It comes as bittersweet relief to learn, every now and then, that my generally skeptical view of the RV park and campground industry is shared by others, and that this dyspeptic outlook is based on a shared understanding of just how readily greed can overcome common sense.
One such affirmation came last week in the form of an email from a broker who’s been in the business for several decades, but who in recent years has seen a piling on of would-be competitors who know nothing about campgrounds, and who wouldn’t even have touched one just three or four years ago. Too cheap. Too déclassé. But now, lured by the promise of quick riches to be made in a hot new real estate market, these opportunists corner the market on new listings by “telling owners their park is worth twice what it really is,” according to my correspondent.
An over-priced campground will “just lay there, never sell and then it gets a stigma, there must be something wrong with it,” the broker wrote. “Plus other owners get the idea their park must be worth a 3-cap,” spreading the contagion of pie-in-the-sky expectations. The end result? Honest brokers get pushed aside, while unrealistically priced campgrounds languish in the listings for years—or worse, those campgrounds find starry-eyed, innumerate buyers who now must figure out how to make a financial go of it, with a ripple effect that drags down private and public campgrounds alike.
To understand why that is, let’s start with a little math. A “3-cap,” for those who don’t know, is shorthand for a capitalization rate of 3%, which is a lousy rate of return for the buyer but a windfall for the lucky seller. It’s also wildly unrealistic for any commercial real estate, where normal cap rates fall into a range of 5-12, but especially so for campgrounds and RV parks, which inherently are more risky than, say, motels or apartment buildings.
Cap rates are calculated by dividing a property’s net operating income (NOI) by its current market value, or sales price. So if a campground has a net operating income (what’s left over after all operating expenses) of $100,000 and is listed for sale for $1 million, the cap rate is 10, meaning a buyer’s expected rate of return on that $1 million investment will be 10% a year. Buy that same property for $2 million, and the cap rate drops to 5. To achieve a cap rate of 3, the sales price will have to exceed $3 million—in other words, the seller expects someone to tie up $3 million in an investment that returns less than a CD.
Sound wacky? Indeed, yet there are numerous brokers out there doing exactly what my correspondent found so objectionable, peddling RV parks at eye-watering prices that will find a buyer only if that buyer is independently wealthy and looking for a vanity project. Consider, for example, a recently emailed broadside from Campground Marketplace, headlined “Opportunity Awaits,” in which one of the top two advertised “opportunities” is a 20-acre riverside campground in Arkansas with seven cabins. The property’s gross sales in 2022 were reported to be $130,769; the property itself is listed at $2.8 million.
Assuming a very generous NOI of 60% of gross, or $78,461, that works out to a 2.8% return on capitalization. You’d get a better return on passbook savings, if such a thing is even available these days. So why would anyone shell out millions for this property? And why would the current owner have any expectation that someone would pay so much for something with such low returns?
One possible answer, as suggested above, is that the seller hopes to attract a deep-pocketed buyer looking for a vanity project. Riverside property is a draw, and there are those seven cabins, which presumably represent sunk costs that the owner would like to recoup. With 20 acres there’s room for expansion, so there’s potential for top-line growth. But unless that mythical buyer has nearly $3 million in hand he’s going to need a loan just to get in the door, never mind building additional cabins or adding RV sites, and no reputable lender will touch this deal.
Or look at it this way. A married couple want their own business and this looks like a dream come true. They scrape together 25% of the purchase price, or $700,000, and through a stroke of good fortune find someone—maybe a rich uncle?— willing to lend them $2.1 million to clinch the purchase. Better yet, their lender will give them a 30-year loan at 6%, which really pushes this example into the realm of fantasy but serves to make a point: even with that impossibly generous deal, the Arkansas property would have a monthly mortgage of $12,590. Which means, in turn, that the nightly rates on those seven cabins will need an immediate 15% increase just to cover the rent, and let’s hope that occupancy rates don’t drop as a result of the price hike.
Operating expenses? Fuhgeddaboudit!
True, this 2.8 cap listing is an extreme example—but it’s real, and it’s not unique. Meanwhile, less extreme examples of campgrounds for sale at 4, 5 and 6 caps are abundant, and all pose the same basic financial quandary: they don’t generate enough cash to cover a buyer’s nut, never mind what it costs to run a business. Yet RV parks and campgrounds are selling like hot-cakes, despite these insane valuations, because everyone’s convinced that this is the new hot thing in real estate: supposedly recession-proof, with demand outstripping supply and apparently no upper limit on what the customer will pay.
No wonder, then, that the first thing buyers of such over-priced properties do is double their rates—followed quickly by slashing staff and cutting back on maintenance and upkeep. Their competitors, aided by the rapid dissemination of computerized and networked reservation platforms that allow them to determine “market rates,” quickly follow suit. And now even the public sector is getting in on the act, justifying increases at state and national campgrounds by insisting they’re simply keeping up with their commercial counterparts.
The predictable outcome has been for camping to become notably more expensive over the past three or four years, even as many properties are looking seedier and more run-down. The bubble is being inflated by the get-rich-quick scheming of hustlers breaking into a business they wouldn’t have given a second look prior to the pandemic. And once the bubble bursts, as bubbles always do, those hustlers will be just as quick to move on to the Next Big Thing, leaving a mess behind. Ain’t unfettered capitalism grand?
Renting Dirt 