First Deal?

Most Popular Reply