We decided to do a little thought experiment. An investor who built a cabin in the Red River Gorge for $240,000, with a $25,000 down payment (be sure to get our strategy infographic that tells you how to do this – or call us) and financed the rest, we can use the following assumptions:
- The investor uses a 30-year mortgage at 5% interest.
- The investor rents out the cabin for 70% of the year at an average nightly rate of $250.
- The investor has annual expenses of $10,000, including property taxes, insurance, and maintenance.
- Closing costs of Total initial costs $7,200 (you will pay closing costs on both a construction loan and the final refinance into a traditional loan after the completion of your cabin build)
Based on these assumptions, the investor’s cash-on-cash return in year one would be 55.87%!
Over a 10-year period the return on investment (ROI), including appreciation of the property and after expenses would be $137,361.80 or a 1574.73% ROI from the initial $32,200 (land purchase + closing costs)!
This is calculated as follows:
Initial Costs:
- Cabin cost: $240,000
- Down payment: $25,000
- Closing costs for the construction loan (3% of the cabin cost): $240,000 * 0.03 = $7,200
- Total initial costs = $25,000 + $7,200 = $32,200
Mortgage:
- Loan amount (cabin cost – down payment – closing costs): $240,000 – $25,000 – $7,200 = $207,800
- Annual mortgage payment (using a 20-year mortgage at 8% interest): You can use a mortgage calculator for this, but it’s approximately $25,351.32 per year.
Annual Expenses:
- Property taxes, insurance, and maintenance: $10,000
Annual Revenue:
- Average nightly rate: $250
- Occupancy rate: 70%
- Airbnb host fee: 3%
- Annual revenue = ($250/night * 365 days/year * 70% occupancy rate) * (1 – 0.03 Airbnb host fee) = $49,087.50
Now, let’s calculate the Cash on Cash Return with these updated numbers:
Cash on Cash Return = (Annual Revenue – (Annual Expenses + Annual Mortgage Payment)) / Total Initial Costs Cash on Cash Return = ($49,087.50 – ($10,000 + $25,351.32)) / $32,200
Cash on Cash Return ≈ ($49,087.50 – $35,351.32) / $32,200 Cash on Cash Return ≈ $13,736.18 / $32,200 ≈ 42.73%
To calculate the potential return over a 10-year period, we can make the following assumptions:
To calculate the potential return over a 10-year period, we have considered the following assumptions:
- Cabin cost: $240,000
- Down payment: $25,000
- Closing costs for the construction loan (3% of the cabin cost): $7,200
- Annual expenses, including property taxes, insurance, and maintenance: $10,000
- Average nightly rate: $250
- Occupancy rate: 70%
- Annual mortgage payment (20-year mortgage at 8% interest): Approximately $25,351.32
- Annual appreciation rate: 3%
Based on these assumptions, the investor’s potential return over a 10-year period would be $394,630 or 2199.68% of initial investment. This is calculated as follows:
Now, let’s calculate the ROI for 10 years:
Total Cash Flow Each Year: Total Cash Flow = Annual Revenue – (Annual Expenses + Annual Mortgage Payment)
Total ROI Over 10 Years: Total ROI (%) = [(Total Cash Flow Over 10 Years + Appreciation) / Total Initial Costs] * 100
After 10 years, the cabin’s value would be approximately $327,838 (including 3% annual appreciation). Now, let’s calculate the ROI:
Total Cash Flow Over 10 Years = 10 * ($49,087.50 – ($10,000 + $25,351.32)) = $137,361.80
Total ROI (%) = [($137,361.80 + $327,838) / $32,200] * 100 ≈ 1574.73%
With the corrected figures, the estimated ROI over a 10-year period, including both rental income and appreciation, is approximately 1574.73%.
It is important to note that these are just estimates and the actual cash-on-cash return and potential return will vary depending on a number of factors, such as the location and amenities of the cabin, the market conditions, and the investor’s expenses.
Sources:
- AirDNA
- Red River Gorge Tourism
- Mortgage Calculator
