Gatlinburg & Pigeon Forge STRs - Pre/Post COVID Rents & Occupancy

[Aaron Akins]

Hi All,

I've seen a few discussions related to this topic, but wanted to see if I can nail down a few specific questions. I'm planning to purchase an STR and need to ensure my numbers will work - even when the COVID hype slows.

Does anyone have any specific data that gives the average % increase in STR rates in the market I've mentioned above relative to the pre-COVID market? Specifically, on average, how much higher (%) are property owners charging for their rates on STRs in Gatlinburg/Pigeon Forge compared to 2019?

On a similar note, on average, how much higher (%) are the overall occupancy rates for Gatlinburg/Pigeon Forge today compared to 2019?

The reality is that if I buy a property in today's market, I should not depend on home appreciation to protect my investment; therefore, I need to ensure the rates I'm able to charge for STR rents will more than cover the mortgage.

For those who plan to buy in the next few months, or that have purchased within the past 12 months, how will you or how did you go about analyzing your STR properties to ensure the numbers will work even if rental rates and occupancy rates decrease?

I recognize that seeing the 2019 numbers on the actual property one is making an offer on is the best way to know historical rents for that given property, but I feel like there must be a bit more to the puzzle. 

Is anyone finding deals that make sense running conservative numbers along side the super high asking prices for these properties?  

Thanks in advance,

Aaron

[Collin Hays]

There is lot to unpack in the questions you ask.  I will try to address some high points.  Our occupancies are no higher than they were in 2019. We have always strived from 280-300 nights per year per unit.  That is our sweet spot, and we feel to be the optimum range for greatest profitability.

Rents are 15 to 20 percent higher than 2019 overall.  

There are a lot of moving parts that make estimating future earnings more of a "guesstimate".  That is because there was a perfect storm that occurred to bring about all of Smokies craze that won't ever happen again.  It all started with the Gatlinburg fire in 2017 that destroyed around 2000 structures.  Honestly, that fire literally burned down a lot of excess inventory.  For vacationers, it was much more a buyer's market before the fire.  There was a lot of price competition to secure guests.

After the fire, the costs of rebuilding soared, as would be expected following a natural disaster.  I rebuilt, for 50 percent more than I was insured for.  

Then came ultra-low interest rates. Not only could people now buy a second home or STR more affordably, but investor money began pouring into the STR universe as a reasonably safe place to store money and even earn income.

Next came COVID.  Guests loathed hotels and flocked to vacation homes.  Then came 18 months of pent-up demand to go on vacation.

So all of the stars aligned for this market explosion in the Great Smoky Mountains. How long will it go, and how high can it go?  It depends on a variety of factors.  Will demand continue?  Yes, but to this extent, no way.  Will supply eventually meet demand?  Absolutely. It always does.  It's the normal ebb and flow of the investment cycle.  Will interest rates remain low?  Yes and no.  The Fed will have to begin raising rates to stave off inflation.

Future investors in the Smokies will not be able to count on a lot of monthly income from a property with a mortgage.  The window has shut on that, as prices have soared to a point that the numbers don't work for that.  

However, that doesn't make the Smokies a poor investment by any stretch.  I purchased a cabin in 2005 for $240,000. My investment in it was $80,000 (down payment and some improvements).  Its appraised value dipped all the way down to $130,000 during the financial crisis.  Yet I held onto it, and it is now worth approximately $650,000.  Even had I not made a dime of income, my investment of $80,000 is now worth $650,000.  And my guests have paid off over $100,000 of the loan.  Backing out the balance of my mortgage, my $80,000 has grown to over $550,000 in 15 years.  That's an annual return of around 15 percent.  

I can see the prices of homes in the Smokies doubling again over the next three to five years. But I don't see the rents escalating much further. I think the strategy needs to shift from income to capital growth at this point. Buy your STR, and let your guests pay it off, but don't count on a bunch of extra cash each month.