Originally posted by @John Carbone:
Originally posted by @Joshua Strickland:
Originally posted by @Todd Goedeke:
@Joshua Strickland I should have been more clear. When buying a STVR business be concerned about overpaying for a business because your profit numbers won t work. Buying a STVR business for capital appreciation is a mistake. You make your money on cash flow not possible appreciation. People should not buy property based on historical appreciation. You don t buy a cash cow in the hopes you may be able to sell at an appreciated value years down the road. Paper profits are not true realized profits. So saying people who bought 10 years ago made a lot of money is only true if you sold not true if gains are unrealized.
I agree once again. I am referring to rental rate growth over that time period similar to rent growth in LTRs. Rates used to be $99/ night. Now that cabin is $199/ night if not higher, but people who bought earlier should have a lower mortgage due to purchase price which means lower expenses and more profit.
Even with inflation, can ADR continue to rise in the smokies? Airdna lists revenue growth potential as being extremely low, and I tend to agree with them. This market has just undergone a total price discovery revaluation, and overall properties and rentals are priced to near perfection now. ADR will not increase from this point at any substantial level (unless we get several years of high inflation). 2022 will likely be similar to 2021. I think you can expect to pay 9-10x revenue for a property (this was 5x 2 years ago). $1m will gross you 100-110k in gross rentals, and I don’t think there’s room to grow on this. Factor In your costs which have just gone up over the past week (mortgage rates have just spiked quickly by .50) and you are probably looking to net a profit of 40k on a million dollar purchase assuming 200k down. That’s still a 20 percent cash on cash, but your banking on no recession for 5-10 years. If things go south, at these purchase levels, there’s a real risk you could be renting for less than the mortgage.
You bring up some good points. And first let me clear the air and say I'm not one of these "STRs to the moon so better get levered up as much as possible" sort of viewpoints.
What I will say is in the Smokies specifically, that area has as much going for it as any. Will ADR continue to rise? No one knows, but here are some things to take into consideration:
-Western Band of Cherokee Indians just broke ground on a 200 acre development in Sevierville that they want to be the Gateway to the Smoky Mountains. Not sure what this will become, but could be huge for the area. It could also be a dud.
-Soaky Mountain Waterpark opened up right before Covid so I doubt they've seen their potential during the summer months or if people have even "discovered" it yet. That will be a draw.
-Dollywood announced a new resort earlier this year as part of a $500 million dollar expansion schedule to open in 2023. So apparently they believe in this area and I would think they do plenty of research.
-The Smokies are within a days' drive of almost 50% of the US population. There has also been an influx of people moving into the southern states which brings a Smoky Mountain vacation even closer to them.
-If and when recession does occur, the Smokies are still one of the more affordable vacation spots versus flying somewhere.
-Along with price inflation we are also seeing wage inflation. If you have fixed debt on your property, but people can pay more because they have a higher income then nightly rates should rise or at least stay close to the same in theory.
-Lastly the 2016 fires destroyed over 1,000 structures. A lot of those being cabins. Just as with the national housing market, builders can't keep up with rebuilding. There are only so many builders and it takes time to build, get plans through permitting, etc.
With all that said, I agree there is still a real risk of being caught with your pants down if recession occurs. That's what reserves are for and not overleveraging. It most definitely should be treated as a business. But a 20% CoC return is still good in my book. (For a million your probably getting at least a 3 if not a 4 bed cabin which should gross closer to $120k+ depending on if it has a pool, close to town, etc.
To wrap up my article(LOL). Every asset class is "inflated" right now. Stocks are higher than ever, crypto is higher than ever, Multifamily real estate is looking at sub 5-6 caps, you have Wall St. entering the LTR SFH asset class at record rates driving yields down, and you definitely don't want to be holding dollars with inflation where it is. The worst place to be is trying to time the market though, because most people will use that as an excuse to not get started. I'll disclose I own rentals in 3 different markets for diversification, and am breaking ground on a 6 bed pool cabin this March in Pigeon Forge. So putting my money where my mouth is for better or worse. I do have a nice pile of reserves just in case though.
