Build or not to build

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Build or not to build

Kyle Smith
New to Real Estate · Member since 2020 · 220 posts · 107 votes

I know there is a lot of uncertainty coming from all directions about the next 1-3 years in short term real estate.  I am all the sudden on the fence about building.  I built a pool cabin with a great view in the Smokies and closed on it in January of this year. I have had incredible returns this year.  I just went under contract for a new lot and I’m looking to duplicate this particular cabin.   If occupancy rates stay as they are now for the next year or two, I will still cash flow around 50k-80k with this new cabin build.   Knock on wood..

Should I wait and build once we have more data about the future economy or take the plunge? My gut tells me to build and scale this thing ASAP! But there’s so much negativity out there and even the old timers are saying the incoming storm will be pretty bad.  People still vacation right now, but will they vacation at 2019 occupancies the next 2 years? Will employment tank and take the vacation market with it? What are your thoughts? Build with my proven formula or hold onto my money and wait? Thanks in advance.

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Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
3y

Right now you're sitting on a piece of raw land. This isn't going to produce any cash flow for you now, if the market goes up, or if the market goes down.

If you have the cash to build, I'd build. Don't expect your cash flow to be as good as your first build. You're in one of the most competitive markets in the country. So your cash flow will take a hit, but at least you'll have some cash flow.

There is a lot of negativity out there (and you say from "even the old timers" ... what I've found is that "only the old timers" are the ones preaching doom and gloom). But nobody knows where the market is headed. My opinion is that markets like yours will probably hit harder, just because they have been over bought the past couple of years. But what do I know.

Anyways all that being said, I think you build with your proven formula. If the market tanks, just keep renting these cabins out until the market recovers.

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  • Caleb Brown
    Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
    3y

    You can't forecast the future. You can only see results and the 1st cabin you built is doing well. Replicate that again with another. Run #'s and have reserves but you already know it works. 

    3Reply
  • Scott E.
    Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
    3y

    Right now you're sitting on a piece of raw land. This isn't going to produce any cash flow for you now, if the market goes up, or if the market goes down.

    If you have the cash to build, I'd build. Don't expect your cash flow to be as good as your first build. You're in one of the most competitive markets in the country. So your cash flow will take a hit, but at least you'll have some cash flow.

    There is a lot of negativity out there (and you say from "even the old timers" ... what I've found is that "only the old timers" are the ones preaching doom and gloom). But nobody knows where the market is headed. My opinion is that markets like yours will probably hit harder, just because they have been over bought the past couple of years. But what do I know.

    Anyways all that being said, I think you build with your proven formula. If the market tanks, just keep renting these cabins out until the market recovers.

    5Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    3y

    Everyone that replys will just be guessing so go with your gut. 

    Run the numbers. 

    Build in alot of buffer in case you need to weather the storm for a couple of years.

    3Reply
  • Jon Martin
    Member since 2022 · 1k+ posts · 1k+ votes
    3y

    By the time it's finished in 2-3 years we should be through this market cycle  . . . LOL. In all seriousness, there should be some wash out during the course of your build. 

    I'd say if you are doing well then go for it. Sounds like you have a model that is working for you, even in a tough year. You are always going to be working off of lagging indicators, especially with a build that ties up your capital for 1-2+ years. 

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  • Ken Boone
    Investor · Greenville, SC · Member since 2015 · 1k+ posts · 1k+ votes
    3y

    @Kyle Smith So I dunno about the proven formula theory.  I am hesitant to build anything in that market right now for many reasons.  In theory I know the formula you are using too cause it's the same one I have used.  My new build that went in to service in 2022 is knocking it out like Covid is still here just like your new cabin is doing.  The problem is my other cabin that used to knock it out the same way every year, even prior to Covid, has now dropped.  It's like the new cabin took the lead spot, and the cabin that used to be the lead has dropped a LOT and they are very similar in amenities.  That cabin was built in 2018 so it's not an "older" cabin.  I am still cash flowing well on that property but not nearly like the latest one.  Not even close.  As I said in another post, I think these cabins should be within 5% of each other and they are nowhere near that close this year.  I think a lot has to do with the algos on the OTAs giving preference to new builds which there have been a ton of in the area.  I don't understand why there is such a wide variance between these two cabins right now - same formula.

    Also, I asked @Collin Hays if there was any correlation he could find between the cabins his company manages that are doing somewhere between 15% drop to 50% drop and he said he could find no correlation.

    If I were to build another any time soon, it would be with a huge down payment, so it would not be so heavily leveraged for my risk tolerance right now.  I definitely would not be building one at todays prices with 10 - 20% down right now.  

    If it were me I would probably try to sell the lot and wait and see what happens. Go look at MLS and search for indoor pool cabins. There are more on the market right now than I have ever seen in the last 6 years. All of them have red arrows with prices coming down, I think one out of 3 pages of listings is pending. The purchase price also has a wide variance right now as well and the prices are dropping. My thinking is they will keep dropping and at that point it might make more sense to purchase an existing pool cabin than to build which is gonna be a real pain - I know you know this already ;)

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  • Collin HaysBusiness Member
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    3y

    Your cash flow of $50-80K...

    What does "cash flow" mean?  Does that mean net cash in your pocket after interest, taxes, principal, insurance, repairs, maintenance, credit card fees, etc.?

    On average, at least with today's numbers, to get $70-80K net in your wallet every year, you'd need a $800K to $1 million property that is completely paid-for. 

    I would be interested in knowing more details about your deal - build price, amount financed, cost of financing, and projected gross rents.  

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  • Ryan MoyerBusiness Member
    Property Manager · Orlando Kissimmee Davenport Salt Lake City, Park City · Member since 2019 · 991 posts · 1k+ votes
    3y

    There's just no way anyone knows, and even moreso, no way you should believe that random people on an internet forum do.  There are people that make a lot of money to make this predictions and even they can't figure it out, so a bunch of randos on BP are all just guessing, as is anyone else.

    The one thing I'll say is the American economy has proven far more resilient than most expected.  Inflation is already back down around 3% while the majority of the rest of the western world is still struggling in the 6-8% range.  And we've done it with the stock market almost fully recovered back near ATH's, the housing market staying strong despite huge changes to interest rates, etc.

    Maybe it's all a mirage and one last hurrah to hold on before the big crash everyone has been anticipating finally does come, and I've been a bit of a doom and gloomer myself, but I think if you'd asked a year ago if it were possible to get back to 3% inflation in a year with the stock market within 5% of all-time highs and housing prices still within 5% of the peak every single person would have said it was impossible.  Yet here we are.

    There's just no way to know.  You just have to consider your own appetite for risk vs. reward.

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  • Justin Hammerle
    Realtor · Providence, RI · Member since 2022 · 404 posts · 262 votes
    3y

    @Kyle Smith - To say what the market may or may not do is always going to be speculation.  I've heard a lot of old timers also say they've never seen anyone play the market and have long term success.  As long as your are being conservative in your analysis and exit strategies I would move forward.

    1Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @Kyle Smith:

    I know there is a lot of uncertainty coming from all directions about the next 1-3 years in short term real estate.  I am all the sudden on the fence about building.  I built a pool cabin with a great view in the Smokies and closed on it in January of this year. I have had incredible returns this year.  I just went under contract for a new lot and I’m looking to duplicate this particular cabin.   If occupancy rates stay as they are now for the next year or two, I will still cash flow around 50k-80k with this new cabin build.   Knock on wood..

    Should I wait and build once we have more data about the future economy or take the plunge? My gut tells me to build and scale this thing ASAP! But there’s so much negativity out there and even the old timers are saying the incoming storm will be pretty bad.  People still vacation right now, but will they vacation at 2019 occupancies the next 2 years? Will employment tank and take the vacation market with it? What are your thoughts? Build with my proven formula or hold onto my money and wait? Thanks in advance.

     Here is the way I see it, and I think you should too. You need to look at this new potential cabin build and figure out how
    it will affect your risk levels. Lack of risk management is the biggest mistake people make in real estate. I am not one these people that follow the Dave Ramsey crowd of pay cash for everything…far from it. I’m all in on this market as well, every dollar I’ve earned and then some has been put into investing in this market.

    when rates were 3 percent I was telling anyone and everyone to get as much borrowing power at fixed terms as you can. This was the expansion phase for businesses, I went hard here myself. 

    with interest rates rising 250 percent, you need to recalibrate your system and look at your portfolio. Is it worth it to go into high interest rate debt for this new project and have this new property impact your other successful properties in your portfolio?

    How much of a drop in rents will you be able to handle? The way I’m underwriting my own deals for expansion is that I need to be able to cover the new payment with 7-10 days of current rental numbers. Anything that doesn’t meet those threshold is too risky for me with borrowed money right now.

    If you can weather a 50 percent drop in revenue and have the means to cover the payment and get through construction then go ahead and do the new build. It’s not about who is going to be right or wrong, Just understand that the risk has risen dramatically and plan accordingly. 

    5Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y

    Hey @Kyle Smith, how long did it take for your new cabin to be completed? Will you be using the same builders/crews as you did for the first one?

    I would assume that if you are building the same cabin again that the new build would take a bit less time depending on lead times for materials as the crews have already done it once.

    What will the value be of the property once the cabin is ready to occupy? Will you have significant equity once it is done?

    1Reply
  • Brian Barch
    Member since 2022 · 272 posts · 253 votes
    3y

    It sounds like you have $5-7k/mo worth of cash flow margin to work with even if things decline. 

    Also, I think it’s nice to remind yourself that real estate has traditionally been a long game. I’m thrilled for your recent success, but that need not be the bar going forward. 10 years from now, are you going to be happy that you did this?


    if you do, simply don’t bet the farm doing so. Use your most conservative estimate and make sure you could stomach that actualizing

    1Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    3y
    Quote from @Kyle Smith:

    I know there is a lot of uncertainty coming from all directions about the next 1-3 years in short term real estate.  I am all the sudden on the fence about building.  I built a pool cabin with a great view in the Smokies and closed on it in January of this year. I have had incredible returns this year.  I just went under contract for a new lot and I’m looking to duplicate this particular cabin.   If occupancy rates stay as they are now for the next year or two, I will still cash flow around 50k-80k with this new cabin build.   Knock on wood..

    Should I wait and build once we have more data about the future economy or take the plunge? My gut tells me to build and scale this thing ASAP! But there’s so much negativity out there and even the old timers are saying the incoming storm will be pretty bad.  People still vacation right now, but will they vacation at 2019 occupancies the next 2 years? Will employment tank and take the vacation market with it? What are your thoughts? Build with my proven formula or hold onto my money and wait? Thanks in advance.

     >If occupancy rates stay as they are now for the next year or two, I will still cash flow around 50k-80k with this new cabin build.

    There is a world of difference between $50k cash flow unleveraged and $50k cash flow from a highly leverage property.  The $50k cash flow by itself does not provide the full picture.

    If you are making $50k cash flow on a highly leveraged property, you should definitely repeat the process and hope to achieve similar results.  However even if the cash flow is reduced, it may not be as great an investment but could still be a fine investment.  

    Good luck

    1Reply
  • Alecia LovelessPro Member
    Member since 2019 · 3k+ posts · 2k+ votes
    3y

    @Kyle Smith If you can build it without being over leveraged then I’d say go for it. Especially if you’ve got good returns from the other cabin. You’re in driving distance to many markets and I don’t think people will give up their vacations, but may downsize their airline flights if costs continue to rise which will just keep helping your growth.

    I’m currently working on trying to pay down/off some of my existing mortgages as opposed to just continuing to leverage more debt. In my market this gives me the same cash flow return as buying more units, just not the added benefit of having more buildings to build future wealth but I feel it’s a smarter play right now given my financial situation. It also prevents giving me the added burden of additional debt liability should something happen and there be massive unemployment or another rent moratorium in the short term.

    1Reply
  • Kyle Smith
    OP
    New to Real Estate · Member since 2020 · 220 posts · 107 votes
    3y
    Quote from @Michael Baum:

    Hey @Kyle Smith, how long did it take for your new cabin to be completed? Will you be using the same builders/crews as you did for the first one?

    I would assume that if you are building the same cabin again that the new build would take a bit less time depending on lead times for materials as the crews have already done it once.

    What will the value be of the property once the cabin is ready to occupy? Will you have significant equity once it is done?

    It took 12 months to build and it was a nightmare but we pulled it across the finish line.  I learned a lot and I’m moving on to another builder which I know and has a great reputation.  He’s saying he can complete it in 8-9 months.  If current prices drop another $65/sqft I’m still sitting around $230k equity on the property once it closes.   I’m hoping we stay in the 400’s/sqft.  Cost to build is around $300/sqft.  
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    3y
    Quote from @Kyle Smith:
    Quote from @Michael Baum:

    Hey @Kyle Smith, how long did it take for your new cabin to be completed? Will you be using the same builders/crews as you did for the first one?

    I would assume that if you are building the same cabin again that the new build would take a bit less time depending on lead times for materials as the crews have already done it once.

    What will the value be of the property once the cabin is ready to occupy? Will you have significant equity once it is done?

    It took 12 months to build and it was a nightmare but we pulled it across the finish line.  I learned a lot and I’m moving on to another builder which I know and has a great reputation.  He’s saying he can complete it in 8-9 months.  If current prices drop another $65/sqft I’m still sitting around $230k equity on the property once it closes.   I’m hoping we stay in the 400’s/sqft.  Cost to build is around $300/sqft.  

    well lumber is down  so that could help.. but if your just getting a lump from your GC I guess that is his delta to capture.  So thats one thought building at todays prices is probably going to be less than in 3 to 5 years.
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  • Joseph Dasmerces
    Rental Property Investor · Myrtle Beach, SC · Member since 2017 · 22 posts · 12 votes
    3y

    I agree with Jay Hinrichs, Building at today's price will be cheaper then it would in the next 3-5 years. Also with STR you could manage your risk by looking for opportunities to do mid-long term rentals, as long as numbers work on both sides of the deal i would continue to expand.

    1Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    3y

    Are you getting a loan to build or using cash from some Refi? A lot of risk here, but I am the jump in the pool and figure out how to swim kind of guy :-)

    Doesn't always work, but sounds like you could recoup your investment if the economy tanks?

    1Reply
  • Kyle Smith
    OP
    New to Real Estate · Member since 2020 · 220 posts · 107 votes
    3y
    Quote from @John Carbone:
    Quote from @Kyle Smith:

    I know there is a lot of uncertainty coming from all directions about the next 1-3 years in short term real estate.  I am all the sudden on the fence about building.  I built a pool cabin with a great view in the Smokies and closed on it in January of this year. I have had incredible returns this year.  I just went under contract for a new lot and I’m looking to duplicate this particular cabin.   If occupancy rates stay as they are now for the next year or two, I will still cash flow around 50k-80k with this new cabin build.   Knock on wood..

    Should I wait and build once we have more data about the future economy or take the plunge? My gut tells me to build and scale this thing ASAP! But there’s so much negativity out there and even the old timers are saying the incoming storm will be pretty bad.  People still vacation right now, but will they vacation at 2019 occupancies the next 2 years? Will employment tank and take the vacation market with it? What are your thoughts? Build with my proven formula or hold onto my money and wait? Thanks in advance.

     Here is the way I see it, and I think you should too. You need to look at this new potential cabin build and figure out how
    it will affect your risk levels. Lack of risk management is the biggest mistake people make in real estate. I am not one these people that follow the Dave Ramsey crowd of pay cash for everything…far from it. I’m all in on this market as well, every dollar I’ve earned and then some has been put into investing in this market.

    when rates were 3 percent I was telling anyone and everyone to get as much borrowing power at fixed terms as you can. This was the expansion phase for businesses, I went hard here myself. 

    with interest rates rising 250 percent, you need to recalibrate your system and look at your portfolio. Is it worth it to go into high interest rate debt for this new project and have this new property impact your other successful properties in your portfolio?

    How much of a drop in rents will you be able to handle? The way I’m underwriting my own deals for expansion is that I need to be able to cover the new payment with 7-10 days of current rental numbers. Anything that doesn’t meet those threshold is too risky for me with borrowed money right now.

    If you can weather a 50 percent drop in revenue and have the means to cover the payment and get through construction then go ahead and do the new build. It’s not about who is going to be right or wrong, Just understand that the risk has risen dramatically and plan accordingly. 

    good stuff everyone.  I appreciate the insight. 

    0Reply
  • Kyle Smith
    OP
    New to Real Estate · Member since 2020 · 220 posts · 107 votes
    3y
    Quote from @Bruce Woodruff:

    Are you getting a loan to build or using cash from some Refi? A lot of risk here, but I am the jump in the pool and figure out how to swim kind of guy :-)

    Doesn't always work, but sounds like you could recoup your investment if the economy tanks?

    It’s a straight up equity loan at 8.35% for the land and down payment .  I know…it’s a big ouch and gasp.   I’m a dive in guy as well.   I guess that’s how my ADHD works… worry about the consequences later.  LOL

    0Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @Kyle Smith:
    Quote from @Bruce Woodruff:

    Are you getting a loan to build or using cash from some Refi? A lot of risk here, but I am the jump in the pool and figure out how to swim kind of guy :-)

    Doesn't always work, but sounds like you could recoup your investment if the economy tanks?

    It’s a straight up equity loan at 8.35%.  I know…it’s a big ouch and gasp.   I’m a dive in guy as well.   I guess that’s how my ADHD works… worry about the consequences later.  LOL

    Do you have other income sources if things go badly to cover all of your properties? You said highly leveraged but how leveraged is that? 

     Also is your $300 a foot all in with land to turn key?


    another thing to consider is how much will this new property if things go well improve your financials? On the flip side if revenues drop in half how much will doing this property impact you negatively?

    0Reply
  • Kyle Smith
    OP
    New to Real Estate · Member since 2020 · 220 posts · 107 votes
    3y

    @John Carbone Is it realistic to consider 50% drop in any market?  I'm thinking the economy would have to completely tank for that to happen or am I being a little too optimistic?  

    The land is in addition to the $300/sqft.  I've done some additional calcs and I'm going to need $110k net income (which includes all carrying costs) to break even.  With the current year earnings I would be around the net income of around $165k (if I used my current cabin net income as a go-by) with this cabin.  The new cabin would be a high-end luxury pool cabin with an unobstructed 160deg view like my other cabin.  

    Yeah, its a risk but a calculated risk.  My high side ($165k net income) is $55k net cash in the bank.  Should I walk away from this deal?  $845,000 is my all-in investment.  If the Smokies market maintains $400 or more per sqft I'll have about $250k in equity at closing (conservatively speaking). 

    It's a tight-rope deal.

    0Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @Kyle Smith:

    @John Carbone Is it realistic to consider 50% drop in any market?  I'm thinking the economy would have to completely tank for that to happen or am I being a little too optimistic?  

    The land is in addition to the $300/sqft.  I've done some additional calcs and I'm going to need $110k net income (which includes all carrying costs) to break even.  With the current year earnings I would be around the net income of around $165k (if I used my current cabin net income as a go-by) with this cabin.  The new cabin would be a high-end luxury pool cabin with an unobstructed 160deg view like my other cabin.  

    Yeah, its a risk but a calculated risk.  My high side ($165k net income) is $55k net cash in the bank.  Should I walk away from this deal?  $845,000 is my all-in investment.  If the Smokies market maintains $400 or more per sqft I'll have about $250k in equity at closing (conservatively speaking). 

    It's a tight-rope deal.

    So your expenses on this once complete are 110k a year and with a 165k in rental revenue you are projecting a 55k profit a year assuming you duplicate your comp cabin over last 12 months?

    I know 50 percent seems extreme, but considering how high things have come since 2019 with Covid demand etc, I don’t think we need an apocalyptic event to see 50 percent revenue haircuts, just a typical recession will likely do considering far we have risen. 

    it seems like a 30 percent drop in rents will wipe away profit and anything beyond you will have to come out of pocket for assuming in interpretations correctly.

    if you have to go negative how long can you sustain payments? Do you have a day job that can get you through. I’m not suggesting this isn’t a good long term decision, you just need to make sure you can’t get wiped out and risking your other cabins. I also don’t like just sitting on land that has been bought either though. 

    @Collin Hays has more data on how far he thinks revenues can drop, he has seen the volatility in the smokies and will know more first hand knowledge.



    1Reply
  • Brian G.
    Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
    3y

    @Kyle Smith how much did the lot cost?

    0Reply
  • Zach Edelman
    Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
    3y

    What are the advantages of waiting? What is the alternative here, to just sell the lot? You will incur the expense of building anyways. Also, furthermore, I have to concur with the point mode above that by the time it's finished, there should be some wash-out in the market during the build. 

    0Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    3y
    Quote from @Zach Edelman:

    What are the advantages of waiting? What is the alternative here, to just sell the lot? You will incur the expense of building anyways. Also, furthermore, I have to concur with the point mode above that by the time it's finished, there should be some wash-out in the market during the build. 

    He has said before he is already highly leveraged

    he is in probably the most volatile market for STR - smoky mountains

    if his projections are off by 30 percent he’s going to need to cover any loses from other undetermined sources.

    i Guess the advantage is making sure he has the means to not have to liquidate other assets in his portfolio to cover the payments in a downturn. 

     If no money has been expended on this new project, hold off and reduce your leverage a little and come back in a few years. 

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