Market Saturation in Smokies?

[Matthew Doyle]

So I already own a STR in a colorado ski town that does fantastic..I would buy another if I could but I want to take advantage of the 10% second home loan for my next property.

The smokies are a popular spot for this investment strategy but something I can't seem to wrap my head around is the market saturation of these cabins in the Gatlinburg area. Does anyone else see this as an issue? There seems to be 1000s of rentals of the same unit type...and they just keep building more. That compounded by the fact that there is no limitation on supply, the land seems infinite to develop.

I'm not in this for quick liquidity reasons, but do people have concerns about even selling in 10 years from now - the supply just seems to be over the top. Also how does one even enter this market as a new rental, the competition seems stiff. Are people still entering this market now (past 6 months) and having success with it? 

Furthermore, are there other areas in the smokies (NC for example) that are worth considering that see similar success as gatlinburg and co?

Thanks for the advice!

[Collin Hays]

A few random thoughts...

In late 2016, the "Great Gatlinburg Fire" destroyed approximately 2500 structures, the majority of those being vacation rentals.  Over three years later, that inventory has still not been replaced.  And it won't be any time soon, because building in the area is a real challenge.  Labor shortages, new building codes that are untenable, etc.  It would be interesting to hear from a local realtor how many housing starts have been approved in Sevier County in the last 3 years. Maybe a few hundred I would think?  

Even in a robust seller's market, the price-to-earnings ratios in the Smokies are unmatched by anywhere in the country that I can find to date, and I have been looking.  

I personally own a 2BR cabin on the Roaring Fork River near downtown Gatlinburg that I rebuilt after the fire of 2016.  I had a guest offer me $575,000 last fall for it and I told him no.  He acted offended and told me that he was offering 50 percent above market because he wanted a cabin on the river, and I said "As soon as you find me $65,000 a year to replace my lost income, I'll sell it to you." 

The point is, even with hugely inflated values, the underlying earnings are still compelling. On my river cabin as an example, I probably wouldn't start entertaining selling it until it reached $700K, simply because I can't readily replace that income with a property elsewhere. It's a mathematical problem for me.

Now, once values reach 10X earnings, I think you start seeing things slow down.  We aren't anywhere close to that point yet.

What does it sell for in 10 years?  Who cares - your guests are going to completely pay it off way sooner than that.  If you just get what you paid for it, you're still in very fine shape.  I bought a cabin in Cosby just before the housing crash for $240K.  That was 15 years ago and it's probably worth $300K by now.  That's not much appreciation.  But, my guests have paid off the darn thing and I'm yielding $40-45K a year on it and have no intention of selling it.  Again, I can't replace that income.  Hope this helps.