Tips for buying a caravan park

CRE Brokers are specialist Business and Property Agents dedicated to the Tourism and Leisure sector. Operating Australia-wide with established offices in Queensland, NSW and Victoria, CRE has a dynamic team of brokers and admin staff underpinned by three generations of experience in the sales and operation of businesses and properties.

So you want to be a caravan park owner?

When buying a caravan park business ensure you are open minded. Of course you can have your wish list but be prepared to have a look at any good business opportunity.

What qualifications do you require?

While there are normally no formal qualifications needed to own a caravan park, there are a number of courses and skills that would be of benefit. These include first aid, marketing, bookkeeping and good handyman skills. There are a number of caravan park management courses available also that can be very beneficial for first time caravan park owners. The added benefit with using CRE Brokers, is that a number of the brokers are past owners and operators of caravan parks, so you are assured ongoing support following your purchase.

As per any hospitality business, the first and most important attribute you must have is a friendly and hospitable nature. To be successful, we believe you need to adopt the attitude that you are welcoming guests into your own home.

The second most important attribute you need is a basic understanding of running a cash flow business. A specialist caravan park accountant can set up accounting systems and business plans for you.

What am I looking for and how much can I afford to spend?

This is the first critical factor you need to consider. This question really needs to be addressed prior to commencing your search. While your broker can give you a general indication, there are many important factors to consider and therefore we strongly recommend that you discuss your finances with a specialist caravan park accountant and specialist finance broker. The amount you spend will depend on whether you are buying a freehold going concern or a leasehold business.

Leasehold Business vs Freehold Going Concern

As a general rule, when buying a caravan park it is the business that generates your investment return. The park, freehold or leasehold, is valued on the performance of the business.

If you own a freehold caravan park, the value of that park is still based on the profitability of the business, unless, in some cases the freehold property has a higher and better use.

For example: an older park on a large block, well located in a thriving town is competing with newer, more visible caravan parks and therefore must keep its tariffs down to compete. This means profitability is unlikely to increase. The older park, being valued on its profitability, would not increase in value. However, because of its size and location, the land could have a much higher value as a development opportunity (e.g. a higher and better use), or capital improvements.

If a caravan park is valued based on the business profitability, then a reasonable question would be, “why not just own the business portion, i.e. the leasehold business?”

With a leasehold business you own the business goodwill, chattels, plant and equipment and through the lease document you have the right to operate that business at the freehold property for the term of the lease and any further options.

The value of the leasehold business usually diminishes as the lease term gets shorter. However, there are exceptions to this where the value can increase. For example: a leasehold business is purchased for $400,000 and shows an E.B.I.T.D.A. of $100,000 (i.e. 4 times E.B.I.T.D.A.) with 23 years available on the lease. After three years, with 20 years available, which is still regarded as a good long lease, if the E.B.I.T.D.A. has been increased to $120,000, the value of the business could be $480,000 (four times E.B.I.T.D.A.).

A leasehold business should provide a yield on investment of between 20% and 35% after taking into account all operating expenses including rent to the landlord. However, it will normally be a diminishing asset and not provide any capital gain, unless the E.B.I.T.D.A. has been increased.

A freehold going concern should generally yield between 8% (eg. A larger coastal property) and 20% (eg. A smaller regional property), after accounting for all operating expenses (exceptions would be properties with high underlying land values). Providing the profitability keeps pace with inflation, it will normally be an increasing asset and thereby provide a capital gain.

There are a number of factors that affect the investment yield percentage for both leasehold businesses and a freehold going concern. These are explained in more detail in the complete copy of CRE Brokers “Buying a Caravan Park”. Other topics covered include: Should the Park be in a Chain or Group; How is a Park Valued?; The Lease Document. To request a copy, please write to admin@crebrokers.com.