Each day we receive calls from people who love the Smoky Mountain area, for honeymoons, anniversaries, family vacations, and group getaways. Some love the experience so much that they envision themselves owning a cabin - not just for their personal use in the mountains, but maybe to generate income from guests when they’re not using it themselves...and in the process pay the property’s expenses.
Owning an overnight vacation rental property (cabin, condo, chalet, etc.) can be a financially rewarding experience and can help diversify your traditional investment portfolio. If you’re considering vacation rental cabin ownership, read our list of frequently asked questions - and become a more informed and education buyer and investor!
Is owning a vacation rental cabin a good investment?
It certainly can be, but like most investments, your return is predicated on the investment itself. A quality updated cabin with sought after amenities will do better than one that is in disrepair and not competitive in the market. Today’s average owner should be able to expect a pre-tax return in the 7% to 8% range - with some luxury cabins generating more for owners.
When deciding if it’s the right investment for you and if it will help diversify your traditional investment portfolio, consider these questions:
1. Does it meet your short-term and long-term goals?
2. Does it fit with your overall risk profile?
3. What should you look for in a management company?
4. What can you expect when owning a property?
What expenses can I expect to incur related to a vacation rental cabin?
Great question! Aside from normal debt service if you elect to finance your purchase, there are 5 common financial components in owning an overnight vacation rental property. They are:
1. The Commission Split
2. Regular and Scheduled Statement – Monthly Fees
3. Maintenance and Guest Inventory Expenses
4. Owner Fixed Expenses
5. Large System – Property Expenses
The Commission Split
This is the fee the management company deducts from the monthly gross rental income the property generates. It is usually referenced by a percentage. Please keep in mind overnight vacation property management and long-term residential property management is vastly different. As such, the commission a vacation rental management company might keep is different than for a residential management company.
The commission is usually based on a tiered percentage rate, predicated by the amount a property “grosses” annually or potentially; in the event of multiple properties, the aggregate annual property gross rental performance. Typically here in the East Tennessee Smoky Mountain area, management commissions start at 40% and graduate down to 10% for very large, luxury, high performing properties. For most modest sized cabins, you should expect a 60% (you) 40% (management) commission split.
Regular and Scheduled Statement – Monthly Fees
Though not an all-inclusive list, some of the typical fees we see on owner’s statements include:
- Hot Tub Cleaning Fee
- Credit Card Processing Fee
- Linen Fee
- Garbage Collection Fee
- Maintenance Supply Fee
- Pest Control Fee
- Landscaping Fee
- Website Fee
- Internet / Phone Fee
- Administrative Fee
- Marketing Fee
- Gross Receipts – Business Occupancy Tax
These fees vary by management company. Some are charged, some aren’t. Some annualize these fees, most don’t. Just remember all vacation rental management companies are not created equal when it comes to fees. Do your homework as some of these can erode your bottom line by thousands of dollars per year and make your purchase and investment not financially viable!
Who pays for cabin cleaning?
Guests are charged a cleaning fee and that is what is used to pay the cleaner. The only time you pay for cleaning is when you personally stay in the cabin yourself, or for property “deep cleans” that usually occur twice a year.
Maintenance and Guest Inventory Expense
Just like your own personal residence, from time to time, items need to be fixed or replaced. Having a vacation rental home is no different, in fact, probably more so – depending on the number of guests your property might host in any given year.
For the most part, vacation management companies don’t like to send out maintenance specialists unless they have to. Most management companies assess their owners an hourly fee for time and also bill them for any replaced parts or items used to make the repair. These hourly fees vary greatly from company to company so again, check around. So – when might a maintenance specialist be called to your property for a service call?
Guest Inventory Replacement
All property management companies have different “inventory” lists for the guest’s use in the property. Most of the items on the list are pretty self-explanatory and common sense, though some are not. Remember, these are not hotel guests, they chose a vacation property so that they could “live in the mountains,” even if for just a short time. This means they will be cooking, doing laundry, and washing dishes during their stay. Please don’t be surprised if you will be asked to replace inventory items from time to time due to normal wear and tear!
Owner Fixed Expenses
These are some of the expenses that you might (and probably will) incur whether or not you only use your property for personal visits or rent it out. Some of these expenses include:
- Home Owner and Liability Insurance (at least $ 1M in liability coverage!)
- Utilities (Electricity, Gas “LP or Propane”, Water, Cable, Phone Internet, Security System)
- HOA Fees
- Property Taxes
- Income Taxes – Yes, you do need to declare your rental income to Uncle Sam!
- Certain City/County Lodging Permits
Please remember, just like your personal residence, utility costs can and will go up in summer and winter months! Keep these in mind when doing your financial analysis on the purchase.
Large System – Property Expense
Again, just like your home or commercial building you might own, sometimes, you’re faced with large “system” repair/replacement expenses. These are some major expenses you MIGHT experience, so make sure to accrue some funds for them just in case. Here are some examples, especially if you are looking at an older property:
- HVAC system - only efficient for 12 – 15 years
- Kitchen/Other Appliances - washer/dryer, refrigerator, oven
- Water Heater
- Termite Inspection – bond
- Large Plumbing/Water/Septic System
- Siding Repair and Staining - pressure wash and restain or paint every 5 – 6 years
- Railing and Decking - repair, cleaning, staining, and sealing
- Carpeting/Tile/Hardwood - repair and replacement
- Gravel Driveway - grading and graveling
What are some of the things guests look for in a cabin?
We are often asked by prospective vacation rental property buyers what property amenities they should provide for their guests. Though some guests come here for a relaxing getaway or a romantic weekend, most Smoky Mountain vacationers have become savvier – and we find that they are a bit more demanding as to what they expect a vacation property to provide them. Amenities most asked for include:
- Outdoor Hot Tub
- Internet - Wi-Fi
- Phone Service
- Premium TV Packages
- Pool Tables/Game Tables/Arcade Games (standing)
- Updated Flatscreen TVs (in all bedrooms)
- DVD Players
For Luxury Lodges:
- Dedicated Theater Rooms
- Pools(Indoor or Outdoor)
Should I allow pets?
People traveling with their pets is becoming more and more popular. The biggest problem with traveling with pets is finding suitable accommodations as most hotels and resorts don’t allow non-service animals on property. Vacation rental properties seem like the perfect solution for these travelers, but what about potential damage and fleas?
It is true that pet-friendly properties do garner higher occupancy rates; they also tend to have additional maintenance needs. How are these costs covered?
- Separate pet deposit
- Additional guests charges
- Owner incurred expenses
Each management company handles pets and damages differently. Before you decide on this very special property amenity, make sure to call and ask how this is handled!
Are Linens Supplied?
Most property management companies will supply your property with basic bed, bath, and kitchen linens. There is only 1 dry cleaner in Sevier County (Gatlinburg, Pigeon Forge, Sevierville), so we highly recommend buying machine-washable items. At Cabins for YOU, we have commercial grade washing facilities.
Items most supplied include:
- Fitted/flat sheets
- Bath sets (bath and hand towels, washcloths, and floormats)
- Pool towels (properties with private pools)
- Kitchen sets
Items you will need to supply include:
- Pillows and pillow protectors
- Mattress pads/bedbug covers
- Blankets, quilts, comforters, bedspreads, duvet covers
- Pillows shams
- Dust ruffles/bed skirts
- Window treatments
How often can I personally use my cabin?
Each property management company is different as it relates to you and your family booking your cabin for a vacation stay; some more restrictive than others. Keep in mind that the more you personally use your cabin, the less you’ll earn because of lost guest revenue generating opportunities - especially during high occupancy periods.
Also consider that the IRS places certain restrictions on “pleasure use” of your revenue generating rental property. Please check with a local CPA or other tax professional to make sure you’re not going to cause expense deductions to be reviewed or reversed!
I have heard that vacation rental properties should be owned by an LLC or other business entity. Is that necessary?
It's not necessary; however, for asset protection and other considerations, there has been a trend to title vacation rental properties in an LLC, or other corporate structure. The reasoning is no different than any other business venture. Keeping assets separate may potentially protect them from legal liability.
Before you decide how to title your property, please consult with your local attorney to ensure your need is properly met and is set up correctly.
What about real estate agents?
Your real estate agent’s job is to encourage you to make a purchase, so you may come across some who will embellish a property’s potential performance. In fact, past history is no guarantee of future performance, but it is a good barometer of what you can expect. If the property you’re purchasing is under management currently, ask for the last 12 months of statements. Trust but verify!
How liquid are these types of investments? Are they flippable?
Our crystal ball is broken as to the future housing sale market here in the Smokies. With this in mind, if you need liquidity in your investments, overnight vacation property ownership will probably not be right for you. You must consider this a long term investment. There is very little “flipping” going on in this market. Keep this in mind during your purchase evaluation.
What is an IRC Section 1031 Property Exchange?
1031 Exchanges are a popular way to sell an appreciated property, use the net sales proceeds (profit) to purchase another similar property, and defer any capital gains taxes (short or long term) due from teh sale. This is very complex, and we strongly urge you to consult a licensed and experienced professional. In a 1031 Exchange, you are deferring - not eliminating - the taxes.
How active do I need to be in the property’s upkeep and management?
Be mindful; owning a vacation rental property can be fun, rewarding and lucrative, but it is a very active investment. Successful owners interact with the management company on a regular basis; they read their emails and return calls promptly. Successful owners visit and/or stay in their property at least once per year and have realistic expectations. Successful owners prepare and accept there will be property expenses – it’s sometimes the cost of doing business.
How do I handle bedbugs?
No matter how clean, most hotels, resorts, and vacation rental properties experience bedbugs at some point. It’s almost impossible to determine which guest brought them in, so unfortunately the cost of removal almost always falls on the property owner. If bedbugs are found, a pest control company will chemically or heat treat the area. Cost varies ($750 - $5,000) depending on the infestation severity and size of the property.
Do I have the TEMPERAMENT to be a short term vacation rental property owner?
We always want to set a proper expectation for prospective owners. This kind of investment is unlike any other investment you might own. Not everyone has the temperament for this. Property management companies and their subcontractors will do their best to clean a property…but it will NEVER be as good as you could do it yourself. All property managers will do their best to maintain the property, but they are not perfect and may miss something while fixing something else. It happens. Decorative items you put in the cabin may come up missing, especially small items that kids can mistakenly take as a souvenir. Items may get broken, and we work hard to get guests to pay for damage; we, (and our competitors) are never 100% successful.
Owning an exclusive 2nd family vacation home, set up like you want and need, is significantly different than using the property as a business that you might want to personally use from time to time. If you think of this property as a business first, and that there is sometimes a cost of doing business – you’ll be fine. IF however you’ll stress over every little thing as if it were an exclusive 2nd family vacation home – you’ll need to ask yourself if you have the temperament for such an investment.
Thank you again for your interest in Cabins for YOU. We hope this video helps answer many, if not all, of your questions. If not we’d like to invite you to call us so we can speak personally on your individual situation.