Buying STR in Smoky Mountains

[Parul Bhasin]

Hi, I am trying to find STR in smoky's under $200,000 with 2BD and great views. Market is too hot right now so I am ready to wait for a few months to get a good deal. I have heard TN is a better option than NC due to low taxes. Can you recommend good areas within Smoky's that are in my budget?

I am a newbie so any help/recommendations are appreciated. Thanks.

[Kyle Smith]

I started looking for 2 bedroom cabins with a view back in 2020 when cabins were very affordable.  I got bit by the paralysis by analysis bug and lost my opportunities.  The ship sailed on view cabins in the 200’s range back in early January-March 2020 and they were very rare to find as well. Two bedroom view cabins may come back down into the high 300s-400’s if the recession continues for 2 years, otherwise I think they will stay in the 500k range especially for cabins within the rental triangle (20mins from either gatlinburg or PF).  

I think people looking to get into this market now should look at 2019 rental numbers and use that as your baseline as a minimum.  I think anyone who is financing 80% for a cabin need to be very careful with their purchase (many of these cabins were bought with cash at these high prices). Cabins without a view may not do well moving into 2023.  A good local investor friend of mine said he spoke to the permit office and there were over 1000 new build permits submitted within this fiscal year.  So, you have a lot of competition coming online next year.  You can’t even get concrete delivered without a 1.5 month lead time right now in Sevier County.  

Don’t get me wrong though, there will amazing deals to be had within the next 2 years especially if we continue this trajectory the economy is taking us.  Im hoping to have some cash available within the next 6 months - 1yr so I can take advantage of the supply of cabins coming onto the market. Right now, interest rates combined with unadjusted cabin prices have caused a stalemate in cabin sales.  I’m waiting for the price drops, but I wouldn’t expect a drop to pre-COVID prices.   

Sorry guys, I don’t mean to sound doom and gloom but it’s better to prepare for the worst than to be caught in a financial crisis. 

[Collin H.]

I agree with Kyle.  Buy carefully.  Vacation home markets are highly volatile.  When profits become really good, lots of new players move in.  Homes being converted to STRs, new construction, etc.  Before long, there exists a glut and things can tumble fast.  I lived through a period from 2008-2011 when there were literally hundreds of cabins that were being sold off by banks for 25% of their value just a few years before.  It can happen again.  The main key is, be a long-term investor.  Otherwise, you are begging for a nightmare.

[John Carbone]

Isn’t this slow down and stalemate a good thing for the market though? For example, as prices stagnate/drop won’t that put a lot of new construction on hold? Also, what’s the conversion rate on new permits and what’s the timeframe? You can’t even get a perc test done in the area to start the process. I know of people 2 years in the process without a built cabin. Also, with rates so high, the temptation to sit on a high interest construction loan dwindles considerably. 

[Jaron Walling]

I agree with @Kyle Smith and recently vacationed in Pigeon Forge. I've travelled to the surrounding areas numerous times. The hiking trails are good, mountain views are fantastic, the events draw a ton of tourism, but it doesn't mean buy a $500K, 2 bedroom cabin, with no view, 30 mins from everything. Feels extremely risky right now. 

[Wilson Hunter]

Even though there has certainly been a slowdown this summer I just received 10 (TEN) new bookings on my honeymoon cabin since Friday. It was six bookings over a 24 hour span from Friday night to Saturday afternoon. This is the most bookings I’ve ever received over a short period of time like that. My August/September calendars are shaping up to match 2021 instead of 2019 even though it was a 2019 July (based on historic data - I wasn’t around then). 

I’ve heard from other owners and cleaners that the late summer / early fall booking surge happened to more than just me this past weekend. And not to toot my own horn, but from my evidence it sounds like it mostly happened to people with really nice listings while a lot of the cookie cutter grandma cabins are still crickets.

The market may get refined where we see the mediocre listings selling out in 2023 and the investors who have winning updated properties leap at the chance to buy deals at less than the current prices and turn them into winners.

[Kyle Smith]

Quote from @John Carbone:

Isn’t this slow down and stalemate a good thing for the market though? For example, as prices stagnate/drop won’t that put a lot of new construction on hold? Also, what’s the conversion rate on new permits and what’s the timeframe? You can’t even get a perc test done in the area to start the process. I know of people 2 years in the process without a built cabin. Also, with rates so high, the temptation to sit on a high interest construction loan dwindles considerably. 

 

Yeah, there’s going to be a better opportunity to buy cabins in this market, but prices will need to drop considerably to make the numbers work for many of them. 

I honestly do not see these new builds going on hold unless it is cabins being built by large investors who can afford to sit on the land and stop construction.   

I am unsure of conversion rate and the percentage of cabins versus primary residence homes in the area but I can say I believe the vast majority of them are proposed rental cabins. I know there are hundreds of foundations being worked on right now according to my buddy who’s a lifetime local investor there. 

These new cabins are being built with ROI in mind and they've either locked their interest rate, they have cash, or even with the higher finance rates their cabin will cash flow. Also, you will find many of those building cabins right now know how the investment numbers will play out. Also many of them are being built with the latest design trends and with indoor pools.

[Kyle Smith]

For those looking to purchase existing cabins, get with a local management company and ask them to share their numbers for 2018/19 and base your numbers from that. Do your due diligence and do not rush into something. We all know that buying in the Gatlinburg pigeon Forge market is very exciting and exhilarating because it is such a wonderful area but please tamper that excitement long enough to research everything. It’s always best to go into a deal with confidence and you will know when you reach that cross over point of major doubt into confidence. Buy the best cabin you can possibly afford to ride you through the tougher times. The view, location, luxury level, cabin amenities, etc all make huge differences when you are competing with the cabin down the road for rental clients. I know there are great resources here like Avery Carl etc. and I might look at them or someone like them first to get you started.

[Kyle Smith]

Quote from @Wilson Hunter:

 And not to toot my own horn, but from my evidence it sounds like it mostly happened to people with really nice listings while a lot of the cookie cutter grandma cabins are still crickets. 

The market may get refined where we see the mediocre listings selling out in 2023 and the investors who have winning updated properties leap at the chance to buy deals at less than the current prices and turn them into winners.

Bingo… dead on 

[John Carbone]

Quote from @Kyle Smith:

Quote from @John Carbone:

Isn’t this slow down and stalemate a good thing for the market though? For example, as prices stagnate/drop won’t that put a lot of new construction on hold? Also, what’s the conversion rate on new permits and what’s the timeframe? You can’t even get a perc test done in the area to start the process. I know of people 2 years in the process without a built cabin. Also, with rates so high, the temptation to sit on a high interest construction loan dwindles considerably. 

 

Yeah, there’s going to be a better opportunity to buy cabins in this market, but prices will need to drop considerably to make the numbers work for many of them. 

I honestly do not see these new builds going on hold unless it is cabins being built by large investors who can afford to sit on the land and stop construction.   

I am unsure of conversion rate and the percentage of cabins versus primary residence homes in the area but I can say I believe the vast majority of them are proposed rental cabins. I know there are hundreds of foundations being worked on right now according to my buddy who’s a lifetime local investor there. 

These new cabins are being built with ROI in mind and they've either locked their interest rate, they have cash, or even with the higher finance rates their cabin will cash flow. Also, you will find many of those building cabins right now know how the investment numbers will play out.

Are you hearing that it is a 2 year timeframe to build though? Things seem to move very slowly in this area. 

[Kyle Smith]

Quote from @John Carbone:

Quote from @Kyle Smith:

Are you hearing that it is a 2 year timeframe to build though? Things seem to move very slowly in this area. 

 Yes, things move slow there.   I’m seeing 1-2 years to build after you close on your construction loan. Some builders are anywhere from 6 months to 1.5 years out to even start.

 Right now this is what I’m seeing:

1. 3-4 months minimum, possibly longer to get a survey (you need 2-3 phases of survey from the moment you close on construction loan through the foundation build)

2. I’m not sure how backed up the county is but probably 1 month for a perc test. 

3. Foundation block is 2-3 weeks lead time

4. Concrete is 1.5 months lead time (and you need at least two bookings for concrete-one for footers and one for the block pour)

5. Trusses are 9 weeks 

6. Windows are 2-4 months lead time

7.  Cabinets are minimum 2 months

And the list goes on.  

I’m 5 months into my cabin build and my foundation is at least 4 weeks from completion and I haven’t even put up a single framing board. 

[Collin H.]

Another data point...while you wait a year from prices to fall 10 percent (if they do), you've probably given up that much, or more, in lost revenue while you stood on the sidelines.  So unless you expect prices to fall substantially, it's probably a zero sum game.

[John Carbone]

Quote from @Collin H.:

Another data point...while you wait a year from prices to fall 10 percent (if they do), you've probably given up that much, or more, in lost revenue while you stood on the sidelines.  So unless you expect prices to fall substantially, it's probably a zero sum game.

And that’s if it’s only 1 year to build (instead of 2) and IF it stays on budget without any surcharges. I don’t think there enough workers in the area that can keep up with demand and people in tennessee for the most part just want to get by. Very few are going to work 70-80 hour weeks to try to keep with demand. I personally wouldn’t trust a new build right now especially at these prices. I talked with a builder off the record and he was laughing about making 100 percent roi on his turn key cabins. 

[Kyle Smith]

Quote from @Collin H.:

Another data point...while you wait a year from prices to fall 10 percent (if they do), you've probably given up that much, or more, in lost revenue while you stood on the sidelines.  So unless you expect prices to fall substantially, it's probably a zero sum game.

My biggest regret was not pulling the trigger earlier. But until one walks in those shoes and goes through the consequences, those words evaded people like myself. I passed on deals and I should have been more aggressive. I  squabbled  over a few thousand dollars.  I had to get in the right mindset to do this.  

[Kyle Smith]

Quote from @John Carbone:

Quote from @Collin H.:

Another data point...while you wait a year from prices to fall 10 percent (if they do), you've probably given up that much, or more, in lost revenue while you stood on the sidelines.  So unless you expect prices to fall substantially, it's probably a zero sum game.

And that’s if it’s only 1 year to build (instead of 2) and IF it stays on budget without any surcharges. I don’t think there enough workers in the area that can keep up with demand and people in tennessee for the most part just want to get by. Very few are going to work 70-80 hour weeks to try to keep with demand. I personally wouldn’t trust a new build right now especially at these prices. I talked with a builder off the record and he was laughing about making 100 percent roi on his turn key cabins. 

True, they sold for double what they would have sold them for the previous year. One builder told me he sold one for 800k that he built and sold for 400k the year before. 

One thing to keep in mind though folks, I think in the future these cabins will catch up with the cabins in Aspen, Breckenridge and other destination locations like this.   It was heading that way but now there’s a pull back. I think once the economy gets back on track the prices will exceed early 2022 prices and it will start to catch up.  That’s just my opinion though. Like Collin says, the long term investor will be good to go. 

[John Carbone]

Quote from @Kyle Smith:

Quote from @John Carbone:

Quote from @Collin H.:

Another data point...while you wait a year from prices to fall 10 percent (if they do), you've probably given up that much, or more, in lost revenue while you stood on the sidelines.  So unless you expect prices to fall substantially, it's probably a zero sum game.

And that’s if it’s only 1 year to build (instead of 2) and IF it stays on budget without any surcharges. I don’t think there enough workers in the area that can keep up with demand and people in tennessee for the most part just want to get by. Very few are going to work 70-80 hour weeks to try to keep with demand. I personally wouldn’t trust a new build right now especially at these prices. I talked with a builder off the record and he was laughing about making 100 percent roi on his turn key cabins. 

True, they sold for double what they would have sold them for the previous year. One builder told me he sold one for 800k that he built and sold for 400k the year before. 

One thing to keep in mind though folks, I think in the future these cabins will catch up with the cabins in Aspen, Breckenridge and other destination locations like this.   It was heading that way but now there’s a pull back. I think once the economy gets back on track the prices will exceed early 2022 prices and it will start to catch up.  That’s just my opinion though. Like Collin says, the long term investor will be good to go. 

Quote from @Kyle Smith:

Quote from @John Carbone:

Quote from @Collin H.:

Another data point...while you wait a year from prices to fall 10 percent (if they do), you've probably given up that much, or more, in lost revenue while you stood on the sidelines. So unless you expect prices to fall substantially, it's probably a zero sum game.

And that’s if it’s only 1 year to build (instead of 2) and IF it stays on budget without any surcharges. I don’t think there enough workers in the area that can keep up with demand and people in tennessee for the most part just want to get by. Very few are going to work 70-80 hour weeks to try to keep with demand. I personally wouldn’t trust a new build right now especially at these prices. I talked with a builder off the record and he was laughing about making 100 percent roi on his turn key cabins.

True, they sold for double what they would have sold them for the previous year. One builder told me he sold one for 800k that he built and sold for 400k the year before.

One thing to keep in mind though folks, I think in the future these cabins will catch up with the cabins in Aspen, Breckenridge and other destination locations like this. It was heading that way but now there’s a pull back. I think once the economy gets back on track the prices will exceed early 2022 prices and it will start to catch up. That’s just my opinion though. Like Collin says, the long term investor will be good to go.

That is my opinion as well. The crowd in aspen though is definitely different. 2022 seems to be a good year for travel and visitation is still the strong. More supply will push prices lower a little. ADR is not likely to rise much more even with inflation.

the market has shifted from early 2020 buyers making 30 percent plus coc returns to now, it’s more or less break even if you use a property manager and if you do it yourself you’ll do 10-15 percent. You may end up negative cash flowing a few years. This is all pretty normal and how business cycles work. We have peaked out and things will moderate.

Before bigger pockets came about, this area always had overnight rentals. Property managers ran them and people were happy to just get their second home paid for by someone else. Technology allowed people to do it mostly remotely which lowered overhead and allowed for the underlying asset to appreciate to the levels we have reached. The market has now adjusted to this, and we are back in the phase of how it always was in this area in the 70s 80s 90s etc. people who held assets during the boom have benefited greatly from the market revaluation (sort of like people buying an ipo)

the new construction will halt when the numbers no longer make sense (we are pretty much at this point now imo)

My question is, who is going to be able to clean all these cabins?

[Kyle Smith]

I admit I’m pretty shocked how quickly sentiment has changed in this market. It was like a tsunami of buyers and insane prices were paid. To see this market cool down like it has so quickly is amazing to me. However, I still see 500sqft cabins with no view or anything going for $250k. The sellers are in for a rude awakening I think.  And yeah, who’s going to clean these new cabins coming online?  LOL 

[David Hedges]

the 200k range with STR's is pretty tough to find, anywhere.

in that range, it still may be tough in that area, but maybe you can find a place that needs to be rehabbed? 

Don't let the tax drive your decision either, low taxes are nice, but if you save on tax, but can't drive enough traffic to your STR to make it profitable, you still have a bad buy. look at the numbers and if it will actually be profitable. The only way tax is really going to matter is if you are letting it sit vacant for long periods of time.

this is just my speculation, but I suspect even if you wait a couple of months, your not likely to see prices drop by a huge factor.  

[Jon Tungsten]

Quote from @Collin H.:

Another data point...while you wait a year from prices to fall 10 percent (if they do), you've probably given up that much, or more, in lost revenue while you stood on the sidelines.  So unless you expect prices to fall substantially, it's probably a zero sum game. 

@Collin H. are you not expecting a greater than a 10 percent drop in prices in your market?

[Collin H.]

Quote from @Jon Tungsten:

Quote from @Collin H.:

Another data point...while you wait a year from prices to fall 10 percent (if they do), you've probably given up that much, or more, in lost revenue while you stood on the sidelines.  So unless you expect prices to fall substantially, it's probably a zero sum game. 

@Collin H. are you not expecting a greater than a 10 percent drop in prices in your market?

No one knows what the real estate market looks like a year from now, two years from now, or even ten years from now.  That's the stuff of casinos.  And I am really not worried about it, as I am holding long term.  My point was that, for every year you wait on prices to go down, you've given up income.  You can make a really poor buying decision and still come out way ahead:

In 2005, I gave $240K for a cabin in Cosby and my neighbors thought I had lost my mind.  Then the financial crisis hit, and the cabin value dropped to $150K-ish.  But I didn't sell so it didn't matter to me.  Over 15 years, it's produced over $600,000 in rental revenue, and is now worth at least $750,000.  And while I was negative cash flow in the early years, that's sofa change compared to the gains.

Find a real estate investment that you believe in for the long term, buy, and hold. 

[Kyle Smith]

Quote from @Collin H.:

Quote from @Jon Tungsten:

Quote from @Collin H.:

Another data point...while you wait a year from prices to fall 10 percent (if they do), you've probably given up that much, or more, in lost revenue while you stood on the sidelines.  So unless you expect prices to fall substantially, it's probably a zero sum game. 

@Collin H. are you not expecting a greater than a 10 percent drop in prices in your market?

No one knows what the real estate market looks like a year from now, two years from now, or even ten years from now.  That's the stuff of casinos.  And I am really not worried about it, as I am holding long term.  My point was that, for every year you wait on prices to go down, you've given up income.  You can make a really poor buying decision and still come out way ahead:

In 2005, I gave $240K for a cabin in Cosby and my neighbors thought I had lost my mind.  Then the financial crisis hit, and the cabin value dropped to $150K-ish.  But I didn't sell so it didn't matter to me.  Over 15 years, it's produced over $600,000 in rental revenue, and is now worth at least $750,000.  And while I was negative cash flow in the early years, that's sofa change compared to the gains.

Find a real estate investment that you believe in for the long term, buy, and hold. 

Good advice here… thanks Collin

[Joshua B.]

This is such a good thread and highlights a lot of what I've seen in other markets I've been looking into.

I think the best thing you can do is run a few set of numbers on a deal for the worse, average, and best case. If you can't weather the worse case for any period of time then you should heavily consider that risk (this is the notion of business cycles that was mentioned above).