Buy Resort Property Carefully

Jim wants to know if buying an investment property in Gatlinburg is a wise move. Dave says he needs to do his research, and since this is a resort property, Jim needs to know what the real value of it today is.

QUESTION: Jim in Memphis wants to know if buying an investment property in Gatlinburg is a wise move. Dave says he needs to do his research, and since this is a resort property, Jim needs to know what the real value of it today is.

ANSWER: It may not be a deal at all. Half off may not be enough off. What you’ve got to determine is what the actual market there today is. What he paid for it originally has absolutely nothing to do with that. Some of the hardest hit areas anytime there’s an economic swing in real estate is resort property. It’s the most volatile real estate, which means it shoots way up and shoots way down. Lake real estate, mountain real estate, ski condos, beach properties, those kinds of things. You can make a ton of money on them, but you can also lose a ton in about an eye blink.

I have not done any research on that particular market, because I haven’t looked at anything there. But anytime you say “resort property,” which you are definitely saying, what you’ve got to determine is what the real value of the thing today is. What is other stuff like that selling for? It may be selling for less than he’s offering it to you for, which is the market value today.

Ninety-nine percent rent is usually a lie, especially in resort property. Just the raw turnover of life, especially in a down economy, people aren’t vacating like they were. I’m not sure I’m believing all of this if I’m you. I want to go see it. I want to touch it. I want to physically go through the books with the rental agent. Why is this one rented and all the others aren’t? I want to know why that is, and then I want to find out what other properties have sold for. I’m not buying it based on what they say the income is. If you could buy the one next door for less than yours, why would you buy that? If yours rents for 99% of the time, why wouldn’t it? If you’ve got 10 of them on one street and one of them is staying rented 99% of the time and the others aren’t, there’s got to be some kind of reason it is. It may be the attributes and amenities of that particular cabin.

I’m going to approach this with a lot of cynicism. Another thing is that a lot of resort rentals are sold on bogus information. I’m not saying your guy is, but if you walk in off the street on a beach condo or a ski-in–ski-out condo, they’re going to give you a pitch about rentals that honestly is pie in the sky. They hype it up to no end. It never does what they say it’s going to. You’ve actually got a different track record here that you ought to investigate. Physical rentals did occur. It’s not projections. I would not buy it based only on that income stream. I would buy it based on what you can buy other properties in the area for per square foot right now and based on that, this makes sense, and why is this one different? Why is it staying rented and his others aren’t? If his whole string of properties there in that area were rented, he wouldn’t be in trouble unless he’s got property somewhere else that’s in trouble. I don’t want you to wade in blindly and then get yourself burned. Gather much, much more information.

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