Log Cabins | What You Need To Know
If you are contemplating the purchase of an investment log cabin in the Smoky Mountains of East Tennessee then there are a number of things that you need to know before making a good, sound, educated decision to move forward. Many people, and I mean around 80% of the dozens of potential buyers that we speak to every week, have an idea in their heads that investment log cabins are, or can be, a very lucrative venture that almost seems like a no brainer. Well, its not that simple. There is much more to it than most people realize and we just want to take a minute to visit some of the main bullet points that will help you understand the process in its entirety.
The In's & Out's Of Purchasing A Log Cabin
Firstly, there are 3 main components to purchasing the right cabin that can put you into a position to POSSIBLY do well, and dare I say, even cash flow. Lets look at them individually.
- Location, Location, Location: As cliche' as that sounds, it could not be any more true. Sevier County is a fairly large county and consists of several cities and smaller unincorporated areas. The main areas are Gatlinburg, Pigeon Forge, and Sevierville. The draws that bring people to our area, the very people that ultimately may rent your cabin, are largely located in these 3 cities. People want to be close to the action, for the most part. There are a small percentage of people that love the seclusion and would have no problem with being 20-30 minutes away from all the attractions and value their privacy in the mountains. So, largely it is important to find a cabin that is around 5-15 minutes from just about anything. Like everything else in life though, there are exceptions to that rule. There are plenty of cabins that can be out off the beat and path that do VERY WELL. It is just a matter of finding the right one. When talking about location we should also talk about access. Access is something that can completely turn off a renter and they will never rent your cabin again. Repeat renters are a necessity for generating the most income possible. What I mean by access is the roads. The condition of the roads, scenery along the roads leading up to your cabin, the incline or decline, and how narrow the roads may be. Narrow roads that wind and lead up a mountain on a steep incline can be a deterrent, especially for people from places with flat land like Florida, Ohio, Georgia, etc.
- Amenities: The good thing about amenities is that when we are talking about the cabin itself, we can update and change them. When talking about the resort, you are basically stuck with whatever they offer, or don't offer for that matter. When looking at cabins online, you want to try and find units that have been updated with flat screen TV's, new/er furniture that is not visibly worn or beaten up, modern or updated appliances, and games, games, games. While that is the best scenario, there are plenty of good cabins out there that could be great by simply updating these things if they are outdated or worn. Units with theater rooms and indoor pools are highly sought after by renters with larger parties s well. When looking inside a resort, a nice community pool area is a plus.
- Property Management Companies: You have essentially two options here. You can hire one of several hundred property management companies that operate here locally, or you can self manage and use VRBO. When at all possible, we are strong proponents for using VRBO. I understand that it is not for everyone and it does take a little work on your end. It is very cost effective and in the next few months VRBO is completely overhauling their pricing structures as well as the logic used to showcase and feature listings. You can read about that "here". VRBO does allow you a much more personal and intimate relationship with your renters. This can work wonders for getting repeat clients. And unlike using a property management company, you get to keep all your rental income that the cabin generates.
If VRBO is not for you then your other option is to hire a property management firm here locally. This is typically where people have a jaw dropping moment. Wait for it.........the standard in this area for a property management company is a 60/40 split. That is 40% of the GROSS RENTAL INCOME for the year goes back to the management company as a cost of managing your unit. There are a few that will do a 70/30 split but it is not the norm. On top of the 60/40 split, you are still responsible for repairs, replacement items' costs, updating, and it most cases credit card fees. Realistically, you are probably going to be operating on something closer to 55/45. Then, you still have to cover you taxes, insurance, and any HOA that may exist in the resort you choose.
What exactly does the property management company do for you? Well, they take care of all the advertising and marketing in both print and online. They take care of all inquiries, bookings, collecting of monies, cleaning, ordering repairs, etc., etc. You can essentially set it and forget it.
But I Need My Cabin To Pay For Itself!
This is a statement that we hear all the time. It would be wonderful if it was as simple as finding a nice cabin, putting it on a rental program, and cashing checks. Unfortunately its not. The reality is that in many instances, you are going to have to pay a portion of your mortgage still. Some months you may actually net some money but there will be other months where you will not. In most instances, these investment cabins will HELP you pay the mortgage, not completely cover it. Now, there are some great deals that pop up every once in a while and you can actually make some money. These instances are not the norm.
Another factor that will play into your cabin's ability to make money is how you pay for it, or more so, the terms in which you finance it. If you are paying cash or using a 1031 exchange then you are simply using the rental income as ROI to be achieved in the shortest time frame possible. If you are financing your cabin then your interest rate and down payment percentage will play heavily into your ability to cash flow. Most people are going to put down 10-20%. That seems to be the norm. Obviously the more you put down then the lower your mortgage payment. This increases your chances for the cabin to possibly pay for itself. Its not a guarantee, but it definitely narrows the margin.
What Is A First Year Income Guarantee?!?!
There are many cabin listing in the MLS right now that will state "Guarantee Rental Income of $XX,000!". There are numerous guarantee amounts ranging from 25K to 150K or more. Here is an example of one:
These guarantees typically come from one of two different rental companies that are very large and very aggressive. When you see this guarantee on a listing it means that the cabin is being managed by a different company than the one/s that are offering the guarantee. Basically, the management company that would like to put this property on their program will evaluate and assess the cabin and compare it to others that are similar in size and features. They will provide a FIRST YEAR guarantee for moving the cabin to their program. Like any contract, there is fine print and conditions. So how often do they meet the guarantee? It is hit or miss. We have clients that have done well and some that have come up short a few thousand dollars. So what happens when they do not meet the guarantee? I have attached a copy of the guarantee document that is used by Venture Resorts that explains what they do in the event that the guarantee is not met.
So where does this leave us? Well, it is different for everyone. The main objective behind this article is to educate you as a potential log cabin investor/owner. Obviously we are in the business of selling real estate. It is what puts food on our table. We love selling cabins, but more importantly we love the relationships that we form with our buyers. We want every buyer to be completely informed and educated about all facets of this market so that they can make good, strong, educated decisions with our guidance. Hopefully this information has shed some light and answered questions that you may have had about the process. If you have any additional questions about the investment log cabin market or the process of buying and owning one, please do not hesitate to contact us.