cash on cash return for Airbnb’s
Warner Robins, GA · Member since 2021 · 17 posts · 6 votes
Hey BP!
So we've heard it said depending on location and a few other variables that the typical "rule of thumb" for our cash on cash ROI on a rental property we should try to shoot for is anywhere from 8%-12%. (The "base hit" number and the "home run" number). Those who are familiar with STRs know that an 8% cash on cash return on an Airbnb property would be a pretty bad performing property in that realm, since the revenues are so much higher.
So if I’m analyzing a deal for the purpose of AIRBNB, what is a good rule of thumb cash on cash return I should be shooting for when considering all the start up costs and expenses that go into that? What is that “base hit” number and the “home run” number for STRs? I might be overthinking this so let me know if I am !
Thanks !
Does anybody else have an issue with these numbers?
So again, lets use the smokies example because i'm somewhat familiar with the area these days.
Lets say you buy 2,000 3/3 cabin for 825k fully furnished which is now doable.
And lets say you can get 10% loan and put down 82k with a remaining loan of 740k roughly.
Assuming 7.5% interest over 30, you're looking at mortgage payments of roughly 60k a year.
Assuming 110k in gross rents (rents have fallen a bit there too) for that product and 20% property management, you're looking at 22k a year in PM fees. Utilities, repairs, insurance, etc another 15k to 20k a year assuming you're able to push most of the costs down to the guests? You're at about 100k a year or so outgoing.
That leaves you with roughly 10k a year in profits. On 82k investment, thats 12 percent COC return.
And people are saying thats not enough?????
Now look at the overall numbers. Again, this is real estate investing. Rental income is a small portion of the returns. On that loan, the principal paydown is another 7k to 8k a year. Now you're getting 17k to 18k in profits boosting your ROI to 22%. You have depreciation of 28k or so a year. Assuming a reasonable tax bracket, thats an additional 5k to 6k in cash there too. Now you're at 29% ROI? And then add appreciation. This year maybe nothing. Maybe it goes down. But historically it goes up 5 to 7% out there. So lets say over 5 year period it goes up 4% a year, thats an additional 30k a year in appreciation.
Thats over 50k in overall profits/equity that property is generating which, on an 82k investment, you're looking at a return of close to 65%.
Now here's the other thing. That 65% ROI is JUST FOR OPENERS. Over time, your mortgage payment stays the same. But your rents go up so your rental income goes up. Over time, your depreciation goes up. Over time, your appreciation goes up. If this year you get 4% times 825k and make a little over 30k in appreciation, when the property is worth a million, you're making 40ka year in appreciation.
In 10 years, that 82k investment is no longer making you 65% ROI. Its making you 120% ROI.
And, oh by the way, if the rates go back down in the next few years to say 5% to 5.5%, you could refinance and make an additional 12k a year just in interest savings as well.
Quite honestly, you could break even on your cash on cash return but still come out with some amazing wealth if you invest in STR's like that. People just need to account for all the ways that real estate is making them money.
And oh by the way, if interest rates come back down to 5.5% again, that 825k cabin is going to gain an additional 100k in value almost overnight.
20% gets thrown around pretty often
if you’re in an actual vacation market the question is not
“Will it make money”
the question is
“Can I handle dealing with drunk vacationers sleeping in my house”
Personally I wouldn't go below 20% CoC for a STR at the moment. Anything over 50% is a home run and still achievable depending on the market and loan strategy. Example: Buy a 3/3 cabin in the smokies for $650k. With a lot it will rent as a 4/3. Put 10% down - $65k. Should gross around $100k which nets you close to $30k - $35k. General numbers but you get it.
If 6 months of gross rent can pay for the purchase price of the house, you're doing good. It may take 8-10 calendar months to get 6 months of rent. You have to deal with refinery contractors though. Big burly guys that smell like diesel fuel, drive jacked up 4x4s, chew tobacco for breakfast and have neck tats. Wait. That sounds like me, except for the neck tats.
I agree that 20% should be your minimum target.
We payed 158K for ours, 10% down. The gross income the past 2 months of 5K per month. We pay a PM to manage and have a cleaning fee every time. The expenses are around $1,500 a month so everything after is gravy.
You probably made a mistake if you're only making 12% in TODAYs emerging/growing STR market, but I'm just saying...12% returns beat the 30yr S&P500 and that means it is a home run in my book. Returns will settle down in the STR market as the industry grows and stabilizes. Time to get in the game now!
I agree with everyone on 20% CoCR. A quick way to estimate topline revenue for a specific property would be to use a tool like Airdna or Rabbu, then you can run a full pro forma from there.
@Gururaj Iyer I just came across them recently after the same error issues with Airdna you mentioned. We’re almost ready to go live with a property in Miami, so I’ll have an answer for you in a year :)
@Caleb Brown That’s amazing! Where is your peppery located?
I agree that 20% should be your minimum target.
How are you calculating that out?
Out of curiosity, for STR in your area, what are the "draws" that would have folks book STR? Is it similar to Asheville?
I agree that 20% should be your minimum target.
How are you calculating that out?
Out of curiosity, for STR in your area, what are the "draws" that would have folks book STR? Is it similar to Asheville?
Draws are being on the lake and Clemson.
@Gururaj Iyer I just came across them recently after the same error issues with Airdna you mentioned. We’re almost ready to go live with a property in Miami, so I’ll have an answer for you in a year :)
Personally I wouldn't go below 20% CoC for a STR at the moment. Anything over 50% is a home run and still achievable depending on the market and loan strategy. Example: Buy a 3/3 cabin in the smokies for $650k. With a lot it will rent as a 4/3. Put 10% down - $65k. Should gross around $100k which nets you close to $30k - $35k. General numbers but you get it.
Sorry for offering such a late response I just stumbled on this thread, but it seems to me there is only one thing wrong with the scenario you laid out here. You didn't include the closing cost or the amount of money that most people need for the over asking price (Appraisal gap), which in 2021 was very commonplace. If you add the over asking price (appraisal gap) to the down payment, plus the average closing cost of around $10,000 you are easily well above the $65K in your scenario. Many would easily be at $100K of upfront money invested and that doesn't even include the setup costs to get the cabin ready to rent.
Personally I wouldn't go below 20% CoC for a STR at the moment. Anything over 50% is a home run and still achievable depending on the market and loan strategy. Example: Buy a 3/3 cabin in the smokies for $650k. With a lot it will rent as a 4/3. Put 10% down - $65k. Should gross around $100k which nets you close to $30k - $35k. General numbers but you get it.
Sorry for offering such a late response I just stumbled on this thread, but it seems to me there is only one thing wrong with the scenario you laid out here. You didn't include the closing cost or the amount of money that most people need for the over asking price (Appraisal gap), which in 2021 was very commonplace. If you add the over asking price (appraisal gap) to the down payment, plus the average closing cost of around $10,000 you are easily well above the $65K in your scenario. Many would easily be at $100K of upfront money invested and that doesn't even include the setup costs to get the cabin ready to rent.
Those were just quick calculations and not meant to be a deep dive. A lot has changed since then. For example…You’re not finding a 3/3 for $650k in the Smokies. I also don’t love the 10% vacation home loan. If you’re using as an investment, you should get an investment loan.
With that said there are still 20%+ CoC returns to be found even in this market, there just not as plentiful.
Hey @Andy Acosta!
I wouldn't recommend going below 20% so you have some room to have as a buffer. Another good calculation you can use though is gross yield. This is one that my team uses on top of using CoC return so we have more clarity in our estimates (Gross Yield = Annual gross rent / Current market value)
Hope this helps out! Feel free to reach out if you have any questions!
-
Josh
Does anybody else have an issue with these numbers?
So again, lets use the smokies example because i'm somewhat familiar with the area these days.
Lets say you buy 2,000 3/3 cabin for 825k fully furnished which is now doable.
And lets say you can get 10% loan and put down 82k with a remaining loan of 740k roughly.
Assuming 7.5% interest over 30, you're looking at mortgage payments of roughly 60k a year.
Assuming 110k in gross rents (rents have fallen a bit there too) for that product and 20% property management, you're looking at 22k a year in PM fees. Utilities, repairs, insurance, etc another 15k to 20k a year assuming you're able to push most of the costs down to the guests? You're at about 100k a year or so outgoing.
That leaves you with roughly 10k a year in profits. On 82k investment, thats 12 percent COC return.
And people are saying thats not enough?????
Now look at the overall numbers. Again, this is real estate investing. Rental income is a small portion of the returns. On that loan, the principal paydown is another 7k to 8k a year. Now you're getting 17k to 18k in profits boosting your ROI to 22%. You have depreciation of 28k or so a year. Assuming a reasonable tax bracket, thats an additional 5k to 6k in cash there too. Now you're at 29% ROI? And then add appreciation. This year maybe nothing. Maybe it goes down. But historically it goes up 5 to 7% out there. So lets say over 5 year period it goes up 4% a year, thats an additional 30k a year in appreciation.
Thats over 50k in overall profits/equity that property is generating which, on an 82k investment, you're looking at a return of close to 65%.
Now here's the other thing. That 65% ROI is JUST FOR OPENERS. Over time, your mortgage payment stays the same. But your rents go up so your rental income goes up. Over time, your depreciation goes up. Over time, your appreciation goes up. If this year you get 4% times 825k and make a little over 30k in appreciation, when the property is worth a million, you're making 40ka year in appreciation.
In 10 years, that 82k investment is no longer making you 65% ROI. Its making you 120% ROI.
And, oh by the way, if the rates go back down in the next few years to say 5% to 5.5%, you could refinance and make an additional 12k a year just in interest savings as well.
Quite honestly, you could break even on your cash on cash return but still come out with some amazing wealth if you invest in STR's like that. People just need to account for all the ways that real estate is making them money.
And oh by the way, if interest rates come back down to 5.5% again, that 825k cabin is going to gain an additional 100k in value almost overnight.
Personally I wouldn't go below 20% CoC for a STR at the moment. Anything over 50% is a home run and still achievable depending on the market and loan strategy. Example: Buy a 3/3 cabin in the smokies for $650k. With a lot it will rent as a 4/3. Put 10% down - $65k. Should gross around $100k which nets you close to $30k - $35k. General numbers but you get it.
SO...., I just randomly stumbled upon this one. 50% CoC. Wow, those were the days two years ago. So here we are, looking at 7.5% rates. What do we need to pencil out CoC, and should our mindset be todays CoC returns aren't amazing, but they will be once we drop a couple of points and we refinance? i.e. 15-20% CoC returns today might be tops.
Does anybody else have an issue with these numbers?
So again, lets use the smokies example because i'm somewhat familiar with the area these days.
Lets say you buy 2,000 3/3 cabin for 825k fully furnished which is now doable.
And lets say you can get 10% loan and put down 82k with a remaining loan of 740k roughly.
Assuming 7.5% interest over 30, you're looking at mortgage payments of roughly 60k a year.
Assuming 110k in gross rents (rents have fallen a bit there too) for that product and 20% property management, you're looking at 22k a year in PM fees. Utilities, repairs, insurance, etc another 15k to 20k a year assuming you're able to push most of the costs down to the guests? You're at about 100k a year or so outgoing.
That leaves you with roughly 10k a year in profits. On 82k investment, thats 12 percent COC return.
And people are saying thats not enough?????
Now look at the overall numbers. Again, this is real estate investing. Rental income is a small portion of the returns. On that loan, the principal paydown is another 7k to 8k a year. Now you're getting 17k to 18k in profits boosting your ROI to 22%. You have depreciation of 28k or so a year. Assuming a reasonable tax bracket, thats an additional 5k to 6k in cash there too. Now you're at 29% ROI? And then add appreciation. This year maybe nothing. Maybe it goes down. But historically it goes up 5 to 7% out there. So lets say over 5 year period it goes up 4% a year, thats an additional 30k a year in appreciation.
Thats over 50k in overall profits/equity that property is generating which, on an 82k investment, you're looking at a return of close to 65%.
Now here's the other thing. That 65% ROI is JUST FOR OPENERS. Over time, your mortgage payment stays the same. But your rents go up so your rental income goes up. Over time, your depreciation goes up. Over time, your appreciation goes up. If this year you get 4% times 825k and make a little over 30k in appreciation, when the property is worth a million, you're making 40ka year in appreciation.
In 10 years, that 82k investment is no longer making you 65% ROI. Its making you 120% ROI.
And, oh by the way, if the rates go back down in the next few years to say 5% to 5.5%, you could refinance and make an additional 12k a year just in interest savings as well.
Quite honestly, you could break even on your cash on cash return but still come out with some amazing wealth if you invest in STR's like that. People just need to account for all the ways that real estate is making them money.
And oh by the way, if interest rates come back down to 5.5% again, that 825k cabin is going to gain an additional 100k in value almost overnight.
@Mike H
I like where your head is at. It’s big picture and the way I’m thinking of it. I have one more to throw in if my research is correct - take away the management cost and use tools to automate the management
1. likely increases your monthly profit
2. You become material in the management and can apply those tax benefits to your W2. I don’t know how much $$$$ or what % this knocks off your taxes but is one of my main motivators
my issue here is Investor loans are like 20-25% down. In today’s crazy house price market that could clear a new investor out and leave little to scale the business. You’re looking at $150-200k just to get in the game.
Welcome experience from the network here
Hey BP!
So we've heard it said depending on location and a few other variables that the typical "rule of thumb" for our cash on cash ROI on a rental property we should try to shoot for is anywhere from 8%-12%. (The "base hit" number and the "home run" number). Those who are familiar with STRs know that an 8% cash on cash return on an Airbnb property would be a pretty bad performing property in that realm, since the revenues are so much higher.
So if I’m analyzing a deal for the purpose of AIRBNB, what is a good rule of thumb cash on cash return I should be shooting for when considering all the start up costs and expenses that go into that? What is that “base hit” number and the “home run” number for STRs? I might be overthinking this so let me know if I am !
Thanks !
seems like things are changing. it used to be 20% as a base Coc. Now its more like 15% as a metric for base coc with STR
We payed 158K for ours, 10% down. The gross income the past 2 months of 5K per month. We pay a PM to manage and have a cleaning fee every time. The expenses are around $1,500 a month so everything after is gravy.
Would love to know where