It is easy to draw a parallel of this to one’s life, in that we chase an existence predicated by the strings and bindings of our society (stone), when in fact we should think about remaining flexible and nimble (rolling stone). There is a case to be made that by thinking outside the box, you can achieve a life that offers a more unconventional path, but one equally satisfying.

For this discussion let’s first examine what we need. Keeping up with the Joneses is expensive. New cars, expensive holidays, designer clothes have a cash cost. You may like those, but you don’t need them. What if you step off that moving path on to another one, not necessarily more humble but certainly more considered? You spend less than you earn and continually salt that away as investments. This is not merely the earnings we contribute to a pension, it’s much more than that. In our case, our assets were in building our own homes and businesses; for others, it is the stock market. Your goal is faceted; you need to limit your outgoings and grow your assets. However, it’s also achievable. In many of the places you will journey to, your cost of living will fall precipitously, your outgoings diminish. As a general guide, take your expected expenditure per annum and assume your retirement nest egg will have to be 20 or 25 times that.   

Still sitting down, but feeling this is impossible? It’s not. A random statistic I heard recently was the average middle-class retiree from Florida to North Carolina has a net worth of something in the region of $1.2M. House, savings, 401K, possessions, and cash. That’s just the average; if the direction of this content resonates, then “average” is likely not you.

So just how to achieve your goal in a reasonable timeline? As investors we have had quite a journey in life so far, most of which have not followed traditional thought lines. But leaving aside that journey, let’s look at a home we built last year in Palmetto Bluff, Bluffton SC.

Costs:

Annual Income:

Now, this house is an operating business, and that business has necessary overheads. Within the rules of the US Tax system, many of those overheads are tax-deductible. So the remaining funds are available to support your ongoing lifestyle and not sunk into maintenance and operation of what is typically your most cash-hungry asset. We can all live on that and have an adventure-filled life at the same time. Additionally to that, your home becomes your inflationary hedge. It’s your major asset, and the value will rise with general real estate prices. Cash does not behave in this way. This is not far removed from the average net worth of the average retiree in these parts, so it’s not outrageously unachievable is it? Important also that their need for 20 to 25 times outgoings just dropped to 10 times as the major cash-burning asset has been eliminated. Try re-reading this paragraph a few times. The answer to how it is achievable is clearly outlined.

I spoke of Palmetto Bluff, though in truth, 2×4 bed homes on Folly Beach, 1×5/6 bed homes on Isle of Palms, 2×3 bed homes in downtown Charleston or many other destinations will achieve the same results. The caveat here is that you have a home to live in, and when you do not need to be there, you are free to roam, and your home provides the income to support that wanderlust. It would help if you planned ahead for this; we can be out of our home in 24 hours, leaving little trace of our existence. Nesting is not a choice of this lifestyle.

I could go on about our own journey, but I’m not going to do that here.   

I’ll highlight instead one of our clients, Janet and John, let’s call them J&J for now. They are well educated, have good white-collar positions in a major city, no children at the moment. An upwardly aspirational and stereotypical American dream. They are also observant and open to thinking outside of the box.

J&J recently bought a house in Palmetto Bluff in the area allowing short-term rental. They often work from home, and the definition of “home” for them, is now basically anywhere connected to WiFi. We will market their new home for them when they themselves are not in residence. It will perform well given the market statistics. In their late 30’s and following their instincts, the nomadic lifestyle is perhaps now only a few years away. We all need a purpose in life, and retirement is not the goal of everyone. Freedom of choice, though, that’s an absolute home run.   

Note: Our Luxury Simplified Retreats team manages an ever-growing portfolio of Charleston luxury vacation rentals both downtown and on Folly Beach. When it comes time to choosing a company to manage your property, they know you’re entrusting them with a significant asset and it’s their job to maintain and secure it while you’re out of town.

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.

There is a lot of press these days in Charleston SC regarding property investors, from those that are behind mega development projects to the second home buyer looking to capitalize on Charleston’s lucrative short-term rental market. Savvy investors are much more than those individuals that simply purchase a second home from afar and have it managed by a local property management firm, overseeing their check-ins and housekeeping needs. Investors are those that take a hard look at the returns on a property, cost of maintenance and finance, revenue projections and market trends. When purchasing an investment property it’s vital to understand that it will be a brick and mortar investment within your overall investment portfolio. If you’re beginning to think of becoming an investor in the Folly Beach market, there are a few things to consider. Let’s dive into whether investing into a short-term rental or long-term rental is the ideal investment for you. 

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Nothing in life is free. Not that which comes easily or that which we work for.  The cost may be intangible but has a measurable effect on time, finances, effort, friendships, at oftentimes even family relationships. In the grand scheme of our lives, and resisting a slant to the cynical, everything has a cost, though some being more overt than others.  If we were to meet randomly and I said that you could own a home in a romantic lowcountry setting, just down the road from Charleston, that lets your family step aside from the hubbub of your life, and that this home could be yours at no-to-minimal cost to yourself, appreciate as the years roll by, and bring a little cash flow along the way would you think me deluded, mad, conspiratorial?  We are doing just that in Palmetto Bluff and here is the story of how.