Real life returns in the Smoky Mountains

I'm hearing a lot of hogwash about what cabins in the Smokies will generate in revenues, and I am afraid that investors are making buying decisions based on an unhealthy helping of irrational exuberance.  The old "overpromise, under-deliver" scenario.  Trouble is, there's real money involved.

As I visit with investors interested in buying a cabin in the Smokies, I usually ask them what their goals are. One goal that often is mentioned is “monthly income.” And while that is an ambitious goal when one is only putting 20% down, monthly income is really kind of missing the point, and I don't know that it is very realistic in the early years.  Regardless, it is just a small slice of the overall return, and it can often cloud over where the real money is to be made.

Let’s say you buy a $500,000 cabin, and your expected yield, for ease of math, is $60,000 per year gross rents (not including housekeeping fees and taxes). Let’s also assume that you finance it for 15 years @ 5 percent APR.

Now let’s detail the monthly expenses:

$3163 principal and interest

$120 property taxes

$200 property insurance

$400 utilities

$1000 management fee (assuming 20%)

$100 repairs and maintenance

$150 HOA fees

So the total monthly expenses are $5133, the income is $5000, leaving you a deficit of $133 each month. Awful deal, right?

Not so fast! Remember, other people are paying off your asset. In 15 years, your total out of pocket has been $123,940 (the down payment of $100,000, plus monthly shortfalls totaling $23,940 ($133 X 180 months). Even if the property “only” appreciates at 4 percent annually, the property is now worth $865,000. So while you had a small monthly deficit, you were basically paying yourself, as you’ve magically turned $123,940 into $865,000 – a staggering 15% annual return! And that isn’t taking into account the tax benefits you receive by owning the property, and assuming zero growth in rents over 15 years.

Of course, you can put even more money in your pocket - $1,000 a month – by paying yourself to manage the cabin. That works as long as you have TIE – Time, Interest, and Energy to do the job yourself.

When investing in the Smokies, consider it a long-term play, with riches in 15 years and beyond.  Such as when you are paying college tuition for your 3-year-old.  Ask me how I know.  ;)