5 Questions Every STR Investor Should Ask
1. Self-manage or management company?
As much as I am a fan of black and white answers, this answer lives in the gray area. The decision to self-manage or enlist the services of a property manager is contingent on individual circumstances and preferences.
Self Managing:
Self-managing your property can offer higher income potential but comes with responsibilities and challenges that may not always align with your lifestyle.
Time: Even with various software tools to assist with rental management, self-managers need to be prepared to address unexpected issues such as internet outages, power failures, or guests who cannot find the cabin. Being on call for these situations can disrupt your personal life.
Team: Success in self-management hinges on assembling a reliable team, including cleaners, handymen, and trusted individuals who can respond to emergencies promptly. The absence of a well-structured team can leave you stranded when issues arise.
Amenities and Marketing: Striking a balance between offering appealing amenities and effective marketing is crucial. Neglecting either aspect can lead to suboptimal bookings. Inadequate marketing can undermine the appeal of even the most amenity-rich property, while great marketing can’t compensate for a lackluster guest experience.
Property Manager:
Time: Property management offers a more hands-off approach, sparing you the day-to-day responsibilities but you will be cutting into more of your profits. However, your Christmas will never be interrupted because of busted pipes!
Team: Selecting the right property management company is crucial. Don’t solely base your decision on their profit split; focus on their track record, reliability, and their commitment to property care. Reading reviews, seeking referrals, and even experiencing a stay in one of their managed properties can provide valuable insights. If a company isn’t taking care of your property and notifying you of issues, you will pay for it in the long run. A bad experience with the company could mean a bad experience (and review!) associated with your property.
Amenities and Marketing: A seasoned management company should offer expert guidance on amenities and marketing strategies that maximize your property’s earning potential. Check out their website and marketing to determine whether or not they’re using a budget photographer and slapping it on an outdated website.
Ultimately, the choice between self-management and property management hinges on your current life situation, personal preferences, and financial goals. To maximize your rental income, carefully evaluate your capabilities, the resources available to you, and your willingness to be hands-on. Surround yourself with the right people, whether it’s a reliable team for self-management or a trustworthy property management company, to ensure your investment’s success. Making an informed decision can lead to increased income and a more satisfying rental property experience.
2. Will a HOA try to keep me from using my property as a STR?
Sevier County is an ideal location for investors seeking opportunities in the short-term rental (STR) market. With a thriving tourist industry at its core, attempting to halt STR activities would be counterproductive to the local economy.
Approximately 45% of properties available for use as overnight rentals in Sevier County are part of active Homeowners Associations. These HOAs can vary significantly in terms of their monthly expenses and included amenities. Some may entail only minimal costs covering road maintenance, while others might run a bit higher and encompass perks such as a community pool, water, sewer, internet, lawn care, and even a clubhouse.
Restrictions on using a property as an STR typically arise from either zoning regulations, especially within city limits, or subdivision-specific restrictions. Investors should be aware of these limitations before making a purchase.
One practical tip for investors is to consider the listing price as an indicator of a property’s STR potential. In Sevier County, you’ll often find a noticeable price difference between properties that can be used for overnight rentals and those that cannot, especially within the city limits of Pigeon Forge, Gatlinburg, or Sevierville. If a property appears to be a steal, it may not be eligible for STR use. It’s essential to exercise caution and thoroughly research any property that seems too good to be true.
3. What is the best location?
This is another question without a clear-cut answer. Ultimately, the closer to the Pigeon Forge Parkway or Gatlinburg Parkway, the better. Our rule of thumb is no more than 20 minutes from either Parkway. However, the right amenities and marketing will also come into play again. While location matters, don’t underestimate the power of amenities and marketing. Guests are often drawn to a property based on its appearance and interior features. If your property offers exceptional amenities and is beautifully presented, it may attract guests willing to stay a bit further from city centers. Properties closer to the Parkways in traditional rental areas will hold their value better over time than properties in more remote locations. A prime example is Chalet Village just outside Gatlinburg, where properties consistently achieve higher rental income and sell for above-average prices compared to more remote locations like Jones Cove.
Don’t overlook Sevierville! Properties with a Sevierville address could be in Wears Valley, Jones Cove, or out at Douglas Lake. The location could be ideal or it could be a bit too far from the action. It is important when looking at properties in Sevierville to look at its location on a map or to determine the distance from popular Pigeon Forge and Gatlinburg attractions. Two easy locations to determine a property’s proximity are The Island in Pigeon Forge and Ripley’s Aquarium in Gatlinburg.
4. How much will I pay in taxes?
Sevier County, known for its low property tax rates, has recently made changes to its property tax classification for short-term rentals, including properties listed on AirBnB and VRBO. In April 2023, the Sevier County board of commissioners voted to align with a 2021 state law, reclassifying short-term rental properties to a 40% commercial classification, up from the previous 25% residential classification. Properties that operate with a business license and are not the owner’s primary residence will be subject to the classification change.
There are 13,000 identified overnight rentals in Sevier County. The reclassification will result in an increase in property tax rates, raising them from $1.48 per $100 of assessed value to $2.22 per $100. For instance, if you own a rental cabin appraised at $500,000, your annual county property tax will rise from $1,850 to $2,960. It is also important to note that on average, short-term rentals across the county are undervalued by over 53% according to the tax appraisal.
For all short-term rentals (inside and outside of city limits) there is also a 3% lodging tax: 50% of the proceeds shall be dedicated for tourism and infrastructure and 50% dedicated for education. This tax is collected from the guest and remitted by the owner to the Sevier County Trustee’s office monthly and you can pay online. You will collect the tax on rent, cleaning fees, pet fees and any other fees that you require. If AirBnB or VRBO handles tax collection, owners must still establish a lodging account with the Sevier County Trustee’s Office. You can obtain a business license with Sevier County here. Inside the Sevierville, Pigeon Forge and Gatlinburg city limits, there is an additional tax for owners of investment properties. This Gross Receipt Tax is a business tax on all of the income generated from the property. When a property is on program with a property management company, it is their obligation to pay the tax. If the property is self-managed, it is the responsibility of the property owner. This tax ranges between 1%-1.25% depending on which city the property lies within.
Sales tax in Sevier County is 9.75% with 7% going to the State of TN and 2.75% for Sevier County, and short-term rental owners are required to register their business with the State of Tennessee. Notably, Tennessee does not have a state income tax.
One tax strategy real estate investors can utilize is cost segregation. Cost segregation is a tax planning strategy that allows real estate owners to reduce their taxable income and increase cash flow by depreciating assets faster. For more information on this strategy and other tax questions, contact our in-house CPA Matt Tatum. Friendly reminder to always check with your tax professional and local entities for property specific information and questions.
Office Phone: 865.366.1023
Cell Phone: 423.299.5734
matt@smokymountainhomesforsale.com
5. What about an indoor pool?
The Smoky Mountain’s rental market has witnessed a surge in the popularity of indoor pools, a trend that has gained momentum since 2020. While indoor pools were once exclusive to larger cabins, they are now a sought-after amenity in cabins of all sizes and bedroom counts. An indoor pool is a standout amenity that sets your rental apart from the competition and equates to additional revenue through higher nightly rates and increased bookings. However, this added desirability does come at a higher price point and higher maintenance costs. On average, you will pay 25%-30% more for a new construction (built no later than 2020) cabin with an indoor pool than for a cabin without one. In addition to the higher purchase price, indoor pools entail ongoing maintenance costs. Regular cleaning, maintenance, and potential repairs are essential to keep the pool in optimal condition. Property owners should budget for these recurring expenses to ensure guest satisfaction. Moisture control is also a major concern and it’s imperative during the inspection process you determine what kind of dehumidification system is in place and if it’s sufficient to prevent issues related to humidity and condensation within the property.
Bottom Line:
If you have more questions or find yourself ready to start your STR journey in the Smoky Mountains, I would love to chat! Follow the links below to schedule a time with me or another one of our top producing agents!
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I am passionate about using my local knowledge, work ethic, and attention to detail to help my clients fulfill their real estate dreams. Real estate in the Smokies is often some form of a dream come true for our clients and I am honored to get to play a part in making those dream a reality!
