Estimating vacation rentals revenue during an economic downturn

[Ryan Thomas]

I currently use airdna to estimate revenue on potential short term rental properties. Obviously this data is based on the current economic conditions.

Does anyone have a rough ball park proxy to discount the ADR and Occupancy for an economic downturn. I am using 50% reduction in the current ADR and Occupancy as a worst case scenario but hoping for advice from someone who owned vacation rentals during hard times.  For reference I am looking in the smokey mountains- Gatlinberg, Pigeon Forge, Byrson City, Boone type areas.

[Chuck Kramer]

Thanks @Avery Carl!

I have been in the area and involved, but not as an owner. Here is what I can contribute and is also based on research I did in late 2016.

The downturn began around 2007 and effectively continued until about early-2012. Lets start with that timeframe.

For each year from 2007 until 2014, visitors to the Smoky Mountain (Sevier County) area either increased or stayed level. Rates, based on info from local property mgmt companies, also stayed somewhat flat or had very modest increases. Keep in mind, it was quite possible to get a nice 3-bedroom cabin/chalet for around $50-60K then.

Foreclosures ran high, as they did in most places. The market at that point was primarily owners who were using the 2nd/vacation homes and renting them when unused. As throughout the country, many were financed through home equity loans or outright and were just as risky as the rest of the mortgage market at the time.

A longtime local property manager has said he believes a major factor that kept the market up was the lack of sufficient hotel space and that the # of available cabins contracted as more foreclosures occurred.

The local labor market also suffered when manufacturing and other jobs were lost and people took lower paying jobs in the attractions areas. This led to foreclosures of permanent residences. Combine that with the new mortgage requirements put in place and many of those foreclosures say unsold for a long time.

That, in turn, drove up the demand for long-term rentals and many property mgmt companies and local RE agencies took up long-term rental management. It was, at the time, quite doable. Simple math: buy $60K home, rent for $500-600/month and make some money. Utilities, insurance, property taxes, were all inexpensive.

Fast-forward to today.

Simple 2 BDRM STR with no view and such is going to be around $200-240K. Average 2BDRM long-term rental in a 20-mile radius is going to be about $650-800/month. Insurance costs have really gone up since the wildfires as well. It is REALLY difficult to make money, or even come close to breaking even at those rates.

Even ignoring the STR market and going strictly LTR is generally not a good idea.I have talked with *many* locals over the last two years that think they are making good money. But they paid all cash and are getting $650-800/month. When I show them the math, that is about a 1.5% ROI; they are losing money against inflation.

There used to be a HUD report online from 2013 that described the area as an opportunity, having insufficient housing for people who need it, etc. However, the average household in the area is 3.1 people and $28,400 avg household income. Not a promising LTR market. Believe me, I have tried. [Note: only way I see to make reasonable return is with mobile homes and that presents all sorts of new challenges in this area]

I won't say that the area is recession-proof, but a lot of big investment is going on in the area with large companies pouring in the money. They wouldn't be doing that if their own smart finance people felt the risk was too high. Local city planners are on record saying that they believe if another downturn were to come, visitor counts would at least stay flat. Some would not come for $$ reasons but likely be replaced by others who typically take more extravagant trips and are now scaling down to save $$ (e.g. Flying to the Caribbean or Mexico for a week is now driving to the Smoky Mountains).

Having said all that, going LTR during a recession or downturn is a way to hedge losses on an STR. You can do your own analysis using some of this info to see how it would work for your specific circumstance. I have done it for mine and I have 1 that I think would still do a little better than break-even, another that would be a very small monthly loss, but the others...well, let's just hope we don't find out until our reserves are built up more.