A Complete RV Park Analysis Walkthrough
Underwriting RV parks is not as complicated as university classes, gurus, or “creative financing” internet personalities make it seem. In fact, it’s so easy that we’ll do a comprehensive walkthrough of everything you need to know right here. These scenarios reflect real underwriting assumptions used across dozens of RV park acquisitions.
Open this link to follow along. All inputs and outputs are generated using the RV Park Analysis Model.
When you open the PDF, you’ll see that the first two sections on the left, titled Acquisition and Acquisition Financing, cover the basics of acquisition pricing and financial leverage. The Disposition (Sale) section below those allows you to toggle your hold period and other disposition assumptions needed to calculate the exit value.
Note: The acquisition NOI is the prior 12 months from the date of closing. The NOI calculated as a result of the inputs in the Rental Income, Other Income, Revenue Adjustments, and Operating Expenses sections is based on the first 12 months after closing. The Growth Rates are annual increases starting in Year 2 (no growth is applied to the inputs in the first year of operations).
Scenario #1: Operate more efficiently
Let’s assume you’ve bought a park that had a property manager, but now you’re going to self-manage it. The base scenario is has an operating expense ratio of 57%, with property management accounting for 10% of of the effective gross income. By taking that expense down to 3%, which is the industry standard for self-managing an income-producing property, your new opex ratio is now 50%. Notice how much Year 1 NOI increases with just that change!
Scenario #2: Increase occupancy of RV sites, cabins & tiny homes, and storage
The acquisition NOI already accounted for the average occupancy of the property when you bought it, which are shown in the base case as 60% in the first year. The operational and capital improvements will start to take effect in the first year. So, assume the average annual occupancy increases to 62% on all unit types. The rent growth rate will increase the annual rent from there throughout the remainder of the investment hold period.
Scenario #3: Average monthly rent increases for both RV sites and cabins & tiny homes
Let’s assume through clever marketing and better management, you’re able to increase those RV site rents from $550 per month to $575 per month. Additionally, you're going to improve the cabins at the campground and earn $850 per month instead of $800 per month.
Scenario #4: Capital improvements are performed after acquisition
Those increases to occupancy and rental rates have to be earned somehow. Let’s assume it requires a total capital investment of $150,000, split between a few projects. This will be applied as equity in the month specified, so it will decrease IRR, cash-on-cash returns (particularly in the first year when the expense occurs), and the equity multiple. This will not impact the cash flows or exit value.
Scenario #5: The interest rate increases
Interest rates can move quickly. Sometimes it’s favorable, sometimes not. With this hypothetical deal dragging on, we’ll increase the interest rate by 0.25% that the bank now requires to close the deal. Notice how this impacts the levered IRR, while the unlevered IRR remains unchanged.
Scenario #6: Costs exceed rent growth
During due diligence, it’s learned that expenses are exceeding rent growth in the submarket where this particular deal is located. The general expense inflation must be increased to 4.0% annually throughout the hold period to account for it.
Scenario #7: Exit cap rate decreases
Due to population growth, high demand, and overall improvements to the property, there’s reason to expect a lower cap rate (higher sales price at exit). So, we need to apply a 0.25% reduction in the exit cap rate. This is a direct multiplier of the NOI at the time of sale, so it will have a significant impact on the exit value of the investment, which magnifies the returns.
