Seem like a good investment?

Question

Hello fellow BP members,

We are FL (no income tax) residents and are currently looking at an out of state investment opportunity.  The details are as follows.

All numbers below are approximations (estimated on the higher end of the scale)

• .60 acre wooded lot close to NC mountains - $32,000 with closing costs
• Tree removal for cabin location - $1,500
• Water tap - $1,500
• Septic - $2,500
• Electric connection - $1,500
• Concrete work (driveway etc) - $5,000
• Small 2 bedroom cabin - $75,000 (with all of the BEST features)
• Garage (must have with small cabin) - $7,000

All in cost right about $125,000. There is a creek that runs the boundary of the property in the back, and green space across the street. One lot to the right, and nothing to the left.  The cabins are managed locally on property, and fees are taken from nightly rents. Fees include WiFi, cleaning, basic maintenance, bookings advertising etc... The claim is that a 2 bed cabin with garage nets the owner $12,000-$16,000 per year in returns. Being in the mountain region the cabins rent from April - November and are winterized (or owner used).

If my math is correct, not including any required state income taxes, the return would be approximately 9.5-12% annually (after state income tax 7.5-9.5%).

Does this seem like a worthy investment? I am not at all taking into consideration the appreciation or long term nightly rate increases.

Thanks,

Aaron K. · Answer

It is good to find that kind of stuff before pulling the trigger on something.  Due diligence to the rescue yet again.

Arlan Potter · Answer

sounds like a bunch of hear-say.  who claims? who said you could get built for $75000?(with all the best features)

Long ways from Florida. Sounds like a pitch from someone wanting to sell vacant lots.

For example, you could give me the money and get 8% interest paid monthly. First mortgage on an Oklahoma Rental Property for security.  No risk, no claims. Just saying that you need to find deals with less risk for the same or better return.

But don't just listen to me, what do I know. it could work out.

Mike Scott-Smith · Answer

BUST!

To close the entire loop on this one, turns out that this deal will not work. I asked the property for some additional numbers I specifically wanted to see the annual revenue and fees for all 2 bedroom cabins. The numbers are solid, however, the average annual nightly rental per unit is fewer than 149 nights, its actually closer to 100 nights. At that rate the numbers are simply not what they claim.

Thanks for the input!

Mike Scott-Smith · Answer

@Steve B. Those are estimated costs from the property owner based on recent builds. The cost of the cabin is known, the builder is in NC. The increased cost would be related to granite/quartz over Formica, vaulted bathroom veiling vice flat, upgraded lighting etc... All minor upgrades, but those costs are known.  I am reaching out to septic installers in the area for more exact costs, all of the others costs are pretty much spot on.

I have since learned that the income tax rate is much lower than previously thought. Won't be much of an impact as I initially quoted. Depreciation and other related costs will reduce that income tax burden owed to the state. Made a valuable call to a state tax accountant.

Thanks,

Mike Scott-Smith · Answer

@Aaron Klatt I have not 100% made up my mind. I feel as if there is something that I ma still be missing. The recession topic is definitely one to consider. In the event of a recession there would be a hope that the property value doesn't tank as well.

Any thoughts on running this through an LLC?

Thanks,

Aaron K. · Answer

@Mike Scott-Smith it sounds like you have mostly made up your mind, just be aware that your vacancy numbers and even nightly rate may look very different in even a moderate recession.

Mike Scott-Smith · Answer

Thanks Aaron. The cabins are not rented in the winter months, the high season is April-October. Approximately 210 available nights, the property has stats that show that there are approximately 149 nights rented in that period. Heaviest use on the weekends of course. Weekend rates are higher than nonweekend. 2 bed on the weekend rents for ~$169 per night. Currently looking at their bookings online all weekends are 100% booked through mid-November.  We are heading up to vacation with the property again at the end of August and will be there for 8 nights. Our all in rate for a 2 bed room cabin w/garage and Military discount is $1775.

Thanks,

Mike Scott-Smith · Answer

Arlan,

Thanks for the response. This is a legit location, I am very aware of it. I am not a fly by night investor!

All cabins located on the property conform to the same specs, and are built by one company. There are limited floor plan options. For example there are only two 3 bedroom floor plan options. However, the exterior dimensions of each are the same.

I appreciate your input but I would not post something that did not lead to a valid investment.

Thanks,

Seem like a good investment?

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