"I'm not making money on my vacation rental...now what?"

[Collin Hays]

I get calls to this affect from various people around the country about once a week now.  It is all a part of the downcycle of vacation rentals. 

I am strictly speaking from a macro perspective here - certainly there have been a number of good buys in the Smokies over the last two or three years.  But...aside from rare deals, most investors paid too much for their rentals in 2021 and 2022.  They bought them based on a multiple of 2021 or 2022 earnings.  Those were bubble years and were quite fun in some ways.

But as a more normal supply & demand returns to the Smokies, the returns on those bubble purchases aren't looking too good right now.  

What to do?  Two choices:  Grind it out or sell.  If you sell, there's a good chance that whoever buys your property will end up doing well, because they will be buying it at a more appropriate price.  In other words, you are probably going to sell your house at a big discount below what you paid.  You are going to lose money.  Whatever you've invested in the cabin is called "sunk cost."  You have spent the money and it's gone.  The fact that you paid too much is neither a reason to now sell, nor to hold on long term.  Sunk cost should never drive your investment decisions.  

In 2005, right before the financial crisis, I purchased my first cabin in the Smokies.  I paid $240K, and my neighbors thought I was nuts for giving that much.  I suppose that I was.  By 2010, the appraised value had dropped to $145K.  So on paper, I was down around 40 percent, and the monthly income was basically just paying the mortgage note.  Certainly no profit.

But I decided to hold it.  Why?  Because regardless of whether I paid too much, other people were going to be paying off the rest of the investment for me.  My cost was sunk, so why sell at a discount and permanently kiss that money goodbye?  Over the years, the income has steadily grown.  I started actually "making money" about 8 years in, and today, 2023, my guests have paid off the property, it grosses around $53K a year, and it's worth at least $500K.  

The moral of the story is, even a crappy investment can end up being quite a good one with some patience and a reality check.