Will you really lose $40,000 cash if you buy a rental condo at Deer Ridge and use Ridge Management Ltd?
As an owner-occupied home, Deer Ridge is an incredible value with THE best view in the Smokies and great amenities.
However, several owners and would-be owners of Deer Ridge condos have asked me if these units are a good investment or not. To help answer that question objectively, I had to analyze the real moving parts of buying and owning here.
The following is my detailed investment analysis based on buying a 1-1 condo unit at Deer Ridge Mountain Resort in Gatlinburg, Tennessee. The numbers for the other sized units at Deer Ridge are very similar, bottom line.
Here are a few pages of the analysis to show you the format. Click any of the following pages to immediately download the full report.
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The Main Assumptions – Using RML To Lease and Manage:
- $50,000 purchase price with $2,000 for initial improvements and $2,000 for closing costs.
- Down payment of 25%, with a mortgage of $37,500 at 7% fixed for 30 years.
- Total resulting initial investment of $16,500.
- 28% marginal tax bracket, 15% long-term capital gain and no state income tax.
- The current $3,400 special assessment for 2011 and 2012, with an additional, average $1,000 per year assessment per unit starting in Year 3 and required for other things like roof, parking lot and “oh, by the way…” ideas from Joe Thomas and the Board.
- Annual appreciation rate of 3% per year, as an average, over the next 10 years.
- Selling costs of 10% – to cover brokerage, closing costs, etc.
- Rental income per night averaging $90 per night after accounting for specials, packages, Hotels.com / Expedia / Etc. discounts with rental rates increasing, on a net basis, by 3% per year.
- Continuation of the historical Joe Thomas and RML 39% economic occupancy for all units on average at Deer Ridge across the entire year. This equates to a 61% economic vacancy rate. (This is the historical average across the past 8 years – with no signs of any improvement.)
- 40% RML management fee. (RML has upped this fee several times in the past – but this is the current charge.)
- $270 per month for the HOA fee (the highest per sq ft. charge in the entire Gatlinburg, Knoxville area.) This represents an 82% overcharge compared to the amount that should be charged for 1-1 units according to the Master Deed. This is expected to be a major point covered with upcoming litigation filed against GGRC and / or its Board of Directors.
- Water at $116 per month. This represents double what should be charged for 1-1 units according to the Master Deed.
- Contents and liability insurance of $300 per year, $500 per year for internal maintenance and/or forced upgrades required by RML and another $500 per year for repairs. Maid service is shown at only $100 per year for spring cleaning. Also shown is the RML pass through costs for credit card fees of about $250 per year.
- Cobbly Nob taxes of $668 and Sevier County taxes of $400 per year.
- Electricity of about $1,000 per year on average along with charges for cable TV and telephone.
- Expenses increasing 5% per year.
The Projected Numbers – Using RML To Lease and Manage:
- Negative Net Operating Income for all ten years after all income and expenses. This means, even without a mortgage of any amount, the property loses money every year. Over 10 years, this adds up to a loss of out of pocket dollars more than $31,000 – excluding any net proceeds from sale.
- With the 75% mortgage described above, the numbers are a lot worse. Over 10 years, your loss of out of pocket dollars would be almost $68,000!
- Taking appreciation into account, if we sell after 10 years and sell the unit for $67,200 after buying it for $50,000 with 75% financing, then the loss after all benefits of every kind would still be almost exactly $40,000!
- That is a $40,000 LOSS – Not Gain – With everything taken into account after 10 years!
- This means after owning at Deer Ridge for 10 years, there would be zero net profit – and it will end up costing you $40,000. This equates to costing you $4,000 a year in order for you to have a place to use and enjoy as a vacation home – assuming you are not “RML Abusive” and want to actually use your unit during the summer or holidays or during the peak foliage time in October.
- If you were to actually hold for longer – say 20 years, it gets even worse. In that case, it would end up costing you over $86,000!
The Conclusions – Using RML To Lease and Manage:
- Using RML to manage your property, it makes zero sense to buy a unit at Deer Ridge strictly for investment purposes, as a rental unit, expecting any kind of positive ROI whatsoever – EVER.
- The exception to this would be if you are able to buy for HALF the current asking prices. At some point, the market will PROBABLY recover and possibly go back to this current asking level per square foot. If that happens, and you able to buy at half price, then you can make money – but will never have a positive cash flow at any time during the holding time – no matter how little you pay!!!
- If you were able to buy for $25,000 instead of $50,000 and still financed 75%, then you could make SOME money from investing in Deer Ridge. After five years, you would NET less than $3,000 total. Even with this low price, if you held for 10 years, you would LOSE over $10,000. Even though these are not great numbers, you could more easily justify the cost per year as an alternative vacation cost – assuming you could really buy a 1-1 for $25,000.
- The HOA fees and the water costs are outrageously high as a result of Joe Thomas and the Board not abiding by the Master Deed Percentages for cost – and this contributes significantly to these numbers not working.
- If you can cost justify on average $4,000 per year to pay for your vacation location (not counting other vacation related costs), then your ownership at a $50,000 purchase price is at break-even with zero ROI as an investment compared to alternative investment opportunities. Of course, for $4,000 a year, you could afford a very nice vacation in other locations without the hassle of ownership at Deer Ridge.
- If you can use Deer Ridge as your primary home, it is a genuine bargain – compared to other alternative living costs per month in the entire Knoxville area. With a spectacular view and great amenities, and the relatively low cost per square foot, it can be an ideal primary residence with total monthly costs for everything under $1,000 a month.
- Likewise, if you are in a position to highly utilize the unit for personal use and not worry about rental abuse, the same numbers can apply as for a primary residence.
- Bottom line: Buy at Deer Ridge to own and use – not to rent – if you are going to use RML.
If You Don’t Use RML To Lease and Manage:
- Historically, over the past 8 years, Joe Thomas and RML have been unable to average anything higher than a deplorable 39% economic occupancy at Deer Ridge. No matter what marketing steps he takes, no matter how much or the owners’ money is spent on those marketing steps, he appears incapable of doing better with the owners’ units.
- If you were to buy at Deer Ridge and use another, more experienced and qualified management company that could cut that 61% vacancy in half, the investment returns from Deer Ridge are astoundingly better.
- Even if you keep all of the other assumptions exactly the same, the same rental rate per night, the same management fee, the operating expenses, even the 82% gross overcharge of the HOA fees that violates the Master Deed – even if all of that stays the same, and you just solved the vacancy problem that seems to have eluded Joe Thomas for years, then you can make money with a rental property at Deer Ridge.
- You no longer have a Negative Net Operating Income for all ten years after all income and expenses. Instead, without a mortgage of any amount, the property now makes money every year. Over 10 years, this adds up to a gain in-your-pocket-dollars of more than $38,000 excluding any net proceeds from sale. This means you have gone from a negative $31,000 to a plus $38,000 – a net swing of $69,000!
- With the 75% mortgage described above, the annual cash flow each of the ten years is right at breakeven. Instead of the $68,000 loss you would have using RML, the positive cash flow over 10 years would now be $1,140 if you use someone else that can average a 30% vacancy rate – instead of the Joe Thomas 61% vacancy! Note this is a swing of almost $70,000 of money in your pocket.
- Taking appreciation into account, if we sell after 10 years and sell the unit for the same $67,200 after buying it for the same $50,000 with the same 75% financing, then we have a net gain of $9,800 – instead of the Joe Thomas loss after all tax and cash benefits of $40,000! This is almost a $50,000 better benefit in your bank account if you don’t use RML!
- This means after owning at Deer Ridge for 10 years, there would be zero net cost to you for having 30% use of your condo per year – over 15 weeks a year – and you end up with about $10,000 in your pocket – plus getting back your $16,500 down payment.
Another ROI Benefit Of Deer Ridge Not Being In The Motel Business
- Right now, Joe Thomas and the Board push all owners to belong to RML, complete with warm-hearted stories that include prayers, motherhood and apple pie – and that you are downright un-American if you don’t donate nearly full use of your condo to the good of RML.
- But Joe Thomas and the Board are playing Pied Piper – not caring if the Deer Ridge owners drown in their losses – as long as RML can keep hanging on by a thread and pay Joe Thomas all his various approved and unapproved compensation.
- The problem is that the more units available for rent at Deer Ridge, the more competition YOU have for renting your unit.
- While a more competent and professional management company could most probably improve occupancy at Deer Ridge, most owners here continue to use RML – no matter how little sense it makes.
- The current low economic occupancy rates at Deer Ridge shows that Joe Thomas has only been able to create a small rental demand for the units compared to all the competitive, newer, less expensive properties in Gatlinburg and especially Pigeon Forge.
- Since there is such low current demand, the more units for rent at Deer Ridge, the less yours will be rented.
- If more units at Deer Ridge are used for personal use or for full time residents, the fewer units there are that will compete with yours for the current narrow niche demand for these units.
- This means your occupancy should rise, and with rising occupancies, rental rates could rise – both of which should make you more money.
- Either way you look at it, Deer Ridge is a LOT better off without RML – and Joe Thomas and the Board have been lying to owners for years that the opposite is true. Don’t listen to their Pied Piper tune. Find someone else to solve your vacancy problem.
Want Proof?
Please see the two sets of detailed analysis that follows – the first assuming RML’s use and historical performance – the second with only the vacancy rate changed from Joe Thomas’ abysmal 61% average to a 30% average vacancy using a more competent and professional management company. Just click Investment Analysis for your own copy of the full report.
Once you have downloaded the full report, you can email it as an attachment to anyone you wish to have a copy, such as your broker.
The good news is if you buy at Deer Ridge, no matter what Joe Thomas may tell you, you have a right to use whatever management company you want to use.
Robert,
Another thing that occurred and still is while i was working here was Joe’s MONUMENTAL push for cabins. (condo’s were taking the back burner) Joe in ‘07 wanted to bring on board 10 new cabins. This was extra revenue for rml, or so he smiled and told everyone. He was elated! He could see dollar signs! Although, i wasn’t so sure, as they use ALL of our amenities for FREE. All the way down from washing our pool towels to free meals and music in October and all the perks rml guests obtain. This cabin push was a MAIN FOCUS and maybe still is.
In ‘08 at the board meeting there was a long, (hours and hours) entwined topic of a “mystery woman” (that is what the board/Joe called this individual that was going to be HIRED to take care of cabin rentals and would also do some office work for Joey. They did NOT want Neil and i to know who she was!) After hearing ‘mystery woman’ for hours on end (w/o digital recordings no one but Neil and i would have known about this because it was going to be slid under the rug ASAP on the hiring and maybe later on the firing!)
Anyway, from working here and knowing the ‘players’, it didn’t take long to figure out in a nepotistic environment whom this ‘mystery woman’ was! Needless to say i upset the whole apple cart (board/Joey) big time with my quick revelation! Luther went goofy vocal, telling Joey not to answer my question! My question was this: “Why don’t you just say whom you are talking about, as it won’t take a genius to figure it out. It has to be either a friend of a friend or a relative, which is it? There is only a person i can think of that would do that and lo and behold BINGO, it was both…a relative and a friend of a friend! Then, all lips became ’sealed’ and no more talk after listening to hours of ‘mystery woman’ topic. This barely hit the minutes! Typical.
I just wish someone could inform me of the benefit to 84 for cabin rentals? These cabin rentals take AWAY from condo rentals, as the push was going to support them. More $ ticket revenue for rml? Not benefiting owners. Good Lord ~ Why would 84 owners support this? Why have this? Do cabin rentals vastly contribute in some fashion that i am not aware of? Appears to me it is more of a ‘take’ situation.
I am sure this would assist in Joey’s bottom line, but trying to figure out if Joe was trying to set himself up (& maybe another board member?) if Deer Ridge ever failed or the numbers dropped off for rml substantially? They were always VERY worried about the numbers supporting rml. If they get below a certain number ~ rml doesn’t exist and Joey loses his job. Ahhhh. With cabins established on US, could someone/s walk right into another business even if rml failed????? Maybe one or more together as partners? Or, was it simply instant greed or gratification? Non caring of our 84 that are paying all the bills, the way i see it. Someone set me straight and tell me if i am wrong, please.
Way i see it cabins are ANOTHER CONFLICT OF INTEREST FOR OWNERS? Just like Ridge Realty.
Hello Fellow Deer Ridge Owners,
My Name is Neil Blair, I would like to let everyone know, I would like to serve on the Deer Ridge Board of Directors.
My wife of 35 yrs and I have been owners here at Deer Ridge for about 3 yrs during which time I have attended 6 board meetings.
We have been using RML to rent our unit since the pooling system went away, Individual Decorating was allowed, and the management fee has been 60/40, and we plan on using RML well into the future, until or unless the contract changes significantly.
We have done well so far renting our unit through RML, and plan on continuing.
We also plan on continuing our ownership well into the future, planning to pass it to our 2 children and their families.
My reasons for seeking a seat on the Deer Ridge Board are very simple:
I want to do all I can to make sure all Records and Books for both G.G.& R.C. and R.M.L. are available to all owners that would like to get copies of them, “After All -We The Owners- OWN Them”
My Wife and I have asked “More than Once” the Board members to allow that to happen, I have asked it to the entire board as a whole, and each one individually, None of them will allow it, some of them will not answer my questions in any meaningful way, a couple will not even acknowledge getting my e-mails.
I have wondered -WHY- the current board members are -SO- against letting owners get copies of the owners records, I wonder -WHY- the board will not allow a detailed Audit of these records, I am not saying there is anything amiss, just want to know -If- There could be a problem, that needs correcting. This board PROMISED TRANSPARENCY… I Don’t see TRANSPARENCY.
If for no other reason..TO CLEAR THE AIR, and Remove ANY Doubt as to the correctness of all these records.
The other reason I want to serve, is to do all I can to have the meetings Digitally recorded.
My reasoning for wanting this, is so that you, or anyone else that would like to be able to hear exactly what is said, AND how it is said in the meetings, can do so.
All owners should be able to hear what happens at these meetings where many Very Important and Very Costly things are Discussed, at length, and Voted On.
I Know many may not want to hear these meetings, and that is O.K., as these meetings are generally 7-10 hrs long. Many of you may live even further away than we do and may not be able to attend and hear these meetings, but would like the opportunity to do so.
If the Recordings were on the Deer Ridge Web Site “Protected by Password” They would be accessible only to owners, and would be available for listening at your convenience.
To my Knowledge the board has not even seen the need to vote on this option, and they are on the record saying so…
We as owners deserve to have that access but the board has even denied those attending the meeting to make their own personal recordings, for later reference.
WHY would the board deny owners the opportunity to listen to an OPEN Meeting that any of us could attend, if we were ABLE to attend?
If you would have liked to have first hand factual knowledge of how and why THE BOARD will be spending up to $50,000.00
Yes, FIFTY THOUSAND DOLLARS of YOUR MONEY on — “Nuts Bolts” —
That opportunity was denied to you, because there is no detailed record of exactly WHAT WAS SAID, WHO SAID IT, WHAT WAS THEIR REASONING…etc.
Please consider voting for me, I have no hidden agenda, I give you my word that if elected, I will answer any and all questions, correspondence, I will answer fully, honestly, openly, in a conversational manner.
I will do all I can to make sure that all business is done in the open, Never Hidden, Never Withheld, Never Obscured.
Always Open, Always Honest, Always Accessible.
Please consider voting for me.
Thank you,
Neil Blair C-208
Neil, I’ll be glad to nominate you for the board. The paper sent me said a one page resume must accompany the nomination. How is that done? Do you send me a copy of the resume?
I am disgusted by the Board’s refusal to address all the questions/problems that we’ve been discussing and especially, since it’s coming up in a month, the assessment they’ve made.
My fear is, once we pay it, we’ll never know where this money is going, and if illegally used, we may never get it back, other than the law suit, which I’m for. Is there any way to delay this or better yet, make it null and void?
Thanks for your desire to represent us on the board.
James,
My feelings exactly.
When an individual or a group of individuals will not open the books (our books) that sets out a huge reg flag. This group of morons play God and truly will have to open the books (forensic audit) sooner or later.
Meanwhile, I do NOT intend (as well as many other owners that i have spoken with) to pay this upcoming assessment. We all need to know where every penny is actually going, with bids. This 353k is not chicken feed and the 50K for nuts and bolts is a sorry and ridiculous figure, as this whole ordeal has a stench to it and they all have a roll of duct tape over their mouth!
I want everyone to know i have ALWAYS paid my bills on time my entire lifetime, or even prior to deadlines, but in this case i REFUSE to hand over money ~ to where it goes nobody really knows. I will have a lien attached to the property. If i sell my unit, it will come out of the sale. Once there is a forensic audit and those individuals are CLEARED then i will write them a check the SAME day. I am NOT going to OPEN UP MY CHECKBOOK, when they will not OPEN up OUR books! There is no point to feeding this regime with play (real) money. I am praying this is gross negligence and not a criminal activity, but REGARDLESS Joey + 5 best be VERY content to get my OUTRAGEOUS HOA fees every month. Which they owe me OVER 10K for last year and it is adding up. I want my money BACK.
When it goes to court this will all be solved. I understand that more and more are filing with the FBI, so that is promising as well. It is going to become very interesting WHEN Joey/board have questions to answer on a 1 on 1 basis with officials. A forensic audit and official/individual questioning will get us to bedrock of what has been going on for years at Deer Ridge Mountain Resort. I, for one look FORWARD to paying this assessment once that is completed!
Thanks James, Tina,
I am already being nominated by someone else. I believe there will also be 2-3 others nominated that feel the same way I do on these 2 issues.
I understand that the 3 people who’s terms have expired will in fact run again….One would have to assume if they are re-elected, it will be more of the same. I understand that 1 or 2 of these people have been on the board for several TERMS 6,7,8 YEARS in succession, or been on several single terms while owning here… In my opinion this is not good…
Some others running have other issues in addition to these, I agree with some and some I don’t. I feel like the 3 issues I am so concerned over are issues that will make good common sense to most owners, if not, and I’m not Elected, I will accept that owners don’t want these things accomplished.
If that’s the case, I will be disappointed, but will continue efforts from the side lines until we get a judgment on these matters, -IF- they are deemed worthy of a court hearing, or an investigation by any one or more of the Governmental Authorities charged with dealing with conflicts of interest, Fiduciary Responsibilities of Board Of Directors, A.D.A. matters… Tenn. Real Estate Commission.. Etc.
Thank you again for your supportive words. Please contact any owners you know and let them know We may face More years of being in the dark about how Deer Ridge is conducting business, if nothing changes…
And being in the dark can cause lots of problems…and make them worse over time…OPEN THE BOOKS, LET US HEAR WHAT YOU SAY IN OUR MEETINGS, LET OWNERS AUDIT THE DETAILS…
What is the downside for the board and management -IF- Everything is Correct?
Thanks, Neil C-208
Neil,
Best of luck to you! The other 2 as well wanting transparency.
We do not need ‘more of the same’ corrupt politicians, set up by Joey and re-elected time and time again. I am positive that is what is in place in the ‘mix’ of current management/board for anyone not wanting transparency in all applications. Or their own personal biases against residents or non-rml owners.
For the overall diverse health of Deer Ridge Mountain Resort, we do not need 1 sided board members with an agenda to keep themselves and manager ‘protected’ and for their own ‘personal gains’ by using the EVER FAILING rml as a PROFIT DEVICE for the FEW.