Here is a scenario that plays out more often than it should in RV park acquisitions.
A buyer finds a park they love. Good location, solid occupancy, clean financials, a motivated seller, and a cap rate that looks attractive for the market. They make an offer, negotiate a price, get financing, and close. And then somewhere in the first few months of ownership they sit down and actually look at the monthly numbers and realize the park is not producing the cash flow they expected. In some cases it is barely breaking even. In a few cases it is costing them money every month.
Nothing went wrong with the park. The revenue is performing roughly as projected. The expenses are in line. The problem is that the loan payment is consuming most of what is left after expenses and there is almost nothing flowing through to the owner.
This is a financing structure problem, not an operational problem. And it is almost always detectable before closing if the buyer runs the debt coverage math before they fall in love with the deal rather than after.
What Debt Service Coverage Ratio Actually Means
Debt Service Coverage Ratio, or DSCR, is the relationship between what a property earns and what it costs to service the debt on it. It is calculated by dividing the net operating income by the annual debt service, which is the total of all principal and interest payments on the loan.
A DSCR of 1.0 means the property earns exactly enough to cover the loan payment. Nothing more. A DSCR of 1.25 means the property earns 25 percent more than the loan payment, which is the minimum most commercial lenders require before they will approve financing. A DSCR of 0.90 means the property does not earn enough to cover the loan payment and the owner is subsidizing the shortfall out of pocket every month.
The formula is simple. Take your rebuilt NOI, the one you calculated from verified data with all missing expenses added back, not the seller’s version, and divide it by your projected annual loan payment. That ratio tells you whether the deal cash flows at the financing terms you are likely to obtain.
Why Buyers Skip This Step
The most common reason buyers do not run this calculation before making an offer is that they do not have their financing terms nailed down yet. They are still in the early stages of evaluating the deal and they have not talked to a lender about specific rates and terms for this property.
That is understandable but it is not a reason to skip the math. You do not need exact financing terms to model DSCR. You need reasonable assumptions. If you know you are likely to put down 25 percent on a commercial loan at roughly current market rates with a 25-year amortization, you can model your approximate annual debt service before you make an offer. That model may shift slightly when you get actual lender terms but it will be close enough to tell you whether the deal is likely to cash flow or not.
Running the DSCR model on the front end also helps you negotiate. If you know that the deal only achieves a 1.10 DSCR at the asking price with the financing terms you can obtain, you know exactly how much price reduction you need to get to a comfortable 1.25. That is a much stronger negotiating position than making an offer and hoping the financing works out.
Walking Through the Math
Let me show you how this works with a straightforward example.
A park has a rebuilt NOI of $180,000. The asking price is $2,000,000. You plan to put 25 percent down, which means a loan of $1,500,000. At a current commercial rate of 7.5 percent on a 25-year amortization, your approximate annual debt service is around $133,000.
DSCR equals $180,000 divided by $133,000, which is 1.35. That clears the lender’s minimum of 1.25 comfortably and produces positive cash flow of about $47,000 per year after debt service. That is a deal that works financially.
Now change one variable. The seller will not come down on price and you pay $2,400,000. Your down payment is now $600,000 and your loan is $1,800,000. At the same rate and term your annual debt service is approximately $160,000.
DSCR equals $180,000 divided by $160,000, which is 1.125. That is below most lender minimums and it means the park produces only $20,000 per year in cash flow after debt service. One slow month, one unexpected repair, one staffing disruption and you are subsidizing the park out of pocket.
Same park. Same NOI. Same financing terms. The only variable that changed was the purchase price, and the difference between paying $2,000,000 and $2,400,000 is the difference between a park that works and one that is a financial stress every single month.
The Lender’s Perspective and Why It Matters to You
Your lender calculates DSCR too and their calculation determines whether you get the loan. Most commercial lenders require a minimum DSCR of 1.20 to 1.25 at the loan amount you are requesting. If your deal does not clear that threshold, the lender will either decline the loan, reduce the loan amount, or require a larger down payment.
Understanding this before you make an offer means you are never surprised by a lender telling you the deal does not pencil at your financing assumptions. You have already run the math and you know exactly what DSCR looks like at different price points and loan amounts.
It also means you can have a more intelligent conversation with your lender. Instead of presenting a deal and hoping it qualifies, you can walk in and say here is the NOI, here is the purchase price, here is the down payment, and here is the DSCR at those terms. Lenders respond very differently to borrowers who know their numbers going in.
What to Do When the DSCR Does Not Work
If you run the DSCR calculation and the deal does not cash flow at the asking price with realistic financing terms, you have several options.
The first is to negotiate a lower price. Every dollar you take off the purchase price reduces your loan amount, reduces your debt service, and improves your DSCR. Use the DSCR math to calculate exactly how much price reduction you need to reach your target coverage ratio and make that the basis of your negotiation.
The second option is a larger down payment. Putting 30 or 35 percent down instead of 25 reduces your loan amount and improves your debt coverage. This only works if you have the additional capital available and if the improved cash flow justifies tying up more equity in the deal.
The third option is to walk away. If the seller will not negotiate to a price that makes the financing work and you do not have the capital for a larger down payment, the deal does not work for you at this time. That is not a failure. That is the discipline that protects you from owning an asset that costs you money every month.
The Bigger Point
DSCR is not a complicated concept and the math is not difficult. But it requires you to model the financing before you make an offer rather than after, which means you need to have a reasonably clear picture of the financing terms you are likely to obtain before you get too deep into any deal.
Talk to your lender early. Not after you have a signed purchase agreement, but before you make an offer on any park you are seriously considering. Understand what rate and terms you are likely to get on a commercial RV park loan at your current financial profile. Then run the DSCR on every deal you evaluate before you get emotionally attached to any of them.
The buyers who build real wealth in this asset class are the ones who run the numbers before they fall in love, not the ones who fall in love and then hope the numbers work out.
If you want help modeling the debt coverage on a specific deal you are evaluating, reach out at pvifinancial.com. That is exactly the kind of analysis I do before my clients make an offer.
And if you have not grabbed a copy of my book yet, ๐๐ฟ๐ผ๐บ ๐ข๐ณ๐ณ๐ฒ๐ฟ ๐๐ผ ๐ข๐ฝ๐ฒ๐ฟ๐ฎ๐๐ถ๐ผ๐ป: ๐ง๐ต๐ฒ ๐๐ผ๐บ๐ฝ๐น๐ฒ๐๐ฒ ๐ฅ๐ฉ ๐ฃ๐ฎ๐ฟ๐ธ ๐๐ป๐๐ฒ๐๐๐ผ๐ฟ’๐ ๐๐๐ถ๐ฑ๐ฒ ($49), it covers DSCR and every other financial metric you need to evaluate an RV park deal with confidence. You can get it direct here: wendipvifinancial.gumroad.com/l/kqmyb, or Amazon has it too, just search author Wendi Rook.
You might want to read this next: “Before You Fall in Love With That RV Park, Do This First”
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