What’s the new gross rental multiplier in smokies?

Question

When rates were low, I know properties were trading up to a 10x multiple for gross rental income around here.

Does anyone know what is actually selling and at what multiple and are there still cash buyers with over a million?

looking to see what kind of interest and multiple a property at 160-170k in gross revenues would bring in (including cleaning fees but excluding taxes)

Prospective property is booked out for June and most of July so there is no firesale due to declining rental income just curious what experienced people in this market think a cash buyer would pay.

Mack Lengel · Answer

Hey @John Carbone I'll take a crack at this one!Just went on the MLS and pulled the data for this:In the past 3 months of sales for properties with a list price of 1.6m-1.7m (going off that 10x), there were 6 closed sales. For a total list price of $10,073,000.The actual sales price for those 6 came out to $97,880,000.Based on that it shows that they sold for 97.17% of the list price or just a bit under the 10x multiple.Note: Here's where my calculations are a bit skewed. 1. This math does not account for all of the original list prices before price reductions on these properties if they had them 2. I only filtered based on list prices of 1.6-1.7, if I were to go thru every listing remark, rental history, or projections then we would have a greater sample size and thus be subject to change. 3. Because I only looked at properties with a 10x multiple of 160-170k a year then I may have missed out on some properties that sold at a higher or lower multiple based on the individual revenues.Cash buyers don't have to worry about rate buydowns, monthly payments, etc that non-cash buyers do to make their numbers work. There are also other factors in determining what makes a good deal for them such as needing to reinvest from a 1031 or buy for a cost seg to reduce a tax bill. Cash buyers have the ability to make the decision that best fits them rather than just making it cash flow. With all that being said if it is a solid property that will continue to generate good income then it makes sense from my perspective.I hope all that somewhat answered your question and if not feel free to reach out and I would be happy to look further into it for you!

Leslie Anne Morris · Answer

I'm not. Personally, I am still doing what I've always done which is net operating income and cash on cash.

John Carbone · Answer

So it sounds like there is still a gross rental multiple that applies, but it now requires more validation to confirm the numbers will continue to produce. While I agree that historical and future projections are more difficult now, the underlying component of “how much will this cabin generate” now and into the future relative to the cost to purchase (ie. A rental multiple) seems to still apply, it’s just not like it was in 2021 where deal comes across, rent roll checks out, done. Surely people are underwriting deals with a gross rental multiple in mind as a baseline even in this market.

Mack Lengel · Answer

I didn't validate the rental capabilities of the properties in the previous post. I was more so just looking at the sale prices of properties that fall along that 10x guideline. Every property is different and should be underwritten as such. Thanks for the question and hope this clarifies it for you.

Leslie Anne Morris · Answer

Yep, agree with you on the t-bills. I mostly work with junior, newer investors...not many cash buyers in my buyer pool.

John Carbone · Answer

What is the cash on cash threshold for a million dollar property for a cash buyer that you are seeing? Generally speaking, a 10 percent cash on cash will equate to an 8x gross rental multiple with no financing (in the smokies.) Looking at current prices now, I don’t see any way someone is getting double digit COC unless it’s a second home 10 percent down, but even those became very strict with a lot of origination points. Investment loans are close to 10 percent, seems like it has to be cash buyers now, and are they willing to take on risk of 10 percent returns when they can get 5 percent risk free in 6 month t-bills?

Leslie Anne Morris · Answer

It depends on the investor and what their goals are. The problem is you can't go on historical rent and projections are tough these days also. I work with bottom line investors and folks wanting a vacation home.

Leslie Anne Morris · Answer

I don’t underwrite my deals like that, or see any sort of statistics based on multipliers as an agent. I know what you’re talking about, but it’s going to be really hard in the current market to do that. Everything seems to be super deal specific and underwritten individually to check profitability.

John Carbone · Answer

Isn’t the rental income the only driver in determining profitability for a cash buyer? As long as there’s no HOA the costs are pretty fixed for carrying costs for a turn key property, If two properties were listed for sale with same rental revenues why would they trade at different prices? Are we no longer seeing bottom line investors or is it shifting to more retail wanting to have a vacation home.

Chris Henry · Answer

@Mack LengelI might’ve missed it, but I see you’ve searched for 1.6m-1.7m list houses, but I don’t see where you’re validating they will perform at 160k-170k to be 10x.