All Forum Posts by: Mike H.

Landlords in illinois for sfh rentals don't provide snow removal or lawn cutting so thats not an issue.   The tricky part of illinois can be the property taxes.  Some of the nicer/newer homes are up there in property taxes even in bloomington (4k to 6k).  The older homes there aren't as bad (2k to 3k).  Thats in the 1500 to 1800 sq ft size. 

Just be wary of the taxes there.  The other issue is that town is a one trick pony.  You're not getting people moving there that can commute to anywhere.  So your renter pool could be limited.

If you like that price point, I would suggest going a little further north.  You'd still be outside of the chicago suburbs but they'd be close enough to where they could work downtown.  Areas like bourbonnais, manteno, bradley, and peotone. Home prices are a little bit higher than bloomington but so are the rents. And you have a lot less availability in terms of rents.

Overall though,when it comes to investing out of state, I would always suggest people look at STRs. You get built in property management which makes dealing with repairs easier.  And you avoid things like damaged properties (guest insurance from airbnb or prop manager themselves cover that), evictions, collections, etc.   And when a furnace does go out, the property manager will fix it.

You can get a property manager for a long term rental too but the numbers in terms of cash flow just don't seem to work well as they do for str's. 

I stopped buying sfh's as long term rentals here in illinois. I just couldn't find deals that allowed me to be all in after purchase and rehab for no money out of pocket like I used to. 

What I did find is that as a builder in eastern tennessee, I could build STR cabins for less than 70% LTV so that I could effectively BRRR my way into growth without coming out of pocket for a down payment.

Now it does take a lot more cash to do because as a builder I have to front a lot of money at times (land, permits, each stage of construction while I'm waiting on the draw).  So its not as easy as it was before with sfh's where you could get 100% of the purchase and rehab as long as the ltv was 70% or better.  But in terms of being able to grow a portfolio with a ton of equity and solid cash flow, being a builder in this area really works.

I think the STR part of it also helps as well. I can build a 1,000 sq ft cabin including land  and holding costs for about 350k or so and the cabin will appraise out for about 500k to 525k and will produce gross rents in year 2 between 50k to 60k. With a loan of say 350k, and paying property management, it should still provide net profit of about 4k to 7k a year in year 2. And go up from there.  

But what I like about it the most is that I don't have "find" any deals to BRRR. Every single cabin I build is a deal I'm going to add 150k or more in equity (I've done a couple of larger ones that have 200k to 300k in equity) and anywhere from 5k to 10k a year in net profit by year 2.  Year 1 is probably a loss though so that is something to consider. Just the way the str thing works because rents seem to take about a year or so to stabilize.

My goal is to get 20 cabins in the next 5 years.   I say that but my goal for sfh rentals here in illinois was to get to 20 houses in 10 years and I ended up getting to 83 in 15 years (I've since sold half though so I don't own that many now). 

Getting title and getting clean title for properties bought at tax auctions are two different things.  Most title companies will never give title insurance on properties bought at tax auctions. Some will need 5 or 7 years to pass and then they might.  So selling it to someone when you can't give them clean and insurable title can sometimes be an issue.

At that price point, not so much. 8k properties tend to have a buyer pool that won't care as much that the title isn't insurable if they see the reason why is because it was bought at a tax sale.  But they'll also need to be aware that they won't be able to get a loan to build anything on it either in the future.

There is at least one company out there I've looked into before.  Something like tax title services.  I think they charge 2k or 2,500 or something and they'll do some legwork on the tax sale and then I believe they work with title companies so that they can insure the title (maybe they underwrite the title policy or something, i don't really know how they work).  But they would allow you to get an insurable title policy on the property which makes it much easier to sell.

Why do you have 24k in cleaning fees as expenses for an STR? Aren't the guests paying for the cleaning fees?

When I see a 500k property that can gross 100k in rents, I have to believe that thing is going to make a boatload of cash.  But is the issue that the 100k you're describing isn't gross rents, its gross revenue? And thats why you have 24k in cleaning fees as an expense?

I'm just more familiar with people quoting gross rents and typically assume the cleaning fees are being paid by guests. 

On the other hand, you stated that the management firm was charging 15% and had a 15k expense.  Management doesn't get a percentage of cleaning fees so something seems off or else its just very different there than here in Illinois or Tennessee. 

btw: Is there any way to eliminate the propane? I know that can get pricey.  But 1k a month in utilities definitely seems high. So I'm guessing thats the item.  Can you replace furnace, stove, etc with all electric and save 300 to 400 a month there? 

I also think you can get 6.5% interest these days so that should be closer 30k a year for P&I.

I just don't see how you can lose money like that if your gross rents are 100k on a 500k purchase price and you're putting down 20%.  Again, not unless its actually that your gross income (including cleaning fees) is 100k a year and your gross rents are actually only 75k. 

But again, your property manager should only be charging you 15% of gross rent not of revenue (i.e. cleaning fees that guests are paying).   So at 15% of 75k, its not 15k in management fees, its 8,625 per year so there's about 6,400 in savings right there.  If you can get a loan at the 6.5%, you're saving another 5k a year off your estimates.  Now things are looking a little better.

But I would be very interested in knowing whether the 100k a year is gross rent or gross revenue.  btw: 24k in cleaning fees seems quite a bit excessive even if it is. You calculated 8 turns a month? Thats a ton of different guest stays to average per month. Obviously you said you are very experienced so I'm sure thats based on that.  But boy does that seem like a lot of guest stays per month.   

I think a big missing piece from the puzzle is where are you at personally with your income. Equity and cash flow are equally important when deciding whether to pull money out.

If you can put the equity to work by adding another property while still having a nice cushion on your cash flow, then I would say definitely yes.  

If you were to refinance property one and pull out another 100k (lets assume a 500k house in tampa that you need 100k for a down payment), you'd be paying 6.5% or so on that 100k.  Now you have to see what your returns would be on a 500k str property there.

Lets say you were to net 5k a year in rental income, there's 5% right there.  Add in the principal paydown on the investment property which would be another 5k. And now another 1k of principal paydown per year on the 100k additional money in the new loan. Now you're at 11% return. And then add in the typical appreciation of say 3 to 5% (of 500k). Another 20k?  Now you're at 31% return.

Now thats making a couple of key assumptions - 1) the property you're buying is around 500k. And 2, that the property with 100k down will have a 400k mortgage and will net you 5k a year. 

And that may not sound like much.  But what does that look like in 10 years.  That property might be making 15k to 20k a year in rental income.  It might be worth 700k by then.  And you would now owe about 330k by then so you would have gained 370k in equity in 10 years.  All from taking out 100k on one of your properties.

The key, to me, when deciding to use more leverage for growth. First and foremost, is the property you're going to use the money to buy a good investment.  And then the second item is - if you do take out more money, where does that leave you from a cashflow standpoint.   

Again, you appear to have two long term rentals. If one of those people doesn't pay or they move out, you're taking a hefty hit on your cash flow for sure.  Does your personal income give you enough of a cushion to handle that.  If it does, then to me the answer is absolutely clear - take that money out and add more property.

You will thank yourself a million times over when you see what that choice becomes in another 10 years. 

btw: I would add that I am very skeptical of anything in florida these days. I did some mobile home deals down there (4 total) and the change in immigration laws and the recurring storms has really dented the demand down there. Then again, as an STR I'm not sure that matters as much because you're not selling the home, you're renting to vacationers so that shouldn't be as affected. And the benefit to all the chaos with the last two storms Is you should be able to negotiate a killer deal on a purchase right now.

I would put in lowball offers (75 to 80% of list) on every house you're interested in and see if somebody bites. You're an investor. You should never pay retail! If you can walk into the deal with some nice equity then it gives you more options in case you want to get out of the area. 

Quote from @Sunil Ghosal:

Quote from @Madhu Kongara:

Hi Everyone,

We are in the process of purchasing 1 acre of land for $300K in the area and are considering building a cabin. I would appreciate any advice on whether it's a good idea to invest in land on a slope and the potential challenges of building on such terrain.

If this seems like a worthwhile investment, can anyone recommend reputable construction companies that specialize in cabin builds on slopes? 

I’ve also been in touch with a design team, and they’re quoting a fee of 10% of the total construction cost. Does that sound reasonable based on your experience?

Additionally, I’m trying to identify the builder of the cabin located at 921 W Cedar Ln, Gatlinburg, TN 37738. Is there a way to find out who constructed that property?

I’d really value your input on this project and any recommendations you might have.

Thanks,
Maddy

 The original poster asked.

"I’ve also been in touch with a design team, and they’re quoting a fee of 10% of the total construction cost. Does that sound reasonable based on your experience?"

They didn't really explain what the 10% fee included.

 Ah. Sorry. I missed that. But no, that sounds ridiculously expensive for design cost.  If you're building a 4,000 sq ft cabin that ends up costing 1 to 1.2 million in construction, that means they're wanting 100k to 120k for design?  Thats absolute thievery. 

Find a local property management company that does the bigger cabins and they'll help you identify the right build choices to help maximize your rents. A good builder will have some solid plans to choose from that your property management company can review and maybe tweak.   

Or find a local design firm that has done cabins where they can show you proven rent results from cabins they've designed and have them charge you by the hour.  You should pay 10k to 15k or less for the service.  10% on a million dollar build is beyond silliness to me.

For 100k to 120k in design fees, I'd want the Property Brothers themselves to come down and design the thing. :-)

Quote from @Bryan Stengel:

Hi Tariq, the STR markets are very saturate especially in the prime areas. There is a lot more competition than before. Listing prices for areas like near the Smokey Mountains are exceptionally. You'd have to be a builder to really reap any sort of profits from an area as such. Truthfully, I don't think a Capitalization Rate of 8% is terrible plus you'll have an appreciating asset along with the tax benefits. At this point, I definitely would find some solace in that. I currently have an STR in the Poconos and I would recommend if you ever pick a home here to consider style. The Realtor that helped me find a home told me it really didn't matter upon purchasing, but later it did become apparent that in VRBO or Airbnb renters are looking for that Chalet-style home with some amenities. If you ever decide to look over in this area, I'd be happy to put you in touch with the systems I utilize over here and give you insight on which areas to look for. Overall, it's pretty affordable too. For a nice possibly furnished STR, you are looking at between $250,000 to $350,000 depending on your budget. Feel free to send me message.

 Interesting addition when you suggest that builders are the only ones to reap any profits.  I think thats true if the builder sells some builds and keeps some.  

But I would add a couple of things.  Don't just look at the area overall and listen to people say its oversaturated and things are down.  Be sure to investigate the varying product types.  Great example is Bryan's take on buying chalet style homes in the poconos.  Thats the kind of information that separates a good investment from a not so good investment. 

And thats exactly what you need to do some digging to find out when you investigate each area.  Sevier county TN (gatlinburg, sevierville, pigeon forge) is a great example.  People buying the smaller cabins for 500k to 550k are getting 50k to 60k in rent by year 2.  Their numbers are solid.  The bigger cabins - not so much. So if you were investing solely in smaller cabins, you'd think sevier county was doing pretty good right now.  If you had bigger cabins only, definitely not.

One thing I would add though is that your returns are somewhat based on your purchase price which you can control.  As an investor, I don't believe in ever paying retail. I just don't think paying retail is investing.  If you could pay retail and make a good return, then literally anyone can do it.

What you need to do is identify your area. Then identify your product niche/type.  Then find matches for that product that you are able to buy at a discount.  Don't be afraid to blast offers to every listing on the mls for 80% of what they're asking.  You'd be surprised at what you might get - especially now with rents being down and some of these long term owners having grabbed a ton of equity over the last 10 years or so.   

Even if these people know their property is worth more, there is sometimes that one owner that wants the windfall of cash they have coming and will take that low offer.  Its a numbers game.  Find a realtor that will submit the offers and lower your cost basis enough to where your returns get a bit of a bump.  But even better is that you'll have enough equity there to where you'll be able to refi sooner and pull all your money back out so you can grow more. 

Quote from @Sunil Ghosal:

10% of total construction cost for what exactly. Does that include materials and labor? Is the 10% include on the cost of the land, infrastructure, etc? 

 I'm guessing this question was for me. But I'm not sure where I referenced 10% of total construction cost so I can't really answer the question. Can you clarify what you're wanting to know?

Quote from @Chris Watson:

Quote from @Mike H.:

Quote from @Marc Bowman:

A lot of our software users in the Gatlinburg area have reported that the Fire Marshall is stepping up and enforcing things that perhaps they didn't in the past. After the fire in 2016 damaged or destroyed more than 2,000 buildings, 16,000 acres, with 16 lives lost, I think they are trying to be better about enforcement. Unfortunately, I tend to agree that they really are not concerned with whether or not you have to cancel bookings.

 The funny thing about that is that the big gatlinburg fire didn't start in a cabin. It started in the forest preserve from two teenagers messing around.  Does the fire preserve have to have a sprinkler system put in anywhere? :-)

A sprinkler system in a cabin isn't going to do anything.  And while I've only been investing out there for the last couple of years, I have yet to hear of a story where people were killed because they got caught in a cabin that went up in smoke. 

Its yet another example of govt trying to butt its way into something because they think there's money for them to grab.  A sprinkler system isn't going to prevent a cabin from going up in flames if the trees around them are on fire. 

Being from illinois, I do get a kick at how much regulation goes on out there in tennessee - where people give me guff about how our local politicians here are so intrusive.  Its even worse in tennessee - by far.  People may act like they are for small govt out there,  but their actions are about as far from that as you can possibly get. 

There have been several cabin fires where people died. This is the one that sparked Tennessee to really start to create legislation on it. 
https://fox59.com/news/officials-confirm-two-dead-in-tenness...
This is a state fire code on sleeping more than 12. Actually, since 2016 up till this year TN fire marshals office was doing all inspections of new builds in Sevier County which required fire suppression/sleep more than 12.  

I guess what I meant to say is that it isn't the cabins catching on fire that created the big fire. And why is it that every single home - whether its a rental cabin or primary residence - doesn't have to have a sprinkler system? 6 people aren't enough people to be worth saving? Only rental cabins catch on fire and not primary residences.

In all honesty, though, I would agree that something that size should be treated more as a commercial property any way and the sprinkler system makes sense to me. And yep, I was made aware a couple of years ago of that 12 person max and/or I think 4,000 sq ft limitation (or some size anyway) that requires a sprinkler system for all new construction.

I don't think they're that wrong for implementing the requirement.  But I do have an issue with asking some of these pre-existing cabin owners to have to retrofit their cabin with the system and expecting them to have it done in a year or something.  They should be given 2 to 3 years to do something like that given its harder to retrofit those in and its also much more costly to put in compared to new construction.

Again, they've been going for 30 or 40 years with nothing and now expect everyone to just jump.  The fire department should put them in for them if they think its so easy to get it done. 

I just don't like to see the government adding all the regulations and significant costs (those systems aren't cheap) as a knee jerk reaction to tragedies.  Here in illinois people die from fires in their homes every year.  They don't make us put in 20k sprinkler systems in our homes. 

I just don't see what the difference is between an owner occupant dying from a fire in their home and renter dying in a fire from a rental cabin that sleeps 12 or more. Other than the fact if they tried to make every owner of their own home put in a 10k to 20k sprinkler system, they'd all get voted out of office - every last one of them. So they pick on the landlords for everything because we don't have enough of us to vote them out.

Quote from @Chris Primavera:

@Nick Velez thanks for the info and I have heard that the Gatlinburg area isn't necessarily a great market for your first investment because of the competition and amenities.  What markets would you suggest looking at?

Every decent area for investing in str's has competition.  And right now the bigger cabins are not a good cash flow play but might be a great equity play when you look back in two to three years.  

That being said, if you look at the smaller cabins (900 to 1,200 sq ft), I think the numbers are still very strong.  The boom in building was mostly for the larger cabins because of the crazy rents they were getting during covid (even a little before covid actually).  And what you've also seen is people that were renting 3 bedroom cabins are now deciding they can get by with the smaller one and two bedroom cabins.  And thats why those units are still seeing reasonable growth even after covid.  Less oversupply with that product type and more renters that were renting the more expensive bigger cabins are choosing the lesser ones because they love the area but don't want to spend as much on rent.

We've talked with several long time investors out there and there isn't a one that have held on to their cabins over time that aren't still adding more.  And that is always a tell tale sign to me.  They've seen the peaks and valleys (08 crash and now post covid crash) and they've done unbelievably well investing there. 

So I would definitely not write that area off.  Its far better than any other area i've looked into over the last two years.  Florida scares me with insurance issues and constant threat of hurricane damage. Other areas constantly threaten to curtail the ability to use homes for str whereas sevier county is based on the rental of cabins and they have zoning that can never be rescinded to guarantee it. 

I'm not saying its the best are in the country.  But I haven't found one better and I've been trying for at least the past couple of years.  The key though is to find the right product type in any area you're considering as there are always good, better and best products in every market.