Finding Your Perfect Investment Cabin In The Smokies
Investing in cabin rentals is one of the primary industries in Sevier County. With 10-12 million visitors annualy, there is a high demand for lodging. On average about 27,400 visitors are in the Smokies per day! The 2000 census figures calculated 20,837 families residing in Sevier County. Sevier County, according to the 2000 census had 37,252 housing units. The 2000 census indicates approximately 17,000 investment properties in Sevier County. In other words, during your travels in the area, you are just as likely to encounter a tourist as a local!
Where do all of these visitors stay? Some stay in hotels, some stay in condos, some camp within the National Park, and some use their RV at campsites. Many choose to stay in overnight cabin rentals. The majority of cabin owners in the Smokies use their cabin primarily as an overnight rental, visiting occasionally. Others decide to use their cabin strictly as a second or vacation home. The predominant ownership usage is as an overnight rental with family visits a few times a year. This is a favorable form of ownership as one can still enjoy the use of a cabin that feels like home when going on vacation and have a substantial if not the entire portion of their mortgage, taxes, and insurance essentially paid for by visitors.
There are many factors to consider when purchasing an investment cabin. It is very important to determine the past rental history of the area, the amenities of the cabin, the location, and the features of the lot. When purchasing an investment cabin through me, I will research and create a detailed investment analysis including past rental histories in the area and of comparable cabins. This enables you to get a good projection of the amount of rental income you will receive.
The amenities of a cabin play an important role for several reasons. When a visitor comes to the Smokies there are certain essential amenities they look for in a cabin. Some of these include a hot tub, pool table, large TV with cable or satellite, fireplace and a covered deck or screened porch. Each additional amenity beyond increases the chances a potential visitor will choose your cabin. Many other popular amenities in the Smokies include theater rooms with a DVD collection and surround sound, outdoor grills or fire pits, high speed internet access, foosball and other game room activities, and swimming pool access within the community. Indoor swimming pool cabins have also become a popular amenity and produce incredibly high gross rental incomes. It is not essential to have each and every one of these amenities, but generally the more the better.
The location of the cabin is vital as it is in any form of real estate. Some people prefer to be close in to Pigeon Forge or Gatlinburg to enjoy the activities in town. Others, however, enjoy a more secluded setting to kick back and get rid of all their worries. Many cabin communities located close to town have the cabins packed in very close to each other and do not offer much in the way of privacy. These cabins for the most part do have good rental histories, but you give up some with respect to the privacy and seclusion feeling of being in the mountains. From my experience and the interaction with several cabin rental management companies, some of the most desired features a visitor looks for in a cabin are view, water, and seclusion. By seclusion, the cabin still has to be fairly easily accessible with a paved road or one without a very steep incline. Some cabins require 4 wheel drive and are difficult to access during the winter months with ice on the roads.
The features of the lot is definitely one of the most important factors. When visitors search for a cabin, one of the first things they will look for is the view from the cabin. If a cabin has an excellent view, it almost certainly has a good rental history if managed correctly. Cabins with great views are not extremely common, but not a rarity either.
A good portion of visitors request a cabin on a creek or river. The number of cabins located on a year round creek or river are substantially lower than those with views, so they are in fairly high demand. Seclusion is the third most requested land related characteristic visitors look for in a cabin and there are many properties meeting this demand. Ideally, a cabin with a view and on a creek is the best cabin rental. Finding this, however, is extremely difficult and the cost is often very high. Finding a cabin that meets one of two criteria - a view or creek - is a obtainable goal with cabins at reasonable prices.
Cabin Rental Management Company vs. Rent By Owner
The vast majority of cabins owned in the Smokies are managed by rental management companies rather than by their owners. There are advantages to each situation. With a rental management company, your investment is handled by a local company with very little of your personal involvement. This enables you to not have to face the daily involvement of managing a cabin. More things are involved than one might imagine. Cabin management companies advertise your cabin usually in print advertising and on the Internet, schedule cleaning of the cabin, perform maintenance checks and repairs, arrange for deposits of payment including the use of credit cards, obtain a database of past clients to contact about future promotions, perform checks on the cleaning of the cabins to ensure quality, a place of operation for the visitor to pick up keys and area information, as well as several other promotional and maintenance duties. Some companies provide these services extremely well, while others seem to be lackluster.
Choosing the right management company is an important decision and not an easy one to make. I suggest contacting other owners of cabins managed by the company, stay in one of their cabins and determine how the experience went, make sure they are active in the location of your cabin, comparing rental incomes of similar cabins managed by different companies, and the visibility of the company on the Internet. The Internet is the most used tool by visitors to choose their cabin and plan their vacation. It is vital the management company has a good presence on the Internet and major search engines. I have seen several cabins not perform well with a certain management company, but once placed with a different company, the cabin thrives and produces a great income. Swings are possible up to $20,000 a year. Although, using a management company has many advantages, it does have its drawbacks as well.
Property management companies in the area frequently charge 40% for their services. This is not a set rate as you will find other companies offering varying level of services for a lower percentage, but you will find 40% is quite a common figure in the industry. In the period prior to the real estate boom, cabins in the Smokies were purchased at comparable bargains to the prices today. With those lower prices and increasing rental rates, many owners had great positive income investments while still paying a 40% management rate.
As the real estate boom from 2000 to 2005 occurred, prices began to rise (at over 10% appreciation), more cabins were built, and rental rates did not keep up with the increasing cost of cabins. This makes the search for an investment cabin producing a positive cash flow today while paying a 40% management fee more difficult to obtain. You can still find positive cash flow cabins, they are just harder to find and take patience to find that great deal. If the owner is already experienced at marketing and managing properties, they may be able to provide a better net result than a management company.
A person who likes a hands on approach and enjoys monitoring and managing their investment is a good profile for a person to manage their cabin themselves. A lot of work and money is spent with regards to hiring a cleaning subcontractor, ensuring quality control from a distance, and marketing the property to visitors. Often a cabin rented by its owner will not generate as much gross income as one manageed by a company, but they do not need to as usually their costs will not meet the rates charged by the management company.
If you are interested in renting the cabin yourself, I would suggest getting things prepared and setup prior to purchasing a cabin. This would include having a domain name and create a website for your future cahin. This enables the search engines to begin ranking your page prior to renting your cabin. Also, research the varying aspects of managing your cabin including cleaning companies, find a maintenance person, and checking on the possibility of placing your cabin on a site such as VRBO.com.
Renting your cabin by owner is a viable and sometimes the best option, but takes the right type person to be successful. It never hurts to try though! If you are not successful yourself, there is always the option to transfer your cabin over to a management company within a very short period of time.
Analyzing The Financial Aspects Of Your Cabin
Some clients come to me and are not particularly concerned about the investment aspect of a cabin and are more interested in the use of their cabin and having a family vacation spot they can call their own. Others, however, desire a cabin strictly for investment purposes and rarely plan to visit the cabin. For those of you interested in the financial aspect, below is a cabin in the area in which I did a basic financial analysis.
This particular cabin was located in a log cabin community outside Gatlinburg with an indoor pool and theater room. It has many amenities and features a typical visitor desires. The cabin is a 3 bedroom, 3 bath property without a mountain view. The cabin in the example below will have higher than typical electric costs (due to heating the indoor pool) and higher than most for insurance as well. The gross rental income for a 3 bedroom property is exceptionally high in large part due to the indoor pool and theater room which are highly desired features by vacationers for cabins in the Smoky Mountains.
The financial illustration and analysis above is an example from an actual listing and rental figures from a cabin in the area. Not all cabins perform in this same manner, some perform better and some worse. This is used for example purposes only. Results are not guaranteed.
I can do a similar analysis on any property you may have an interest. Feel free to email me with any requests and I'd be happy to respond.
Investment cabins in the Smoky Mountains area of Gatlinburg and Pigeon Forge in the past were extremely difficult to cash flow due to the inflated prices. With the recent corrections in the market, it still isn't easy to find a cabin that produces a positive cash flow, but they certainly are out there and I pride myself with finding those properties for my clients.
Depreciation, Taxes, and Mortgage Interest
Depreciation is calculated based upon the value of the structure(s) on the property, not including the land value. This value is then depreciated equally over a period. Be sure to consult a tax professional regarding these details. For straight line depreciation on a residential building it is over 27.5 years, however some rental cabins may be considered overnight use such as a hotel building and require depreciation over 39 years. In the example provided above the depreciation was taken over 39 years in a straight line depreciation manner.
The difference between depreciation over 27.5 years and 39 years can be fairly substantial per year. For example, if the value of the building on a property is $300,000, then the depreciation per year on your tax return would be $10,909 per year at 27.5 year depreciation while $7,692 on a 39 year depreciation basis.. In an instance of owning a cabin rental, the depreciation could be used to offset the positive net operating income generated from the cabin. Certain items such as furniture and other non building structural improvements can be depreciated quicker over a shorter term.
To maximize your return per year it is important to make the distinction between the value of the building itself (27.5 or 39 years), the furniture/contents (5 years), and driveways/fences/landscaping (generally 15 years)This allows for a much better tax position. Generally speaking, real estate property taxes are also able to be deducted. Most circumstances allow the interest from a mortgage on a cabin to be deducted from taxable income as well. The IRS details for depreciation on depreciation of rental property can be found here.