What makes a Profitable Cabin?
WHAT MAKES A PROFITABLE CABIN?
We have prepared this report for both novice and seasoned investors alike. Our goal is to educate and inform investors on how to select an investment property that will provide exceptional rental income, appreciate above other properties, and maximize tax advantages.
What Makes a Profitable Cabin?
1) Look for a Good Location…
It’s the punch line in the joke…”What are the 3 most important factors to consider when buying real estate?” Location-Location-Location. When it comes to buying an investment cabin, it’s no joke. As a matter of fact, it’s so important that we’ve made this our Step#1. When choosing a location consider what the majority of renters are looking for. They want to be close to “the action,” yet not close enough to hear every car door shut or horn blow on the Parkway.
Many investors think choosing a cabin that is far “away from it all” will be appealing to renters. And it actually may be to “some” renters. However, as an investor, you are looking for a property that appeals to most renters. This is one case where the difference between “some” and “most” can be very big. Here are the things that “most” renters want from a vacation cabin location:
a) Short drive time to attractions, theaters, shops, etc. Advice: Keep your cabin within 5-10 minute drive time from the Parkway.
b) Stay on pavement or good gravel roads. Avoid one lane, rutted-out, steep, mountainous roads. Watch situations were it is questionable as to who is going to maintain.
c) Although close is good, don’t get too close. Advice: Be careful with cabins that are only one street away from the Parkway. Remember, you are renting a cabin and cabins are supposed to be located in wooded areas.
2) Choose Your Cabin Wisely.
Rental cabins have been popular among tourist visiting the Smoky Mountains for the past 30 years. However, some things have changed. What tourists were looking for 30 years ago is not what they want today. If you are going to do well in this investment market, you must stay current with what’s popular to rent.
Similar to fashions and cars, investment cabins have trends. Now a trend in the fashion industry may last one summer and a car may be popular for a year or two. But, rental cabin trends seem to change every 7 to 10 years. For example, 20 years ago a chalet with interior walls of sheetrock and decorated similar to a traditional home did very well on the rental program. 10 years ago, there seemed to be a shift in trend, moving towards cabins and away from chalets. Popular cabins back then were smaller and more rustic. Today, renters are looking for premier cabins with more amenities. Top producing cabins of today will have the following amenities:
a) All wood interiors (tongue and groove style)
b) Large Decks
c) Lots of Glass
d) One or two game tables
e) Large Hot Tubs
f) Whirlpool tubs
g) Vaulted Ceilings
h) Electronic entertainment, media and sound upgrades
3) Building Quality and Age.
It stands to reason that the older the property is, the more likely you are to have maintenance issues. Most rental company repair personnel agree that a well-built cabin will start showing signs of wear and tear at 5 years of age. Most major repairs can be expected when a cabin is over 10 year’s old. Again, this is referring to a well-built cabin. It’s very important to buy a quality built cabin or the above time line can be dramatically shorter. If you are looking to minimize your expenses, buy a newer cabin. If you purchase a newly built cabin, most come with a one year builder’s warranty. It is also possible to purchase a warranty for an older cabin.
4) Cash Flow- What Can You Expect?
A good investment property will pay for itself through rentals, tax savings and appreciation. Cabins that have been on a rental program will have a rental history.
Rental histories are always quoted in gross revenues. Most rental management companies do a 60/40 split, with you taking the 60%. New properties do not have rental histories and therefore need to be viewed differently.
5) Choosing The Right Rental Management Company
Almost as important as the cabin you choose, is the management company you place the property with. There are over 300 rental companies in Sevier County alone. Based upon experience, we would only recommend a handful of them. Many of the aggressive, top-of-the-lie agencies are very choosy regarding the cabins that go on their program. When interviewing rental companies, one should ask about their marketing strategy, how many cabins they have on their program, and o they own their own cabins or cabin community? If the company does own their own cabins, you need to be comfortable with the fact that those properties will not receive preferential treatment.
Many rental management companies are starting to focus on selected communities. This allows them to focus their marketing efforts on the specific attributes of that community. A frequently asked questions is.” what do management companies charge for their services?” Most companies charge 40% of the gross rental. We usually advise prospective buyers to add another 5% to that number to cover any additional expenses associated with the rental process.
6) Shopping for Financing.
There are as many ways to finance an investment property as there are investment properties. For most investors the question seems to be who should they go to when trying to obtain financing…a bank?...a mortgage broker?
Banks have limited sources of financing, based upon in-house lending programs.. If you have an establish relationship with your banker, this may be a good option. If you are considering going with a bank, you may want to consider using a Sevier County Bank. Sevier County Banks are familiar with cabin market and have made an art out of the lending to the investor. They are often quite competitive and can be very efficient. We will be happy to supply with you a list. There are several national banks, such as Bank of American and SunTrust that participate heavily in Sevier County.
The second option is mortgage broker. These individual typically have greater resources and therefore, more options for financing. We can help you with suggestions here as well.
If this is your first investment property, your financing options are increased. Most first time investors finance their cabin as a second home. Second home financing generally offers a lower interest rate.
On investment properties currently you will need to put a minimal of 5%-10% down. If you put 20% down you will get the most favorable rate and there will not be any mortgage insurance required.
7) Understanding the Outlook for Investment Cabins in This Area
Simply put, the forecast for continued growth in this area remains strong. Over 1.5 billion dollars of retail, entertainment, and amusement development is currently underway. Tourism has increased year after year. Surveys conducted by the Gatlinburg Chamber of Commerce and the Sevier County Economic Development Council indicated that tourism will continue to flourish for the foreseeable future.
