Build or not to build

Short-Term & Vacation Rental Discussions
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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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  • Kyle Smith
    OP
    New to Real Estate · Member since 2020 · 220 posts · 107 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. 

    I’m still in the feasibility stage for the lot and I can walk away.  
    0Reply
  • Kyle Smith
    OP
    New to Real Estate · Member since 2020 · 220 posts · 107 votes
    3y
    Quote from @John Carbone:
    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. 





    yes, you are correct with your interpretation.  

    I think     we have settled into pre-covid occupancies and if we look at the numbers we are already sitting on 2018-2019 rental numbers in 2023. This gives me a bit more confidence moving forward. So, I think we have already dropped 25% in Sevier County overall.  But as many of us have concluded it’s mainly hitting the mediocre middle and lower end cabins.  

    I appreciate everyone’s comments.  I’ve taken my risk assessment up a few notches since we started this discussion.  
    1Reply
  • Kyle Smith
    OP
    New to Real Estate · Member since 2020 · 220 posts · 107 votes
    3y

    I just got word from a trusted friend who owns a large local property management company in PF.  He only saw about a 20% drop in occupancies for the top performers in the last recession.  It’s just another nugget of data to keep in our back pockets moving forward.  If you own a top performer it has to be considered a part of the equation.  

    0Reply
  • Logan M.
    Investor · Provo, UT · Member since 2016 · 759 posts · 626 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?


     Just want to spotlight Michael's posts/replies always being on point.

    0Reply
  • Logan M.
    Investor · Provo, UT · Member since 2016 · 759 posts · 626 votes
    3y

    I would calculate worst-case scenarios. 

    What is the minimum occupancy that you need to break even? Too often STR owners are looking at extremely high occupancy rates like nothing will ever change. I suspect that changes over time will take away a lot of STR benefits nationally but your area may be great.

    Another situation I would run is what the numbers look like as a long-term and medium-term rental and then what you would make if you had to sell it.

    0Reply
  • Michael BaumPro Member
    Olympia, WA · Member since 2016 · 8k+ posts · 7k+ votes
    3y

    Thanks for the info @Kyle Smith. This is one of those scenarios that is really a crap shoot. It could go either way in the end.

    I am someone who really grinds down on the numbers. I know that if they look good now, that could change, but most likely they will continue to look good in the future.

    There are so many variables in the US right now that could affect the outcome of this but in the end, if you build and end up with the amount of equity you think you will have, you should be able to sell it if needed which mitigates the risk IMHO.

    The bigger the risk, the bigger the reward. :)

    2Reply
  • Chelsie HallPro Member
    Member since 2022 · 11 posts · 10 votes
    3y

    Fortune favors the bold.

    3Reply
  • Kyle Smith
    OP
    New to Real Estate · Member since 2020 · 220 posts · 107 votes
    2y

    hello everyone, I would like to resurrect this thread again because I have been searching for Land to build on for a year, and I still have not closed the deal. I have been fairly confident in my quest to build another cabin similar to what I have now, however, rates and occupancies are down so much I am seriously considering abandoning building again in Sevier county. I’m starting to look at other investment opportunities. How has your experience been the last few months?   Am I the only one seeing a legitimate pinch in Airbnb bookings in Sevier county?   I’m still going to do well this year, but building new with the current finance rates, it may be a tight proposition. 

    0Reply
  • Matt Mertz
    Leander TX · Member since 2020 · 179 posts · 150 votes
    2y

    We also planned on building in Gatlinburg.  We have the lot.

    Quick background: we built a 4 bedroom (sleeps 16) in 2021 and it's doing great.  This time we wanted to cater to the other side of the market with a small, modern 1 bedroom.

    We abandoned the idea after the construction costs came in so high we couldn't justify the ROI. This little cabin was going to cost as much for the sub work (HVAC, plumbing, electric, etc) as our big cabin.

    Be thankful you got a new build when you did (we are!)  We couldn't afford to build a big cabin today.

    0Reply
  • Kyle Smith
    OP
    New to Real Estate · Member since 2020 · 220 posts · 107 votes
    2y
    Quote from @Matt Mertz:

    We also planned on building in Gatlinburg.  We have the lot.

    Quick background: we built a 4 bedroom (sleeps 16) in 2021 and it's doing great.  This time we wanted to cater to the other side of the market with a small, modern 1 bedroom.

    We abandoned the idea after the construction costs came in so high we couldn't justify the ROI. This little cabin was going to cost as much for the sub work (HVAC, plumbing, electric, etc) as our big cabin.

    Be thankful you got a new build when you did (we are!)  We couldn't afford to build a big cabin today.

    Oh yes, I’m very thankful!  😁
    0Reply
  • Account Closed
    Investor · FL · Member since 2016 · 332 posts · 388 votes
    2y

    I have built a few in the area over the past 6 years. I have two builds finishing up next month. Personally the wisest thing is to pause till the fall or winter to see where occupancy, nightly rates and interest rates are.  For the past 2 yrs everyone has said in a few months rates will drop and all have been basically wrong. I also expect builders to drop prices by 10% around then due to not enough work to keep them all in business. Just as owners dropped their nightly prices in the past 3 months due to fear and scarcity expect builders to follow.  Build times might even quicken. Also, the election will be over and people might be more confident in the economy depending on who is in charge and people might start to spend more/vacation. The worst case is you lose the opportunity on 6 to 9 months of income. Lastly, hopefully the inspections and low returns will force 2% to 5% of cabins back into the 2nd home only (non-rental) or owner occupied. 

    2Reply
  • Ken Boone
    Investor · Greenville, SC · Member since 2015 · 1k+ posts · 1k+ votes
    2y
    Quote from @Kyle Smith:

    hello everyone, I would like to resurrect this thread again because I have been searching for Land to build on for a year, and I still have not closed the deal. I have been fairly confident in my quest to build another cabin similar to what I have now, however, rates and occupancies are down so much I am seriously considering abandoning building again in Sevier county. I’m starting to look at other investment opportunities. How has your experience been the last few months?   Am I the only one seeing a legitimate pinch in Airbnb bookings in Sevier county?   I’m still going to do well this year, but building new with the current finance rates, it may be a tight proposition. 

    Yea it's been going like this for quite some time.  We actually had a contract on a 2 bedroom cabin last year.  There was an issue with the HOA and the resort not actually having a pool in place at the time (they were planning on rebuilding) and we backed out.  Every STR I have purchased has been a home run and this would have only been a base hit, but that is where the market was.  Hindsight I am SOOOO glad I backed out of that one. 

    I think we are back to pre 2016 levels in the sense that, if you build/buy something now, your reasons are to have someone else pay it off for you, not because it is a great cash flowing investment.  I primarily invest for cash flow, so this market is no bueno for me right now.

    2Reply
  • Nathan W.
    Austin, TX · Member since 2013 · 152 posts · 104 votes
    2y

    I've been in a similar holding pattern. 

    I own two cabins that are doing great. I also own a 2 acre view lot between Pigeon Forge and Wears Valley. Someday I want to build on it but the cost to build right now is just insane. I hate having paid for land that's doing nothing but I don't see any other option right now besides selling.

    You have to be careful with some of these Spec cabins as well. I had a contract on one for a great price but I ended up having to back out of it because it had foundation, septic, and well issues. 

    3Reply
  • Matt Mertz
    Leander TX · Member since 2020 · 179 posts · 150 votes
    2y

    So what's your next move, @Kyle Smith?  Just curious on how other construction-minded investors are proceeding with their plans.

    Personally I strongly believe in the Smokies market.  Having a stand-out property is pretty good protection against increasing inventory.  My problem is that traditional stick builds are too expensive and I'm chasing cashflow, not appreciation.

    0Reply
  • Collin HaysBusiness Member
    Property Manager · Gatlinburg, TN · Member since 2020 · 3k+ posts · 4k+ votes
    2y

    My $.02:

    1.  There will be no significant cut in interest rates, because the Fed can't cut rates; inflation is still running hot. And when they do cut rates, 6% mortgages are probably the floor.

    2.  The 3% mortgage years were a product of the Federal Reserve artificially tampering with otherwise free-market bond sales.  Any time the gubmit injects itself into a free market economy, there later are inevitably mass imbalances and disruptions in the economy. We are living this now.

    3.  We see these disruptions in inflation manifested all around us, but the sectors that the government has gone "whole hog" in, inflation has been particularly wild:  Healthcare, college/higher education, and real estate.  And once the gubmit is entangled, it cannot easily extricate itself. Case in point:  Biden is now proposing a $10K tax credit for sellers. Well, that just made the price of a piece of property go up $10K.  The gubmit never quite gets it.

    4.  There is no way for the Fed to give us any sort of soft landing in real estate. What's done is done. Those that landed with 3% mortgages are the haves; those facing 7% mortgages are the have nots.  

    5.  Opportunities for "cash flow" with vacation rentals are gone if you are financing 75% of the loan or more.  Money is too expensive.

    6.  As inflation takes its bite, there are fewer vacationers chasing more properties, meaning rents right now that we haven't seen since 2015.  

    In 2020, most factors made investing in a vacation rental prudent.  In 2024, most factors make investing in a vacation rental imprudent. 

    [email protected]806-672-7102
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    3Reply
  • Kyle Smith
    OP
    New to Real Estate · Member since 2020 · 220 posts · 107 votes
    2y

    Thanks for all the great responses.  Well, I have about $180k in cash and I’ve been trying to buy a big view lot.  I’ve missed a few opportunities due to “paralysis by analysis” but I’m still looking.  My 3 bed pool cabin is  doing pretty well, although my rates have dropped 20% or more since March.   Someone mentioned we are at 2016 occupancies.  I was think we were closer to 2019 occupancies but I wasn’t in the business back then.  Are we seeing 2016 numbers right now?   If the economy doesn’t turn around, I would imagine things will get worse with rising saturation in this market.  
    However, maybe all of my bad luck finding decent land under $300k may be a sign (Note, nice plots of land with big views near PF/Gat are selling for $250k and they are under contract in a matter of hours).  I’m unsure who’s buying these big view lots but I can tell you they are getting scarce.   How can you make the math work spending $250k for the land?  I’ve been looking for land around the $150k mark for 9 months and have come up empty handed.  I’ve been under contract probably 5 times now, and every lot I get under contract on has some sort of issue.  Maybe I should take the hint and take my money elsewhere.  

    0Reply
  • John Carbone
    Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes
    2y
    Quote from @Kyle Smith:

    Thanks for all the great responses.  Well, I have about $180k in cash and I’ve been trying to buy a big view lot.  I’ve missed a few opportunities due to “paralysis by analysis” but I’m still looking.  My 3 bed pool cabin is  doing pretty well, although my rates have dropped 20% or more since March.   Someone mentioned we are at 2016 occupancies.  I was think we were closer to 2019 occupancies but I wasn’t in the business back then.  Are we seeing 2016 numbers right now?   If the economy doesn’t turn around, I would imagine things will get worse with rising saturation in this market.  
    However, maybe all of my bad luck finding decent land under $300k may be a sign (Note, nice plots of land with big views near PF/Gat are selling for $250k and they are under contract in a matter of hours).  I’m unsure who’s buying these big view lots but I can tell you they are getting scarce.   How can you make the math work spending $250k for the land?  I’ve been looking for land around the $150k mark for 9 months and have come up empty handed.  I’ve been under contract probably 5 times now, and every lot I get under contract on has some sort of issue.  Maybe I should take the hint and take my money elsewhere.  

    I’ve considered doing exactly what you are as well with the same price point in mind. Honestly, keep money liquid right now, 18-24 months revisit, I have a feeling we may even be seeing some partially finished cabins that don’t get built out completely for a good price to finish out. There is clearly a softening happening. 
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