I am getting a lot of calls these days from buyers asking about how rentals work, best houses for rental, how much they can make, etc. I do not want to be a Debbie-downer but I do want to be real.
Callers fall into a couple of categories: 1) those who want to purchase a home on Smith Lake and pay for it with rental income, 2) those that want to INVEST in a rental property on Smith Lake (“we will only use it when it is not rented”), or 3) those that bought a lake house a few years ago and realize they are not here a lot of the time and want to monetize that time. I will address each of these later but first a status on the rental market. I will say this…the best scenario is when someone wants to own a home on Smith Lake as their primary motivation and rentals help offset the cost of that ownership.
Supply and demand are out of whack. This is across the country, not just at the lake. The difference is that industry wide the increase in supply is about 20%, on Smith we are at 100%+. The lake has gone from ~125 rentals pre pandemic to over 250 now. Guests numbers are up but they did not double so occupancy per property is impacted. I used to recommend using 80-100 nights of occupancy but now its 60-80 nights. As an FYI…this is about 1/2 of what the beach and mountains get as the lake goes dead in the offseason with no snowbirds. One other note….rental rates have not increased at the same pace as property prices so the ROI has basically been cut in half. I used to say 6-8% (not taking appreciation into account) but now I use half of that.
Category 1: Those who want to purchase a home on Smith Lake and pay for it with rental income. My response to that is if that was possible I would own a lot of lake homes! You can knock a dent in it but you will come out of pocket.
Category 2: Those that want to INVEST in a rental property on Smith Lake (“we will only use it when it is not rented”) Sounds good in theory. To my comment above, only really works if you DESIRE to own a lake home.
Category 3: Those that bought a lake house a few years ago and realize they are not here a lot of the time and want to monetize that time or you just want to buy a lake house for your family’s enjoyment and use rentals to offset the expenses. Now we are talking. This is the best strategy for you and me. Neither of us wants to depend on rentals but they sure are nice when it is free money.
One thing we did not address…APPRECIATION!! Prepandemic I used to model in the normal 3%. In 2020-2022, properties appreciated 50-100%+….crazy right!! It happened everywhere and has affected returns across the industry. I do not recommend putting appreciation in your model until things settle out. I think the “AIRBNBust” (google it) will affect those in Category #1 and #2 above as they come out of pocket or don’t get the returns they desire (especially with a recovering stock market as competition). I think these properties will hit the market in the next 1-2 years as they try to take advantage of the higher property prices. Don’t know that prices will drop but I also don’t think they will go up…just one man’s opinion.
In conclusion…if you want to own a lake property to make memories with your family and want to offset the costs then come on!! Otherwise, if you are looking for a great investment…buy Amazon or Apple or Google 🙂
If you have questions about this or anything else on the lake…feel free to call me at 205.492.3211. I love talking about this stuff.