865-999-SOLD (7653) - www.TNRealEstate.Auction

Smoky Mountains Log Cabin

Investments Information

Thinking about buying a investment log cabin in the Great Smoky Mountain area?

A log cabin investment in The Great Smoky Mountain area is one many people are looking at. The Smoky Mountains had 11.4 millon vistors in 2018. So now your thinking where did they all stay? Hotels,Motels,Condos,Campgrounds, and Log Cabins. Log Cabins can be a good investment as long as you do your homework before buying. Listed below is somethings to consider before investing.

Location:

I'm sure you have heard the saying location,location,location. We use this phrase a lot in the real estate business for properties that are more desirable and in a better Location than other properties. The log cabins in a better location usually rents better. The renters want a cabin that is close to the activities they are wanting to do. Some of the activities include: The Great Smoky Mountains, Dollywood, Splash Country, Rocky Top Sports World, Ober Gatlinburg, Ripleys Aquarium, and Cal Ripkin Experience just to name a few.

Amenities:

The amenities of a investment cabin can also help your rental income. When families come to the area they have more than likely done there homework and have already reserved their cabin online. They will be looking what the cabin has to offer and does it meet their requirements. Some cabins are in a resort which might have more amenities than a cabin outside a resort. Some of the amenities include: a club house, swimming pool, basketball court, etc. When you are looking for a cabin in a resort be sure you know what amenities the resort offers. There are also cabins with theaters, indoor pools, fire pits, ect. Its not essential you have all the amenities but it does help with the rental income.

Property Management Companies:

When you buy your cabin the next question is who am I going to get to rent my cabin. They are several companies in the Smoky Mountain area that can manage your cabin for you, or you can use VRBO or Airbnb and you will be your own management company. Lets look at the options:

Option 1: Rental Company - There are several rental companies in the area that handles property management for you. They have their own online reservations service, cleaning services, maintenance department, and marketing staff. The price for this is usually a split in the rental income. a 70/30 or 60/40 with you the owner receiving the larger amount. There is also overnight rental taxes that has to be paid and the rental companies take care of this for you.

So you ask which rental company is the best? I would do a little homework and see which ones pull the highest on a google search. I would look at their web-site and make sure it is very user friendly and easy to make a reservation. The final step is to interview the companies you think you would like to use and see what different companies have to offer. Some companies will even look at your cabin and give you ideals on how to improve your income and even give you a projected income your cabin will probably do with the amenities it has.

Option 2: Self Manage: - VRBO, airbnb, and Turnkey are probably the most used in the Smoky Mountain area. These companies have the software to help you book your properties and manage your rentals, but you will be responsible for marketing, cleaning, maintenance, overnight rental taxes, ect. There are several independent companies that handle cleaning, and maintenance for you. You would have to find the best companies to fit your needs. Yes there is no splits to pay but you are in charge of your destiny.

How Much Money Can I Make? / Will It Pay For Itself?

These is the 2 biggest questions investment cabin buyers have. I was told long ago from a very smart elder "You dont make money when you sell the property you make money when you buy it." This statement has stuck with me through out the years and has remained so very true. If you overpay for the property you have to wait on the market to catch up before you see the profit. If you purchase the property with it cash flowing already then your profit will increase as the market does. The next question is how do I know if it cash flows? I will try to make this clear as mud for you.

Gross Income:

Total income from property before any expenses are deducted.

Net Operating Income (NOI):

Income from the property after operating expenses has been deducted, but before deducting income taxes, and financing expenses. (Interest & Principle Payments)

NOI = gross income - operating expenses

Cash Flow:

The total amount of money being transferred into and out of a business, especially as affecting liquidity.

(Example of a Cabin Operating Expenses)

Potential Gross Income - $40,000 a year

(If you use a rental company on a 70/30 split) $12,000

Cable & Internet: $75 month x 12 = $900yr

Insurance: $1,200yr

HOA Fees: $150 month x 12 = $1,800yr

Pest Control: $30 month x 12 = $360yr

Electric: $225 month x 12 = $2,700yr

Water/Sewer: $100 month = $1,200yr

County Taxes: $1,200 (estimate)

Sales Tax 9.75%: $3,900

___________________________________

Total Expenses for a Year - $13,260 or $1,105 a month

Total Expenses w/ Rental Company - $25,260 or $2,105 a month

Then Minus your mortgage payment if you have one.(Example $300,000 mortgage with 20% down,5% interest principle & interest payment :$1,145.81 month x 12 = $13,749.72)

Total Expenses with a Rental Company & Mortgage - $39,009.72 or $3,250.81 a month

Total Expenses without a Rental Company but with a Mortgage - $27,009.72 or $2,250.81 a month

This scenario using a rental company with a mortgage your cabin should have a positive cash flow with around $1,000 to the good.

This scenario without a rental company with a mortgage your cabin should have a positive cash flow with around $12,990.28 to the good

(You would have your expenses from VRBO, airbnb,Turnkey,or whichever company you use. Along with cleaning fees, and maintenance fees)

You can also do a quick look by Purchase Price x 1.3% (min) to get a monthly gross the property should be doing.

Example: $300,000 x 1.3% = $3,900 a month or $46,800 a year

So you ask where does the 1.3% come from? It's your rate of return (r/r) per month.

So Im needing $3250.81 a month to positive cash flow this cabin.

$300,000 x 1% r/r per month = $3,000 a month (not enough to cover expenses)

$300,000 x 1.1% r/r per month = $3,300 a month ( too close for comfort)

$300,000 x 1.2% r/r per month = $3,600 a month ( not much for Murphy) Who's Murphy? - Murphy's Law

$300,000 x 1.3% r/r per month = $3,900 a month ( This might work)

Of Course if the cabin is making more than 1.3% r/r per month. (Don't Worry - Be Happy)

Disclaimer: In the Smoky Mountain area we see that a 1.3% monthly r/r being the minium % you would want to figure on to positive cash flow a cabin with a mortgage. Remember this is just a quick look and the only true way to figure your cash flow is to take the gross rental income - operating expenses to get your true Net Operating Income (NOI). Then minus your taxes and mortgage.

( Note to Self - A $300,000 cabin with only a $40,000 income would be very hard to positive cash flow with a mortgage)

Rate Of Return:

The percentage relationship between the earnings and the cost of the investment.

(Example: Jack deposits $100 in a savings account. At the end of the year Jack receives a payment of $10. Jacks rate of return is 10%)

The rate of return can be calculated for any investment. Lets take the example of purchasing a Log Cabin in The Smoky Mountains. (The Cabin cost $250,000 and you paid cash for it. In 1 year you sold your cabin for $300,000)

$300,000 (Sold Price) - $250,000 (Purchased Price)

__________________ x 100 = 20% Rate of Return

$250,000 (Purchased Price)

$40,000 (Projected Income) - $25,260 (Expenses w/Rental Company) (No Mortgage)

__________________________________ x 100 = 37% Rate of Return

$40,000 (Projected Income)

$40,000 (Projected Income) - $39,000 (Expenses w/Rental Company &/ Mortgage)
__________________________________________ x 100 = 3% Rate of Return