The future of rental cabin investments

As we continue to navigate the global challenge of the coronavirus and its impact upon the economy, many are asking what the effect on the real estate market will be over the next few years. In a recent article, I shared about what we learned from the downturn in the last decade when we saw foreclosures and short sales. I don’t expect we will see that sort of thing this time around, for several reasons.

One of the main differences this time is the stimulus and business loan programs that are being offered. The federal government has already issued one-time payments to families – something that didn’t happen during the crash in the late 2000s – and they are considering more. Also, even people who aren’t normally eligible for unemployment are being allowed to sign up for it now due to loss of work. These stimulus packages, if they are all approved, will lead to people earning up to three times as much than they made when they were working – particularly those who were considered lower income earners. The result of this will be seen as early as the third quarter of next year, with an inflation increase of 3 to 4 percent. It will also probably lead to increases in mortgage rates during that same time period, probably closer to where they were before the current pandemic all began.

Right now, interest rates are incredibly low and it is a fantastic time to buy, especially if you are looking at options for long-term investment. As we move into a new season, property values for the strongest investments are expected to increase. Coupled with higher interest rates in that next season, the window of opportunity to buy will close.

On the sellers’ side of things, this is a fantastic time to sell if you own a investment or vacation/second home cabin. Inventory continues to be low and market prices are holding steady, however we know from our past experience that as summer approaches there will be people who need the cash equity from their cabins. Perhaps it was something they were using strictly as a vacation property or it wasn’t earning enough on rental to help the owners stay ahead of the mortgage payments. Those cabins will be priced below market value and their sales will impact appraisal values on cabins that are sold after. So sometime around September we will begin to see a slight shift in appraisal values. Cabins that continue to cash flow will be less likely to be sold during this time, and so inventory will continue to be low. This will also mean new construction will continue to be a popular option for many people.

And it will be worth the wait for the cabin to be built, as the new construction options will include newer, more popular amenities, upgraded materials and design to match what is most appealing for our guests. So when it is done it will be worth more than something that is older and outdated, and will generate more in gross revenue rental income as a result.

As always, I am always available to talk with you and answer any questions you may have about the current real estate and rental cabin market. Stay safe!

What’s next for investment cabins?

As we near the end of 2019, we are in a very interesting place in the market. Inventory – the number of properties for sale – continues to run low. Why is that? The reason inventory is low is multifaceted. As many of you remember, we had a massive wildfire in November 2016. Many cabins and chalets, and some residences, were destroyed by the fires. The devastation resulted in the removal of literally hundreds of cabins from the rental market. Some rental companies lost 100 cabins overnight. While a few of the owners of those affected properties have built them back (or still are actually in the process of building back), many of those properties will never be built back the way they were. The codes for cabin construction have changed and tightened up from a decade ago. So because of the infrastructure such as septic fields, narrow winding roads, or inclines where a fire truck cannot gain access, the county or the permitting authorities – Gatlinburg, Pigeon Forge or Sevier County – might not approve a building permit.

Replacement construction was affected by other factors, too. For example, just the sheer number of those structures in need of rebuilding made obtaining the necessary materials for construction difficult and expensive. Also, the availability of contractors has been a challenge. Where so many of the projects are funded with insurance money – meaning the cash is immediately available – those will tend to take precedence over ones that are being financed through a lender where the project involves a bit more approval, oversight, and paperwork to keep the money flowing during the construction process. So if you want to build something new you’re going to be competing with that group.

What makes building the most appealing in spite of the challenges, however, is the shortage of properties for sale on the market these days. At the time of the economic downturn just over a decade ago, the resulting housing crash held the property values low, making it unattractive for sellers to sell. But with the improvement of the overall economy, prices have risen and sellers have been able to meet their goals. Now once where they were okay with delaying the decision to sell, most of them have already moved ahead and sold in that group of properties that changed hands with the first flurry of buyers after the wildfires. So, that group of properties is gone and there are fewer cabins available to sell. This whole situation causes values to climb.

Of course, real estate prices tend to cycle, and we are back where we were before the economic downfall of the overall country with values for many cabins. In other words, we are reaching the top of the market.

Will values continue to climb? That’s a difficult question because the construction industry is not at the level it was previously, it has room to grow. There is much more demand for new construction then cabins or homes being built, which would indicate we can continue to see appreciation in market prices. Interest rates might remain low and visitation to the area is at an all time high. We are a top choice among retirees looking to relocate and those who just prefer a slower pace. 

On the flip side, what would cause the high market prices to end or slow down? One very dominant reason why it would slow would be the competition of more new construction projects. As the construction industry makes a come back and its infrastructure is filled, supply will begin to meet the demand once more. We’re reaching a point where new construction is the preferred purchase, as the price of building something new and the price of buying move closer in line with each other.

In addition to price comparison, the other biggest reason that building will become more appealing is because new construction takes into account the new desires and amenities of that renters look for, such as theater rooms, large game rooms, large luxurious bathrooms, indoor pools, etc.  Also new construction will have less maintenance cost appliances. HVAC systems, water heaters, etc. will last longer then something that has some age on it so it will tend to compress the price of older cabins. Generally speaking, they will not be able to rise any further in price than new construction prices.  

So if you are thinking about selling, this is the time. I hope you will choose wisely. And remember – there’s always a win in real estate. We’re always here to help you understand and sort out what that win is for you based on your personal goals.