InvestmentPalmetto Bluff: Cost Estimations as a New Investment Project Begins

After completing our new home in Palmetto Bluff in April it has now been rented for the summer. Six days on the vacation rental market and our calendar was booked out for 8 weeks solid, ending only to accommodate the (possible) beginning of the school year for our son. If you are considering Palmetto Bluff for a second or investment home, there is much to evaluate, from the ins & outs of cost projections to what can reasonably be expected as “return on investment.” As we are poised to undertake another investment property on an adjoining lot to our first, just what have our own experiences been so far?

RENTAL DESIRABILITY & LIFESTYLE

Firstly, let’s examine the rental offering and lifestyle that is unique to the Palmetto Bluff development. By comparison, it is unlike most local Charleston rental markets. Unlike downtown Charleston and its popularity with the long weekenders, Folly Beach with its sun-seeking families, or Isle of Palms and the large party houses that are popular there. Perhaps the closest in lifestyle is Kiawah Island, with its changed demographic and resulting expectations for what a rental typically brings. Rental rates in Palmetto Bluff are healthy, though servicing this clientele is also not without its attendant costs, a demanding contingent of renters who seek a luxury vacation experience. A vacation rental offering in Palmetto Bluff can command robust weekly rates. Our home achieved sufficient income over the eight-week summer to cover run, management and finance costs for the year. A good return that we will circle back to later. You can view the listing HERE.

MANAGEMENT

Any property needs managing. Just as other areas such as Kiawah tend to require professional management and oversight of each short-term rental (STR) property listed, expectations in Palmetto Bluff are similar. Rental management companies in Palmetto Bluff fall into two camps. Montage, the hotel group that operates most amenities in the development. They provide a very comprehensive service aligned with their luxury hotel brand and concierge offerings. Management rates for homes managed by Montage are also higher than the independent management agencies, but for justifiable reasons. The second category comprises independent management companies with rates closer to what is typical in and around Charleston. These smaller boutique firms mostly serve only the Palmetto Bluff market and will have a good understanding of the clientele and provide an excellent service. I suppose our management service falls somewhere between the two, being present in other high-end markets outside of Palmetto Bluff but with lower overheads than the hotel group.

We now have another piece of land under contract in Moreland Village and are considering just what to build. To aid in making that determination we examined:

• the scope of products/other homes available in the marketplace
• the likely returns from those products in terms of Average Daily Rates (ADR) and occupancy

then we layered it with our understanding of consumer demand in our “Covid” world, including the desire to feel safe, socially distant and not necessarily have to undertake shared experiences.

FEASIBILITY 

There is a big difference between building a house as one’s personal home and building it as a vacation rental where the cash flow potential takes a more important role. Our existing home has five bedrooms. There are 11, 5-bedroom homes for rent in Palmetto Bluff, of which just one has a private pool (ours). In this Covid world, having a private pool is a distinct benefit and we have built many within our rental portfolio for this reason.

Within the rental market, as number of bedrooms decrease, availability increases, and returns decrease – both because of lesser room offerings and to an extent, more inventory choices. A lot of renters in the luxury space travel with extended family and some with home help and personal chef’s. The highest returns will always be from higher bedroom count.

MARKET ANALYSIS

1.) Average Daily Rate for 2019 – this data looks just at 4 & 5 bedroom homes. It reflects some seasonality but also the increase in popularity of the development (see Graph 2). Our own calculation layered direct 2020 experience plus added for the pool.

2.) Revenue growth 2017-2020 shows the increasing popularity of the Palmetto Bluff development with time. The vertical axis is total AirB&B/VRBO income for the development and the individual figures are average income monthly per home 4/5 bed homes. Remember here, your choice of management firm makes a major impact on the sophistication applied to balance rate and occupation, hence the total income generated. *Figures exclude those rented outside of the above platforms.

3.) – Occupancy for 2019 showing some seasonality.  It’s important to remember here that some can be taken off-market for owner-occupation during popular times.

DETAILS & STYLING

So from this data it is clear that we are looking at going vertical with a 5-bedroom offering. By reducing bedroom sizes, closet & bathroom space and maximizing common areas, something in the range 2500-3000 square feet with exceptional outdoor spaces and perhaps a small auxiliary unit should fit the bill (managing square footage is the easiest way to keep build costs sensible, reducing unheated space is second, selections & finishes are third). We then considered the aesthetics. The local vernacular in Palmetto Bluff is nice but tends to be a similar look across many homes. If you want to stand out, then do not be timid in your design. We are going to build a structure that closely reflects a barn. Barns are monolithic in mass, industrial/agricultural, weathered wood, beams, black iron, simple trim. The guiding theme in Moreland Village is “modern, Southern.” The site can take such a building. A mix of modern space with the height and mass of a barn, incorporating some historic elements, would grab attention. Limiting piazza spaces keep costs down and extending the visuals so outside merges with inside spaces will add  to the wow factor. Add a substantial pool, a garden designed to reflect the farming theme. That’s as far as we have sketched so far, further design deliberations will come in a later blog.

COSTS & PROJECTIONS

How does the math of this enterprise work, taking in the details outlined above as our initial best guess? We apply figures from the ending balance sheet of our recent build ($170/per ft. all construction, $300/per ft. heated and cooled spaces only). With this we can produce a “first level” estimate for costs as a self-build project utilizing ourselves as General Contractor and our internal construction crews where possible.

Next, we can estimate from historical rental data the likely ADR and occupancy projections. We know the finance costs and can be cautious with a 65% Loan to Cost estimate (not Loan to Value). We can examine comps for large homes within the development, also on the riverfront with an STR license to estimate likely finished value upon completion. 

Our initial projections are as follows:

852 Old Moreland Road

2800 square feet, 5 bedroom.

Build
Land – $650,000 (price reflects a riverfront lot in STR district)
Physical Build – $700,000 plus $140,000 contingency
Total Equity – $1,490,000
Estimated value [less selling costs] – $2,256,000

Operating expenses
Taxes – $28,000
Utilities – $10,000
Management – $50,000 (avg 20% Gross Operating Income)
Services – $23,000 (Accounting, insurance, repairs, pool, resort ..)
Total Expenses – $111,000

Income Projections
ADR – $1600 per night
Occupancy 45%
Gross Income $250,000
Debt Service – $31,500

Annual Cash Flow – $78,000
Cash/Cash return – 16%
Appreciation Rate of Return 61%

NOTE: While we believe some of these estimates are conservative, they are better than some of our more established assets in nearby markets like Folly Beach. There is enough equity built into the final number that we can sell the home profitably should it not rent as expected. Besides which, it is high time I undertake another build project in Palmetto Bluff, as I need something to do as my long-suffering wife, Sebrina keeps telling me.

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