cash on cash return for Airbnb’s

[Andy Acosta]

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 !

[Mike H.]

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.