How to proceed in smokies?

Question

Hello all,

I'm in contract for my first property in Wears Valley: 4bed/4bath w/indoor pool and media room, 3600 sq ft for 900K. My intention was to go as big as possible right out of the gate for better returns. However, I initially began putting in offers in the 500-600K range because I qualified for a second home (10% DP), thinking that I'd exhaust that option before buying a larger property. (I'm planning to buy a few in a relatively short period of time, if things go well.) I put in bids for 2/2s in desirable areas/resorts that were expected to gross about 65-70K and it was just insane: people coming in with cash, waiving appraisal contingency or providing gap coverage, etc. The only reason I got my deal is because I joked to my agent that I should just give up on this range (since it's clearly too competitive right now) and go for a larger house....she just happened to have this one, which was off-market, price was firm, and I took it. Commercial loan, 20% down, higher rate, but expectations for 150K.

So, are people "overpaying" for these smaller homes? I am getting double the gross returns (150K +/-)for a house that's only 50% greater, not double, the purchase price. I know I had to put more % down, but there's no way around that at this price point, anyway.

And then the obvious follow-up: do I take that 10% dp and use it somewhere else (PCB etc.) or just forget it entirely and use that cash towards the next 20% DP on a very similar property to the one I'm getting in the smokies? I'm leaning towards that, but maybe I'm missing something.

Plus, if I don't take the DTI hit from the second home loan, I'll be able to cash-out refinance my primary residence for a lower rate (home is 60% paid off and has 3.5% interest rate) and put it towards the next deal.

Thanks in advance.

Conor Shinnick · Answer

Bigger is definitely better if you can afford it. We started with a 2 bed pool cabin w/good views and then followed up with a 6 bed pool cabin w/stellar views. Both take the same effort to manage, but the 6 bed brings in double the revenue. My next target is 7 bedrooms w/even better than stellar views.

Everybody has to start somewhere, but buying the highest revenue generating property is the fastest way to get where you want to go.

Rohin Dhar · Answer

I'd echo @Justin Anderson that I sort of like our smaller properties better than our larger one. With a one bedroom you're typically renting to a couple so there is less risk of bad things happening like an unauthorized party that disturbs neighbors. In general, the guests tend to be happier and the maintenance needs are a lot less. Plus if you can pick up the right deal like justin's one bedrooms, your cash on cash %  returns can be absolutely insane!

That said, larger homes probably appreciate better and generate more absolute profit. But they come with more mental cost as you manage them! We're not in the smokies but I think the "small versus large" decision is something to think about for every market.

Luke Carl · Answer

Not everyone can afford 900k. Why buy a single-family home if you can afford an apartment building? In STR a large SFH is multifamily!

Bravo! We're going to be neighbors :)

Justin Anderson · Answer

Sounds like you got a deal -- congrats!  I was just talking to an agent yesterday and she had 21 offers on a 400k 2BR cabin within the first 24 hours.  There is a lot of money on the sidelines looking to be put to work and this is a great place for it.  I think by going higher, the competition thins out quite a bit so you may be able to find a deal.  And of course off market is great as long as the price is right.

As you look to grow, I'd suggest staying in the area if you can find another viable opportunity.  You're going to build a network of connections and it takes time to weed through the bad ones.  Adding another location is just doubling that effort.  Also, if you grow to several, you can start getting economies of scale as you get better pricing and treatment from people you work with.

I also went big with my first -- a 7 BR with an ok view.  It's been a VERY solid performer, hitting 210k last year.  After that one, I bought 2 1BRs that both hit 60k last year.  At the time, the big cabin cost about 3x what the small ones  (720k vs 225k IIRC)  I'll be honest, though...  I prefer the small ones to the big ones.  The big cabins have WAY more maintenance needs than the smaller ones because big groups do damage.Given the current market, though, I think going big is the only practical way to play the game right now.

How to proceed in smokies?

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