Bought a vacation rental for my mother

[TexasHusker]

My mom is retired, and most of her income is derived from rental income. Heretofore, she has owned 4 residential houses with decent yields. However as her age advances she has less energy and wherewithal to manage the houses, so I advised her to liquidate them and replace them with vacation rentals. My own company will be managing the rentals and I will be charging her a modest 10 percent just to cover my costs, but here is how the investment/potential income is projected:

- Sales price: $274,000
- Current annual rents: $45,000
- Gross annual yield ($45K/$274K): 16.4%

Annual expenses:

- Insurance: $1500
- Taxes: $1100
- Mgt fee: $4500
- Utilities: $3600
- R&M: $2000
- Credit card fees: $855

- Net annual rent after all expenses: $31,445
- Net annual yield: 11.47%

Depreciation allowance bumps it to a little over 12 percent annual yield. Not bad!

Here's a look:

https://www.zillow.com/homes/for_sale/859-high-mountain-way-gatlinburg_rb/

[disneysteve]

Sounds good. It’s late and I’m tired so tell me what R&M stands for.

[TexasHusker]

Sounds good. It’s late and I’m tired so tell me what R&M stands for.

repairs and maintenance

[bjl584]

Sounds like a good deal.
Is this rental near your rental?

[disneysteve]

The numbers look great, though they are somewhat inflated by the fact that you're not charging your normal management fee. How much would that fee be if the customer wasn't your mother based on the services you will be providing?

[riverwed070707]

Property taxes are insanely low! How is it valued at $35k but selling for $275k? Any concern about that going up in the future since the assessed value seems quite low? For me personally, its too low of a return but mostly because I'd lose half the profit to a mortgage. Nice not to have to account for that so the numbers work!

[TexasHusker]

The numbers look great, though they are somewhat inflated by the fact that you're not charging your normal management fee. How much would that fee be if the customer wasn't your mother based on the services you will be providing?

If you insisted on paying someone like me to manage it, we charge 32 percent. That lowers your yield to just under 9 percent annual which still isn't bad.

[TexasHusker]

Property taxes are insanely low! How is it valued at $35k but selling for $275k? Any concern about that going up in the future since the assessed value seems quite low? For me personally, its too low of a return but mostly because I'd lose half the profit to a mortgage. Nice not to have to account for that so the numbers work!

Property taxes in Tennessee are indeed insanely low, which is a big reason that I invest heavily there. The assessed value is based on a percentage of the actual appraised value. Comparing similarly-valued homes between my hometown in Texas and Gatlinburg, taxes in Texas are about 6 times as much as TN. It's been that way since I started investing in TN property in 2005.

[TexasHusker]

Sounds like a good deal.
Is this rental near your rental?

We do have several rentals within about 2 miles of this.

Here is one with an interesting story: This location burned to the ground in the Gatlinburg fires late 2016. The old place cost us approx. $210K and the rents were about $29K annual. Thankfully we got a settlement check from the insurance co. for a total loss of around $200K. The problem is, that was nowhere near enough cash to rebuild. So we did some serious re-arranging of finances to get it rebuilt in hopes of even better returns. We ended up spending over $310K for 1400 square feet. But the flip side is that the projected annual rents are now around $60,000, and the house would easily sell for the mid $500s in today's market in Gatlinburg. I had it listed briefly for $585K and got cold feet and took it off the market.

https://www.zillow.com/homes/for_sale/81460701_zpid/35.717813,-83.493259,35.7156,-83.496907_rect/17_zm/?view=public

[james.hendrickson]

Texas, my first thought is...the river might flood. That happens a ton here in Oregon, especially in rural parts of the state where water control infrastructure isn't as good.

[TexasHusker]

Texas, my first thought is...the river might flood. That happens a ton here in Oregon, especially in rural parts of the state where water control infrastructure isn't as good.

Any time you are looking at a property on water it requires some investigation for sure. Flooding isn’t a concern in this location because the grade (slope) that the water cascades down is significant - there isn’t time for water to accumulate to any level that would cause a flood. To be cautious, however, we did raise the foundation 5 feet above base flood elevation.

Once you get down the mountain and the waterways begin to level, flood risk is significantly higher because the water cannot evacuate as fast.

[riverwed070707]

We do have several rentals within about 2 miles of this.

Here is one with an interesting story: This location burned to the ground in the Gatlinburg fires late 2016. The old place cost us approx. $210K and the rents were about $29K annual. Thankfully we got a settlement check from the insurance co. for a total loss of around $200K. The problem is, that was nowhere near enough cash to rebuild. So we did some serious re-arranging of finances to get it rebuilt in hopes of even better returns. We ended up spending over $310K for 1400 square feet. But the flip side is that the projected annual rents are now around $60,000, and the house would easily sell for the mid $500s in today's market in Gatlinburg. I had it listed briefly for $585K and got cold feet and took it off the market.

https://www.zillow.com/homes/for_sal...m/?view=public

And your taxes are less per year than most people pay in a month! That's wild. Why cold feet? Are you attached to it or just because its doing well?

[TexasHusker]

And your taxes are less per year than most people pay in a month! That's wild. Why cold feet? Are you attached to it or just because its doing well?

Yes taxes are cheaper in TN than I've seen anywhere. As a side note, the primary reason for that is that hotel/occupancy taxes (tourists) are paying a huge portion of TN's budget, so the burden on homeowners is quite small.

I got cold feet because I would then have to turn right around and reinvest the money, and it is doing good where it's at.

I had a co. offer me $200K for my management co that nets around $70K a year. I said "well gee, if I sold it to you, where do you suggest i look to replace that $70K a year with $200K in my pocket?" He didn't provide an answer.

[bjl584]

We do have several rentals within about 2 miles of this.

Here is one with an interesting story: This location burned to the ground in the Gatlinburg fires late 2016. The old place cost us approx. $210K and the rents were about $29K annual. Thankfully we got a settlement check from the insurance co. for a total loss of around $200K. The problem is, that was nowhere near enough cash to rebuild. So we did some serious re-arranging of finances to get it rebuilt in hopes of even better returns. We ended up spending over $310K for 1400 square feet. But the flip side is that the projected annual rents are now around $60,000, and the house would easily sell for the mid $500s in today's market in Gatlinburg. I had it listed briefly for $585K and got cold feet and took it off the market.

https://www.zillow.com/homes/for_sal...m/?view=public

Gorgeous place