All Forum Posts by: Mike H.

Quote from @Mike H.:

@Aaron Zimmerman   I followed the link and it is in an enterprise zone.  I'm trying to find the benefits, if any, for rehabbers but don't seem to be having much luck.  I have an email into the region's EZ administrator to see if they have something.  And now I'm going to do some more research on EZ benefits to see if there's something that may be of value.....  Thanks.

What a bummer.  The administrator just got back to me.  Apparently the zone doesn't allow for any benefits if the use is single family homes.  Multifamily of 12 units or more would work too but not doing that.

Quote from @Mike H.:

@Aaron Zimmerman   I followed the link and it is in an enterprise zone.  I'm trying to find the benefits, if any, for rehabbers but don't seem to be having much luck.  I have an email into the region's EZ administrator to see if they have something.  And now I'm going to do some more research on EZ benefits to see if there's something that may be of value.....  Thanks.

I did find that I can save sales tax on materials if I fill out a form.  Since these are full on gut rehabs, we're talking about 100k rehabs.  Of that mayber 40k in materials.  So 3k to 4k savings?  I'll take that. 

@Aaron Zimmerman   I followed the link and it is in an enterprise zone.  I'm trying to find the benefits, if any, for rehabbers but don't seem to be having much luck.  I have an email into the region's EZ administrator to see if they have something.  And now I'm going to do some more research on EZ benefits to see if there's something that may be of value.....  Thanks.

Why doesn't the gc just hire security there during the day.  Its not like they're going to be needed for months.  Just long enough for the electrician, plumber and hvac guys to get done. The gc should also get some cameras up as well to help deter them from robbing the contractors and the house itself.

For a 2.3 million dollar home, I'm guessing the gc is making some decent money.  He could probably tell the buyers to foot the bill so that they can finish the house.  Or maybe go in half on the security cost.  What choice would the buyer have.  It could add months of delays and that means the buyer is paying interest on it sitting there.  Security would be cheaper than the interest on that costly of a home. 

I guess I'm seeing some key data points missing.  But the other most important thing is that you absolutely need to find a seller of the land that will wait for your rezoning process before you close.  Or else you should keep looking.  So stick with the sba loan and just find the right seller - even if you have to offer him a little more on the purchase price for the wait. 

You absolutely don't want to risk buying the land and then having it turned down in the permitting process for your use.  Then what are you going to do with the land.  The idea that any village or county is just going to rubber stamp your approval for rezoning is not an assumption you want to make. 

Some of the other questions are How much is the land itself? And the other is with 400k in income how do you not have any cash in the bank to invest with?  At some point, you might be able to pull this off with little to no money out of your own pocket.  But you're going to hit some roadblocks if you're looking to do something of this scale with no money of your own.

And You're wanting to build two RAL homes? Are they going to need to be on the same piece of land? Are they both going to be 16 room homes or similar in size? What are the estimated build costs? Can you do one at a time? Can you do them on separate pieces of land?

It would seem better to me to do one home at a time - Each on its own piece of land so that you can minimize your holding costs as you do your build. And then once you're done with the first one and the home is stabilized with residents and income, you could use some of that income to make your interest payments on the second home project.

Looks like a fascinating project.  And its good you have a mentor on the deal with experience.  Having 400k in income will help but its going to be something that comes up if you say you don't have cash on hand. Most investors and/or the sba is going to want to see you have some real skin in the game on any loan they do. 

The economy is definitely going to drive lower numbers everywhere.  There's just no other way to cut it.  But i think there are always better areas and product niches to be in.  In gatlinburg anyway, i think the smaller ones and twos are doing ok actually.  The bigger ones are taking the hit for sure.   And that makes sense.  

Families traveling to these areas are getting hammered with inflation and the uncertainty of jobs and more inflation coming down the road.  It doesn't help that trump keeps playing games with these tariffs - going from 10% one day to 145% for china the next.  Or steel from 25 to 50%.  Those are huge increases in pricing that the consumer is going to be hit by.  And when they are, that means less travel.

It also doesn't help that we've alienated a lot of the people internationally by targeting their country or saying stupid things like we're going to make canada the 51'st state.  Thats definitely affecting tourism as well.

So yea.  I'm guessing people are still going to travel but not as many and they're going to look to save money when they do.  So a family of four is going to be more likely to want to drop down from a larger 3 or 4 bedroom str to a 1 or 2 bedroom if they can make it work.  

I know for me in gatlinburg, the ones and twos are all I'm interested in adding right now.  I love the two's for families because they're big enough for the mom and dad and the kids can take the other room and/or use a pullout - but the place is still big enough for some amenities like arcade games or pinball and such.   Just put a superchexx in one that is a new build going up next week. 

This is a great market and an even greater example of simple economics.

Here is my take on the market now and what led us to where we're at and where i think its going.

1) The numbers precovid were actually very strong. But they were very strong for a lot of STR markets back then too.

2) The covid years created a bubble for the bigger cabins.  During covid the numbers on the smaller one and two bedroom cabins were not that great.  Paying 450k to 500k for 1bed cabins that rented between 45k to 55k.  Or Paying 600k to 625k for 2 bed cabins that rented between 50k to 65k.

The larger 3's (2,000 sq ft) or 4's (2,200 to 3,000) were going for 400/sq ft to 440/sq ft but were renting out for 100 to 120k on the 3's (that were selling for 800k to 850k) and 110 to 140k for the 4's (selling for 900k to 1.2 mil).

You could make some really nice money on the 3's and 4's with those numbers. Not so much on the 1's. 

So everybody starting building big cabins.  

3) Reality hit and supply and demand rules kicked in.  And by the time covid ended, those large cabins all started coming online.  And the money people had to buy dried up and the interest rates doubled from 3.5 to 7 so the cash flow fell apart too.  Economics law of supply and demand on the rentals and the returns.  

Rents dropped because you had a lot more inventory of the larger cabins and a lot less visitors wanting to rent the bigger cabins because they really didn't need that size rental.

That however drove up the rents on the one and two bedrooms quite a bit.  Because there you now had the 3 and 4 cabin renters wanting the ones and twos.  AND you really didn't have many people building ones and twos so the growth in inventory was small. 

4)  So right now what you have is the bigger cabins aren't moving at all and nothing is being built or sold for 3 or 4 bedroom cabins.  That should help the existing owners of the bigger cabins though over time because there are very very few bigger new cabins being built. The few that are are available at cut rate prices.

Now the smaller cabins are selling extremely well. And their prices are continuing to go up. Why? Because their rents are continuing to go up.  The one bedroom (1,000 to 1,200 sq ft) cabins are going for 550k to 600k right now.  The rents are 50k to 65k.  And the twos (1,400 to 1600 sq ft) are going for 650k to 725k with rents between 60k to 75k even.

This is where we're at right now.  The building has been way off for the past 2 years now.  Now I'm only talking about cabins there and not apartments or hotels. But anybody that says otherwise is either lying or misinformed.  We are a builder out there and we talk with the building permit offices and the health dept that does septic permits.  So there is zero doubt that the builds are way down - even from precovid levels.

Overall visitors are definitely down there as you would expect given that most areas in the country are.  But this idea that this area is busted is silly.  I see this market exactly like I saw the years after the crash of 08.   Overbuilding to the extreme during covid just like the 05 to 07 years in the national market did.  And now slowly, the nominal level of building going on is going to suck up the oversupply and then the area is going to deliver a great return like it always has.

Its become one of those areas like nashville and/or disney.  Once you get enough attractions, the people will come.  The more people that come, the more attractions continue to be added because they can make money.  And its a snowball that feeds itself.  Whats unique about the area is that its driven by STRs unlike a majority of markets - so you never have to worry about some crazy regulations to restrict the use of the homes for STRs. 

I would tell anyone looking to invest right now, that you could really walk away with some really nice equity if you were to go buy 2 or 3 of the bigger cabins at these prices - but not new construction.  Buy the pre-existing where the discounts are significant. In 2 to 4 years, those cabins that you can buy for 300/sq ft are going to go back up to that 425 to 450/sq ft price point.

And if you're looking for something that will definitely cash flow and you can get in now - I'd look at the one and two bedrooms. I think even though people are seeing the prices and rents of those doing well, they are still not interested in building anywhere near what the demand is calling for.  My guess for that would be they just aren't the big homeruns that those bigger cabins were a few years ago and most of the people building out there are NOT first timers, they're the experienced owners who have seen huge wins and now they're gun shy on doing anything.  

Again.  I went through the 08 to 2018 or so period where 08 to 2014, everyone told me I was crazy for buying sfh's as rentals.  People had such a bad taste for real estate during that period it was silly. Toxic is the only way to describe it.  But follow the numbers.  The numbers tell me that the smaller ones are going to cash flow now and in the future. And the bigger ones are going to be a great way for equity capture going forward.

Its all about supply and demand just like it was right after the crash when building came to an absolute halt and never returned - even to precrash levels. This idea that people see a cabin or two being built around them doesn't reflect the true numbers.  The building permits tells you the real numbers and the permits are down significantly even from precovid levels.  

All that being said. I don't believe its truly investing if I'm paying retail for anything. So I should add the caveat that my absolute confidence in the market is also based on the fact that I'm building cabins myself and doing it at 65 to 70 cents on the dollar. So the cash flow works better there. And the equity capture is solid too. Its the BRRR method but with new construction.

But where theres doom and gloom, there's opportunity.  So if you really believe that a bunch of cabins are going to get foreclosed on, then you should go ahead and start putting in offers.

But I can also tell you that I've been watching the master clerk's website for several years now looking for deals to maybe come out.  And you simply don't see cabins going to foreclosure maybe ever!  It just doesn't happen...... I would guess I've seen 2 or 3 in total over the last 4 years....... 

So I'm working on a project that is going to require full on gut rehabs on a significant number of homes
and some smaller apartment buildings (3, 4 and 6 unit bldgs).  These rehabs are going to need all new roofs,
all new windows, all new hvac and many all new electric. 

I know they have some energy efficient tax credits for homeowners.  I was wondering if they had any for the investor
if they upgrade all those things on a house or multifamily.  OR, possibly, could we give the receipts to the buyers
so that they can claim the upgrades for tax credits for themselves?

Its in Illinois, so if anybody knows of any state or federal credits that might work, please let me know.

thanks

I think out of state investing is more than just picking the area and some of the key metrics in terms of property values and rents.  I think you have to look at the product type too. Find the right niche in the right market and you might really be able to do something special.

Are you going to buy for STRs or LTRs?  Are you going to do fix and flip? Build new construction? What size product do you want? 1,000 to 1,500 sq ft? 2,000 sq ft? 

Depending on the market and the product type that you choose, you'll get a better idea of what makes the most sense. 

I will say this.  I think finding an area where the property taxes are low is a big first step.  Las Vegas looks good.  Tennessee is good too. Illinois is an absolute nightmare. Its something that most people don't factor in when they're running numbers.  They're looking at price point of homes and rents and thinking thats it.

But there is a HUGE difference in numbers when your property taxes on a 300k property in Tennessee is $800 versus the same 300k property in illinois you're paying 9k a year in taxes as an investor.   And those are actual numbers here on some properties I'm familiar with.

And believe it or not, the rents are actually about the same for both. 

@Daniel A Drummond

Just curious.  But what were some of the reasons you decided you wanted to pursue investing in real estate in the US? I don't know much but I think I've heard that australia real estate has been appreciating at a pretty good clip.  Do the rent to values simply not add up?  Are fix and flips not really an option there?

One suggestion I have is that once you identify a couple of markets, I would look to partner with someone in those markets in your investing.  

If you don't want to hold rentals in a partnership, maybe what you could do is split the deals so that you get a hold and then your partner gets a hold and then you get a hold and so on. But having a partner when you're out of the country would make things a lot less stressful and mitigate a lot of the risks.