Short-term rental (STR) investment property owners often purchase properties because they are familiar with the area or had a memorable experience. Other investors may rely on market trends to determine the best market. In either case, knowing the type of property to buy — one that generates the most return on investment — is often the more challenging question. At Revedy, uncovering this mystery is our specialty, and we investigated one of the country’s hottest markets to show you: the Gatlinburg and Pigeon Forge areas of Tennessee.
On the edge of the Great Smoky Mountains National Park, the Gatlinburg and Pigeon Forge areas are a dream destination for families seeking the perfect weekend getaway. The area received an A+ score by our partner AirDNA, a firm specializing in analyzing vacation rental data, highlighting the area as one of the top spots to buy STR properties.
Despite being one of the best regions to invest in, not all homes in this area are created equal. To help you gain a clearer picture of what to buy, we crunched the data to determine the types of homes with the best chance of generating the most income.
Crunching the data on Gatlinburg / Pigeon Forge
When considering a STR investment, it’s critical to explore the correlation between the number of bedrooms and bathrooms within a home to the CAP rate.The CAP rate of a home is important because it represents the rate of return a property will produce on an owner’s investment. Now, let’s break it down. And fair warning, we’re going to get statistical here.
(Note: P_value or P_val, is a number that is generated due to the correlation of two lists being computed. The number indicates how likely the correlation is to be caused by the null hypothesis. The higher the value [max of 1], the more likely the null hypothesis is valid. The null hypothesis is simply the idea that there is no difference between the two lists besides the difference observed from sampling or experimental error. An example would be that two lists containing the same information would have a p_value of 1 as there would be no difference between the two lists.)
- Bathrooms: our first surprise. We discovered the average CAP rate showed homes with more bathrooms would likely have a lower return than homes with fewer bathrooms. Notably, this effect is relatively small, with an average change in CAP rate of only -.262% per added bathroom.
- Bedrooms: we saw an opposite trend and our next surprise. With each additional bedroom, the expected CAP rate increases. For instance from 1 to 4 bedrooms, for each additional bedroom the CAP rate increases by .327%. The increase in bedrooms also showed a correlation of .954 with CAP rate and a p_val of .045.
- Occupancy: referring to the percent of rented nights in a month for a STR, for homes with 1 to 6 bedrooms, we saw a correlation of -.900, p_val of .014, and an average change in occupancy per additional bedroom of -2.567%. For 1 to 6 bathrooms, we saw correlation of -.662, p_val of .152, and average change in occupancy of -.27%. Notably, the p_val of the 1 to 6 bathroom calculation makes us question the validity of the correlation, however. When looking at 1 to 5 bathrooms, the correlation becomes more clear with a value of -0.867 and p_val of .057.
What this means for buyers
Toilets can be very expensive — at least when looking at your return as an STR. Per our data, the purchase price of a house and the rental revenue changes based on the number of bedrooms and bathrooms. Since the CAP rate considers the net income and current market value of the house, if the rental income rises more than the market value for a house for an additional bedroom or bathroom, the CAP rate would increase. Both bedrooms and bathrooms have measurable impacts on homes purchased in the Gatlinburg/Pigeon Forge area, just not always in the way you would expect.
For example:
- 4-bathroom homes: additional bedrooms (from 2 to 4) add on average 9% to the rental income while only adding around 2% to the price of the home.
- 4-bedroom homes: each additional bathroom (from 2 to 4) adds 38% to the price and 23% to the rental income.
Since the price of rent increases in both cases, a decrease in occupancy is expected in large houses with more bedrooms and bathrooms. Now, why would a house with 4 bedrooms and 4 bathrooms be 38% more expensive than a house with 4 bedrooms and 3 bathrooms? That 38% jump is significant, especially when compared to a 4-bedroom, 4-bathroom house that is only 2% more expensive than a 3 -bedroom, 4 -bathroom house. The answer lies in the additional square footage needed for another bathroom in a house.
Builders do not design homes with bathrooms next to one another. They are normally spaced within a house depending on the number of bedrooms. For homes with more bedrooms, however, the house does not need to be very big. A builder can build 3 bedrooms next to each other without adding much square footage and the house would seem perfectly normal. Our data identifies these trends. If you look at homes with 4 bedrooms, on average each additional bathroom (from 2 to 4 bathrooms) increases the square footage by 30% while homes with 4 bathrooms only add 15% more square feet per bedroom (from 2 to 4 bedrooms).
In the Gatlinburg and Pigeon Forge area, homes with more bathrooms may seem risky because the data suggests these houses tend to have a lower occupancy and CAP rate. But, this does not tell the full story. The data also suggests the high square footage in these homes to be the real culprit to lower occupancy and CAP rate. So, when buying a STR in this area, worry less about the number of bathrooms as they are simply a consequence of square footage.
When looking for a STR home, try to get as many bedrooms as possible in homes with the least amount of square footage. Having a higher number of bedrooms allows the rent to be higher without increasing the price of the home by a large margin.
As you can tell, we love data because it provides us with the insights to help you not only buy the properties you want, but also the properties that have the highest return on investment. If all this was a little overwhelming, don’t worry. Leave the data crunching to us for your next STR investment.
Are you interested in learning more about purchasing in Gatlinburg/Pigeon Forge? Have another market in mind and want to know exactly what type of home to buy there? Speak to one of our experts today. You can also sign up for our new tool at revedy.com to help you find that special home.
Revedy makes your dream a smart decision. Our team of vacation rental experts and real estate consultants help buyers and sellers navigate the sales process in vacation rental markets nationwide. We leverage our proprietary tools to analyze market data and support our investors in making informed decisions. If you are considering investing in a vacation home or have any questions, please call us at (503) 908-5225 or email inquiry@revedyhome.com