All Forum Posts by: Pretty Khare

I’d say 99 percent of  properties right now are bad deals. I wouldn’t give up looking though, they are out there. 

@Amber Krueger You've gotten a lot of excellent opinions and advice in this thread.  I'm just going to talk about my experience... I'm closing on my 7th cabin in the Smokies today, and it's my biggest purchase yet.  I'm still a firm believer in this market!

There's been a lot of discussion about things trending down here lately... well, year over year my portfolio is down about 4% YTD from 2021, but I always knew 2021 would be an outlier, so I'm quite pleased with performance overall.  The properties I've added in the last 12 months (three of them) are performing well.  I began investing here in 2017.

Historically, while property values did dive significantly during the 2008 recession (which was pre-self management of vacation rentals and locally most cabins were second homes and/or had management fees around 40%) - but tourism in the area saw a very small decline over that same time period.  The way vacation rentals are valued locally has changed dramatically since then; now the values are much more tied to revenue potential and without a dramatic decline in revenues, it seems unlikely values will fall in such a precipitous way.  

Hundreds of millions of dollars are being actively spent on commercial development here - two of the most high profile projects are the Cherokee Nation's attraction development and the biggest Buc-ee's in the nation, both located at exit 407 off I-40, the main access point to the region.  That indicates a high level of confidence by those organizations in the area's continued tourism economy.  (btw... for everybody talking about big cabins sitting empty right now... YEAH.  School just came back and Labor Day is around the corner.  Large groups don't typically travel right this minute, especially on Monday/Tuesday!)

All that said - it IS an expensive market. It may not be the right choice for everyone. Given that it appears to be near peak for this time period, I would recommend that anybody looking to invest here have the reserves and nerve to weather some fluctuation in the near term. Buy smart - fortunately right now buyers have more negotiating power than they have in the last several years. Don't overleverage yourself. If you're concerned that you'll be in trouble if rents don't cover expenses during the upcoming slow months of January/February, that's a good indication you're stretching yourself too much. This is true in any market - and any STR market is going to have seasonality with some months less profitable than others.

Definitely come, check it out, and enjoy your time here - and hopefully all this will help you decide if the Smokies are the right market for you right now, or potentially in the future.  As @Avery Carl said, there's lots of other great markets as well that you may feel more comfortable with at the moment!

The Smokies is definitely what I would call a blue chip market in terms of short term rental investing. It has stood the test of time through economic events, natural disasters, and of course the pandemic. The prices have grown to reflect that. Deals can still be had with patience and persistence. However, the point of real estate investing is to build your wealth and in turn help you sleep easier. If the prices are so high that the mortgage payment is going to keep you up at night, then go a different direction. We have 14 other markets to choose from, and a number of them are significantly cheaper than The Smokies. If that market ends up being too uncomfortable for you but you still want to get in the STR game, we can certainly help you pivot to find something that is less of a budgetary stretch. And if you want to wait it out and see what the market does, all of this stuff will still be here for you to pick up later.

There are a lot of similarities between 2006 and 2021/22:  Everyone had to have a cabin in the Smokies to rent out.  See the price history of this cabin.  There are a number of them in this development - Maranatha - that were built.  All with indoor pools.  This cabin originally sold for $899K in 2006.  What happened in the next few years wasn't pretty.  It would eventually sell for $205,000 in 2010.   A similar outcome for all of the cabins in this resort.  Of course, they've long since recovered, but it took 14-15 years.  

If someone tells you "but this time is different," run Forest, run!   Boom and bust cycles are a part of the deal with vacation homes.  No way around it.  

I'm in negotiations with a STR management company. The bit of their contract that has me concerned is that, per their contract, they can charge any fee at any amount and retain the money while also being in control of the rent pricing. I want them to have control of the rent pricing, so they can adjust it to make sense for the market and to optimize occupancy, but I'm concerned about the unlimited control over fees, which could be a conflict of interest. Example: If they upcharge the fees or base the fee as a % of the booking or an extra $100 per cleaning, it's revenue being collected in addition to agree upon 25% of revenue generated by the bookings. And/or if the overall price of the booking is no longer competitive because of the fees, they'll lower the rate instead of their profit on the fees. I'm fine if they need to upcharge a bit, but I'm concerned that they aren't sharing exactly what fees they are going to charge or how much, or if it is really at cost to them. They say they're just covering their costs with the fees they charge to customers, but they don't seem to want to share their pricing models or even a list of what fees they will charge. We've been trying to work on a solution, but the solutions they come up with keep the vagueness of the fees in place.

I can't tell what degree I need to be concerned about this, and would like your opinions as investors and business owners. 

@Pretty Khare this is a nuanced issue. First, unfortunately many CPAs are not interpreting the Regs to IRC 469 properly and some are even defaulting STR to Sch C and SE tax without regard. We see new clients with 2-3 yrs of improper treatment all the time. Its seems many pros are burying their heads to the regulations or not thoroughly understanding how to interpret STRs in the tax code (the transient rental rules etc).

The IRS CCA clarified the above issue (SE tax) in January. I’d encourage anyone who has a CPA that does not understand how different types of STRs interplay with IRC469 and IRC 1402 to start with the IRS legal memo.

Next, regarding W2 offset, the answer like everything in tax is it depends. It 100% is possible to limits but you need to plan around the Excess Biz Loss rules from TCJA.

 Pretty, thanks for the recommendation. Just ordered the book. 

I am no CPA, but you should work with one that understands your goal..."can't" usually means there's something they don't know or is not being creative enough, I'll plant a seed that I received from my CPA that I won't butcher because I'm not a CPA. But get an LLC and rent from it personally...any cleaning expenses, paying your mortgage etc. come from the LLC's bank account, any outside money that you need to fund the account will be a capital contribution and then you will be able to do cost seg on that property. If you speak to a CPA who understands remotely what I mentioned then you're in good hands.