Do any agents or builders selling new construction STRs include proformas?

[Mike H.]

As a somewhat new GC here in Sevier county, I am building to hold and building to sell.  The market for sales has slowed down considerably here.  But the margins are still there if you're willing to price these right.  What I'm wondering though is if any agaents/builders in this area or any other areas include actual proformas with their sales materials.

As a long time investor, I look at the numbers on these deals - even at retail prices - and am amazed at how good of an investments these cabins are if someone actually looks at all the numbers.  

We've got a large 3 bedroom cabin with somewhat conservative rental projections for sale that I think if people actually saw all the returns on the investment over time, it would be a no brainer. But I think people tend to look at what a rental property is going to do in year 1 and just pass it by.

i.e. Cabin will appraise at a little over a million (1,050,000) and we could sell it for 950k and still be happy on our end.  Assuming they could finagle a 10% down payment loan and put up 95k, they'd owe 855k and have close to 200k in equity.  At a rate of roughly 7.25, they'd likely only make about 7k a year net after everything (property management, expenses, etc).  So I could see why they doesn't seem as appealing on a 95k investment.   But the reality is they'd also gain 42k in appreciation (assuming 4% which is conservative out there), and another 8k in principal paydown.  And they'd be able to use the additional depreciation to write off regular income and save about 5k on their taxes.

So what is the real return on their 95k investment.  Well one would be the equity capture they'd gain right off the get go by buying below market (100k), plus the 7k net rental income, 42k appreciation, 8k principal paydown and 5k from tax writeoff on regular income = 162k is what they'd technically gain.  But thats only in year 1.

Where things really work out in real estate investing is over time as the mortgage stays the same but the rents increase.
After year 6,  that property would be worth 1.33 million (again, assuming the 4% appreciation) and they'd have a remaining loan balance of 791k which gives them 539k in equity.  Their net rental income for that year 6 (assuming 5% rental increases per year but increases in management fees, utilities, taxes, insurance) would be 24k.  Their principal paydown in year 6 would increase to 11,500 per year, and their appreciation for that year along would be just over 50k. 

So in year 6, that same 95k initial investment they made is going to allow them to gain 24k net rental income (and the depreciation is still enough to cover that so it would be TAX FREE), 51k, in appreciation, 11,500 principal paydown = roughly 86k in total return in year 6.
So a 95k investment after 6 years would give them an asset that they'd have 539k in equity.  And they would have added 86k in total return in that year.

As an investor that built up a nice portfolio after the bust through covid where I got to 83 sfh's, the returns on these str's, are just silly. And whats even more impressive is that the numbers include property management built in so its much more passive then managing yourself. And you have no risk of evictions and, depending on your management company, you get most of your damages covered even.

So I'm wondering if maybe investors just need to see the actual proformas and what these numbers look like with some basic assumptions (i.e. annual rent increases, annual appreciation) to really hit home how good these numbers truly are.   To me the biggest risk to STRs is the municipalities shutting down the ability for owners to rent homes out short term.  And that is one of the reasons I really like sevier county.  The subdivisions are specifically zoned to allow STRs or they aren't.  

[Collin Hays]

Quote from @Mike H.:

As a somewhat new GC here in Sevier county, I am building to hold and building to sell.  The market for sales has slowed down considerably here.  But the margins are still there if you're willing to price these right.  What I'm wondering though is if any agaents/builders in this area or any other areas include actual proformas with their sales materials.

As a long time investor, I look at the numbers on these deals - even at retail prices - and am amazed at how good of an investments these cabins are if someone actually looks at all the numbers.  

We've got a large 3 bedroom cabin with somewhat conservative rental projections for sale that I think if people actually saw all the returns on the investment over time, it would be a no brainer. But I think people tend to look at what a rental property is going to do in year 1 and just pass it by.

i.e. Cabin will appraise at a little over a million (1,050,000) and we could sell it for 950k and still be happy on our end.  Assuming they could finagle a 10% down payment loan and put up 95k, they'd owe 855k and have close to 200k in equity.  At a rate of roughly 7.25, they'd likely only make about 7k a year net after everything (property management, expenses, etc).  So I could see why they doesn't seem as appealing on a 95k investment.   But the reality is they'd also gain 42k in appreciation (assuming 4% which is conservative out there), and another 8k in principal paydown.  And they'd be able to use the additional depreciation to write off regular income and save about 5k on their taxes.

So what is the real return on their 95k investment.  Well one would be the equity capture they'd gain right off the get go by buying below market (100k), plus the 7k net rental income, 42k appreciation, 8k principal paydown and 5k from tax writeoff on regular income = 162k is what they'd technically gain.  But thats only in year 1.

Where things really work out in real estate investing is over time as the mortgage stays the same but the rents increase.
After year 6,  that property would be worth 1.33 million (again, assuming the 4% appreciation) and they'd have a remaining loan balance of 791k which gives them 539k in equity.  Their net rental income for that year 6 (assuming 5% rental increases per year but increases in management fees, utilities, taxes, insurance) would be 24k.  Their principal paydown in year 6 would increase to 11,500 per year, and their appreciation for that year along would be just over 50k. 

So in year 6, that same 95k initial investment they made is going to allow them to gain 24k net rental income (and the depreciation is still enough to cover that so it would be TAX FREE), 51k, in appreciation, 11,500 principal paydown = roughly 86k in total return in year 6.
So a 95k investment after 6 years would give them an asset that they'd have 539k in equity.  And they would have added 86k in total return in that year.

As an investor that built up a nice portfolio after the bust through covid where I got to 83 sfh's, the returns on these str's, are just silly. And whats even more impressive is that the numbers include property management built in so its much more passive then managing yourself. And you have no risk of evictions and, depending on your management company, you get most of your damages covered even.

So I'm wondering if maybe investors just need to see the actual proformas and what these numbers look like with some basic assumptions (i.e. annual rent increases, annual appreciation) to really hit home how good these numbers truly are.   To me the biggest risk to STRs is the municipalities shutting down the ability for owners to rent homes out short term.  And that is one of the reasons I really like sevier county.  The subdivisions are specifically zoned to allow STRs or they aren't.  

A proforma right now is a total crapshoot. Rental revenues are down 15 percent from last year, and last year was down 12 percent from 2022. Who knows where 2024 goes.  

Same for "appreciation".  I lived through 50 percent depreciation cycles in that market. In 2010, there were "new" cabins - with indoor pools - that sold for $899K a year or two earlier going for less than $250K by the bank. 

There are many investors in the Smokies that would like to sell right now, but they cannot because they will have to bring money to closing.

I wouldn't be doing new construction in Sevier County under any scenario right now.