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.

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.

Did you rent your Deer Ridge Mountain Resort unit through Ridge Management Ltd., RML, for all of 2009?

Wonder how your unit’s performance stacked up against the other units for rental?  Well, here’s a chance to find out.

An owner of one of the 2-2 units at Deer Ridge provided me a copy of their year end RML statement.  Here’s what their numbers looked like for 2009 (used here with their permission):

A Quick Analysis

• Owner X had gross rental income on their unit of $14,454 for all of 2009.
• In December, the income was $456 for 6 rental nights according to the above information.  This works out to an average nightly rental rate of $76.
• Since this is a 2-2, let’s assume that the average nightly rental was $105 per night across the whole year.
• This means that for $14,454 of gross income, this unit was rented for about 138 nights out of the 365 nights in a year.
• This means that this unit saw an economic occupancy of only 37.7% – or conversely, a vacancy rate of 62.3% for the year.
• These numbers are consistent with the entire Deer Ridge property as a whole, which has suffered from an average annual economic occupancy of only 39% for the past 8 years under the very questionable leadership of General Manager Joe Thomas.

Is Deer Ridge A Good Investment? / Bad Investment?

• Owner X saw distributions for the whole year of $4,504.  This works out to an average monthly check to them of about $375 per month.
• From this distribution, Owner X had to also pay:  Sevier County taxes, electricity, content and liability insurance, HOA fees and other maintenance from wear and tear and theft.  All of this added up to about an additional carrying cost of about $5,800 for the year.
• This means, that Owner X lost about $1,300 for the year – not counting debt service.  This also does not include the costs for any of the thousands of dollars the board is requiring for the upcoming Asinine Assessment.
• If the monthly mortgage payment was $320 per month, then the total LOSS for the year for Owner X was over $5,000!
• If Owner X keeps their unit for 10 years – and these same trends continue, this means that the aggregate loss for them will exceed $50,000!

Does this make it a good investment – or a bad investment for owning a condo at Deer Ridge?

The answer to that is not quite so black and white – and needs a much more in depth analysis to reach a valid conclusion.

Because so many owners, and prospective buyers, want to know if Deer Ridge is a good or bad investment, my next post will be a comprehensive analysis and downloadable document – so you will finally KNOW the answer!

How Did YOUR Unit Compare to Owner X?

In the meantime, how did your unit stack up to Owner X?  What was your economic occupancy rate with RML?  How much did you REALLY end up making or losing on your investment in Deer Ridge when you count all the costs?

Please comment below – and stay tuned for the next post!