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.
Based on these assumptions, the investor’s cash-on-cash return in year one would be 212.5%. This is calculated as follows:
Cash on cash return = (annual revenue - annual expenses) / down payment
Annual revenue = $250/night * 365 days/year * 70% occupancy rate = $52,500
Annual expenses = $10,000
Cash on cash return = ($52,500 - $10,000) / $25,000 = 212.5%To calculate the potential return over a 10-year period, we can make the following assumptions:
- The cabin appreciates in value at 3% per year.
- The mortgage is paid off in 30 years.
- The investor continues to rent out the cabin for 70% of the year at an average nightly rate of $250.
- The investor’s annual expenses increase at 2% per year.
Based on these assumptions, the investor’s potential return over a 10-year period would be $531,250. This is calculated as follows:
Potential return = (annual revenue - annual expenses) * 10 years + appreciation
Annual revenue = $250/night * 365 days/year * 70% occupancy rate = $52,500
Annual expenses = $10,000
Appreciation = $240,000 * 0.03 * 10 years = $72,000
Potential return = ($52,500 - $10,000) * 10 years + $72,000 = $531,250It 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
