This month’s topic is for both novice and seasoned investors alike. Our goal is to educate and inform investors on how to best select an investment property so that it will provide exceptional rental income, appreciate above other properties, and maximize tax advantages.
- Look for a Good Location.
It’s the punch line in the joke…”What are the 3 most important factors to consider when buying real estate? Location, location, location.” When it comes to buying an investment cabin, it’s no joke. As a matter of fact, it’s so important that we’ve made this our first step. When choosing a location consider what the majority of renters are looking for. They want to be close to “the action,” yet not close enough to hear every car door shut or horn blow on the Parkway.
Many investors think choosing a cabin that is far “away from it all” will be appealing to renters. And it actually may be to “some” renters. However, as an investor, you are looking for a property that appeals to most renters. This is one case where the difference between “some” and “most” can be very big. Here are the things that “most” renters want from a vacation cabin location:
Short drive time to attractions, theaters, shops, etc. Advice: Keep your cabin within 15-20 minute drive time from the Parkway.
- Stay on pavement or good gravel roads. Avoid one lane, rutted-out, steep, mountainous roads. Watch situations were it is questionable as to who is going to maintain the road.
- Although close is good, don’t get too close. Advice: Be careful with cabins that are only one street away from the Parkway. Remember, you are renting a cabin and cabins are supposed to be located in wooded areas.
- Last Question: resort vs. private setting – you can go either way. It seems 50 percent of renters want a resort with a pool and the half wants privacy.
2) Choose Your Amenities Well
Rental cabins have been popular among tourist visiting the Smoky Mountains for the past 30 years. However, some things have changed. What tourists were looking for 30 years ago is not what they want today. If you are going to do well in this investment market, you must stay current with what’s popular to rent.
Similar to fashions and cars, investment cabins have trends. Now a trend in the fashion industry may last one summer and a car may be popular for a year or two. But, rental cabin trends seem to change every 7 to 10 years. For example, 20 years ago a chalet with interior walls of sheetrock and decorated similar to a traditional home did very well on the rental program. 10 years ago, there was a shift in trend, moving towards cabins and away from chalets. Popular cabins back then were smaller and more rustic. Today, renters are looking for premier larger cabins with more amenities. In the last six months we have also seen some top preforming Chalets that were outfitted in a Smoky Mountain Décor and Artistic Lodge style. Top producing cabins/chalets of today will have the following amenities:
- Wood interiors or mostly (tongue and groove style)
- View and or Pristine Setting
- Large Decks
- Lots of Glass
- One or two game tables- pool table
- Hot Tub on the Deck
- Vaulted Ceilings
- Electronic entertainment, media and sound upgrades
- Large flat screen TV’s
- Outside Fireplace or Fire pit
- Fantastic Upscale Smoky Mtn. Décor
High performing cabins/chalets will also have a theatre and perhaps even an indoor pool. Many of the amenities can be corrected or added. They do make a difference and must be considered. Just changing old TV’s to the latest and largest can change the rental numbers significantly. Because we are all about the numbers we need to look at each cabin and determine what can be done to maximize the rental revenue. We will help you with this process. Some of the best deals are going to be where a seller is making simple mistakes that we can remedy with minimum dollars.
- Cash Flow- What Can You Expect?
A good investment property will pay for itself through rentals, tax savings and appreciation. We will want to project the gross revenue and expenses. Rental histories are always quoted in gross revenues. Most rental management companies do a 60/40 split, with you taking the 60 percent. If you are purchasing a foreclosure or a cabin that is a great buy it is likely that you will be purchasing a cabin that will either not have a rental history, or will have a poor history. We will need to do an analysis as to what is needed to generate the highest and best revenue. We will want to get a rental history from comparable cabins and also estimates from rental companies as to their gross revenue expectations. We will be able to give you estimates from the rental companies that we consider top notch.
- Choosing The Right Rental Management Company
Almost as important as the cabin you choose, is the management company you place the property with. There are over 200 rental companies in Sevier County alone. Based upon experience, we would only recommend a handful of them. Many of the aggressive, top-of-the-line agencies are very choosy regarding the cabins that go on their program. When interviewing rental companies, one should ask about their marketing strategy, how many cabins they have on their program, and do they own their own cabins or cabin community? If the company does own their own cabins, you need to be comfortable with the fact that those properties will not receive preferential treatment.
Many rental management companies are starting to focus on selected communities. This allows them to focus their marketing efforts on the specific attributes of that community. A frequently asked questions is.” what do management companies charge for their services?” Most companies charge 40% of the gross rental. We usually advise prospective buyers to add another 5% to that number to cover any additional expenses associated with the rental process. Recently we have a cabin rental company that we can recommend that charges 27%; we are excited about their presence in our community.
- Shopping for Financing.
There are quite a few options when purchasing second homes and investment properties. We will be happy to supply with you a list of our favorite lenders. There are several very strong local banks as wells as national banks and lenders that specialize in second homes and investment properties. Rates are at an all time low and make a purchase at this time quite positive. However the lending process is slower and much more detailed so we will need to allow ample time. You will need to be prepared to provide more records than you are probably accustomed.
The second option is mortgage broker. These individual typically have greater resources and therefore, more options for financing. We can help you with suggestions here as well. If this is your first investment property, your financing options are increased. Most first time investors finance their cabin as a second home. This loan is classified as a residential loan. On investment properties currently you will need to put a minimal of 10% down. If you put 20% down you will get the most favorable rate and there will not be any mortgage insurance required.
- Understanding the Outlook for Investment Cabins in This Area
Simply put, the forecast for continued growth in this area remains strong. Tourism has increased year after year. Visitation to the Great Smoky Mountain National Park remains at an all time high. We continue to be the most visited National Park in the United States. We are within a days travel time for the majority of the population of the US. Surveys conducted by the Gatlinburg Chamber of Commerce and the Sevier County Economic Development Council indicated that tourism will continue to flourish. Our clients that have purchased high end cabins report positive cash flow with continuing increase as their cabins build a loyal rental following.
However, we would advise against purchasing chalets and rustic cabins without amenities. Though the rental per night is lower the renters who would choose these are choosing a less expensive condo or hotel. We believe that the rental demand for these will remain low for the foreseeable future. If the location is great, you like the view and the price is wonderful, you might consider taking one of these and upgrading the amenities, adding log siding and tongue and groove. Otherwise you need to purchase a log home and make sure it meets all the criteria we have discussed. There are many cabins to choose all the factors need to fall into place making it a great investment. Should you lose sight of important aspects you can undermine your investment.
Our role is to guide you, research for you, and analysis with you; remind you of your goals and then negotiate the best deal possible. We love the process and we have many, many successful repeat investors. We hope to make you one!
- In Conclusion
The Key to why this area will bring you the highest rate of return on overnight rentals vs. other destinations is the 12 million visitors to the area each year, about 10 million of those are visiting the National Park.
The Great Smoky Mountain National Park is the 12th most visited attraction in the World; we have more visitors each year than the Louvre or the Eiffel Tower.
We are visited more often than the Grand Canyon, the New York Metropolitan Museum or Hawaii’s Waikiki Beach. That’s the secret and that’s the reason you can get excited about a cabin you can enjoy yourself and know that you are making a great financial investment. Many of our investors also have stocks and bonds but they tell us they love their investment cabins the most- as they don’t get to enjoy to the view or lavish in the hot tub of their paper investments! It’s a great perk , to visit your investment and count the trip off on your taxes.
We are here to partner with you to meet your real estate dreams of owning a fantastic Smoky Mountain Investment cabin that you and your family can enjoy for many years to come!