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ROI Breakdown – 258% Return On Vacation Home

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SUMMARY:

Today, I’m going to breakdown the ROI on my investment property that is just a couple hours outside Toronto and what that could mean for you!

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This is going to be a little different than the normal videos on this channel. What I’m going to do is show you the spreadsheet that I use to calculate the ROI on an investment property for short term rental. Then, I’m going to show you how we were able to project a 258% minimum ROI on our recent investment in the first year. 

If you’re interested in investing in short-term rental properties, I will be working with a small, intimate group of students for six months here, helping them to invest in their first property for short term rental. 

Book a call with me to start investing in Airbnbs: 

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Now most people think about the cash on cash return meaning the return that you’re getting from the actual cash flow. That’s only one small area of your return. When you’re investing real estate, you’re going to be building up equity from paying down the mortgage. You’re also going to be profiting off forced appreciation from renovations, or whether that’s just a 2% annual standard appreciation on the property. 

Bear in mind, these are the most conservative projections that I have. You’ll see we’re only grossing about $50,000 in annual revenues for the property. This property in its location as a long term rental would only generate about $28,000 a year. So it’s still a huge jump from a long term rental and are based on 2018 and 2019 data, not the inflated 2020 values. 

We bought this property for $520,000, not including closing costs and other acquisition costs.  We took out an $80,000 loan for the renovations at an interest rate of about 4%. The last thing is just going to be our interior design and photography once it’s ready for Airbnb. 

Now, next comes the projected income. Our average nightly rate is about $315. We’ve put in a sauna and a hot tub to make it attractive in the winter. One of the big keys to making a property perform in the low season is making sure that your property stands out. 

The potential annual income, if it is rented every single night, is about $115,000. Now, our projected occupancy rate is only about 44% in a worst case scenario. That means an annual gross revenue, inclusive of cleaning fees and all these projections of ~$55,000. We managed to get this property at 5.19% down payment with a 1.45% interest rate and amortization of 25 years, leaving a total monthly payment of $2,038.58. 

You need to run this type of analysis on your property. It’s important to understand what costs are applicable to you and make sure that you account for them. 

We’ve got an average monthly cash flow of $29.66. Looks like a really bad deal when you look at that. 

Now, throughout that year, we’re also going up paying down principal on that mortgage. About $16,000 of that is going to be building up equity in the property paying down the principal. 

Now, we’re conservatively setting the post-renovation property value at about $700,000. We got the property for an absolutely fantastic deal and we’ve done our renovation strategically. So you want to make sure that you’re buying a great deal and make sure you do strategic renovations. 

Meaning the appreciation ROI is absolutely insane at 270%. So you combine all those up, and you’re looking at a combined ROI in the first year in our worst case scenario of 315%. 

Now, let’s say that we get the occupancy rate up to about 60%, which is more in line with the lower end of realistic. Now suddenly, you get that cash on cash return of 38%, almost 39%. Again, I do like to always make sure on investment that the absolute worst case scenario is still something I can deal with. 

Now we free that up so that now we’re earning a 5% cash on cash return, even in the worst case scenario. Now again, if you bump this to 60%, then you’re closer to 43%. The video then goes through how the rest of the numbers shape up. 

There’s also some really awesome ways to do this with money partners. So you can get someone who can get a really strong mortgage capability, get a really great interest rate, and they put the money in, but you still get the 50% ownership in the deal. We’ll talk about that as well. 

A big focus of mine over the next couple years here is working with people to help them add to their passive income and help them build wealth. Just click the link above, you can schedule a 15 minute call with me, I’d love to walk through this with you in more detail. 

VIDEO TRANSCRIPT:

What's up guys, it's James here and in today's video, I'm going to talk to you about a recent investment I made into a short term rental that we're projecting is going to be bringing in conservatively about a 258% ROI in year number one. Now I'm going to break that all down for you in detail. And I know this number sounds pretty unbelievable. But I'm actually going to show you how we were able to do that by using a combination of different real estate investing strategies, and short term rental profiting strategies to make that happen and have such a great return on investment.

Now, if any of you guys are interested, I am going to be working with a very small group of people in the coming months, very selective group of people who are serious about getting started investing their capital into short term rental properties that they can use to get a really great return on their investment. And they can also use to enjoy themselves as a vacation home. So if that's something that you're interested in, again, it's not going to be a good fit for everyone.

Only for the people who are really serious about investing into property for short term rental and getting started with real estate investing, then just let me know in the comment section down below, if you have got this video for an email from me, then respond to that email, let me know. Or you can go to the about section on my channel here on YouTube. And you can get in touch with me that way. So whatever it is, if you want to get in touch with us, and you want to be one of those few people that we're going to work with, it is going to be a very, very small and intimate group of people I'm gonna be working with.

So if you think that that would be right for you, then just reach out and let me know. Otherwise, for any of you guys who are interested, we do have free trainings linked down below that are going to help you to build a business managing other people's properties on Airbnb as well. So I welcome you and invite you to check those out as well. Now let's start off by talking about this property. So if you've checked out any of my other recent videos I talked about a little bit, right bought a property in cottage country north of Toronto, and I managed to get this property for a great deal about $100,000 below asking price.

And this is in a market where most properties out that way are going for about 70 to $100,000 over asking price. And that was a combination of some great negotiating tactics and skills that we deployed. And then also just finding the right deal that's a really important piece is it's just about finding the right property that is going to be a good sort of arbitrage opportunity, where it for whatever reason might not be as desirable to other people buying vacation rooms, or in this case cottages, but is very desirable for a short term rental. Now, for us.

For me personally, the reason that this property was so attractive, and that it fit that mold was because it needed quite a bit of renovation work to be done. A lot of people buying cottages want something that is moving ready, it's a vacation home for them, and they don't really want to be spending time renovating that property. So this property, having a need for some renovations was actually not super desirable to the rest of the buyers in the market. But for me, it was great because it means that in a year from now I can do a cash out refinance and pull out almost all of the money if not all of the money that I have invested into the deal for the down payment and the closing costs and what have you.

So to really great deal from that respect. And then let's also talk about how I'm going to be able to pull off these numbers of a 250% 58% return on investment in your one. Now bear in mind, that is also our most conservative projection of how the property will perform. So I'm basing that off of other properties and how they perform in 2019, for about four and 500 properties. Now in 2020, the numbers were substantially inflated, and they likely will be in 2021, as well. So it's likely those that those numbers are going to be drastically outperformed in reality, our property is also a six bedroom property. So it's quite likely it'll do better than the four and five bedroom properties that I was comparing our numbers to.

So yeah, I have a whole separate video where I talk about why it's important to be conservative with your projections and how to properly run projections for a short term rental, whether that's one that you're buying, renting or managing on a percentage management fee model. So the one aspect of that return is of course, the cash on cash return. Now we have pretty minimal amount of money in the deal, because I was actually able to get a really low interest rate loan for a lot of the renovation expense. And we're also able to get pretty small downpayment on the property. So I don't have a ton of my own money tied up in the property.

Now that's a really great way to do any of your deals, if you can manage to structure them that way. And again, that's something that we're gonna be talking about with this very, very small intimate group coaching that I'm going to be doing with some people who are going to be interested in investing in properties for short term rental. So there's a whole bunch of strategy behind exactly how to do that and how to structure your deals properly, so that they make a great ROI. But the first part is just making sure that we have a pretty minimal amount of money in the property.

And then there's the cash on cash return that we're going to earn on that which of course is generated from the income less all the expenses. So we're projecting anywhere from 50 to $70,000 per year in gross annual income for the property from how on short term rental. Now, a big component of that is obviously, I know all the strategies to make the property perform exceptionally well. So our worst case scenario projection is $50,000 per year, and it could go all the way up to $70,000. or potentially even beyond that.

But for year one, again, we want to stay relatively conservative with our projections, that's a whole other aspect of having a successful vacation rental is just knowing how to optimize its performance, because it can make a very sizeable difference on the amount of money that you bring in, and therefore the return on investment that you're now the second way that we're earning return on our money through messing in this property is our equity ROI. So your cash on cash return is just the net amount of money that you're making every single year after you pay for all your expenses, such as the operating expenses, your holding costs, like your mortgage, your insurance, all those sorts of things.

Now, the equity appreciation is the or the equity ROI, I should say, is the amount of equity that you're building up in the property, because obviously, each month you're paying that mortgage, and a portion of the mortgage is going towards interest, but a portion of the mortgage payment is also going towards the principal pay down, that means you're building up equity. So in our case, there's over $15,000 in equity that we're building up every single year, and we're getting more equity in the property. So that adds substantially to the overall ROI. It's important to realize, though, that that ROI that returns specifically is still tied up in the property.

So that's not an ROI that we actually get out in cash that we would do with the cash on cash ROI. The cash on cash ROI is actually money that we have leftover that's in a bank account in completely liquid form. Whereas the equity gain, the equity ROI is still tied up in the value of the property. The third way that we're earning a return on investment is through appreciation ROI. Now, again, that's another type of return, that's going to be tied up in the value of the property. So we're not actually going to realize the gains on that until it's time to actually sell the property. And there's a couple of really cool ways to make sure that you don't get hit with a big tax burden when you realize that gain as well.

So again, that's another part of the strategy that I'm going to be talking about with the intimate select group of people I'm going to be working with. But there's appreciation gain is about 2% per year averaged out. Now, what's really cool about that is that although you're looking at it, you think, well 2% of 258%, really not a substantial number. But it's important to remember that that 2% appreciation is on the total value of the property. So let's say you buy a property for half a million dollars. Now 2% gain is on the half million dollars, though, you likely wouldn't have bought the property for cash, you'd probably have a mortgage on the property. So let's say you only have maybe 50, or $100,000 in that property, where you're going to be adding 2% on 500,000, even though you only have 50, or $100,000 into the deal.

So your actual gain on your invested capital is quite a bit more substantial than just that 2%. Now, when you add all those numbers together, based on the projections that we've run for the most conservative scenario, they add up to about 258% ROI that's in year one. So it's important to remember as well that because we are doing a renovation, it's going to give us a substantial return on investment by increasing the value of the property that is going to boost up that ROI in year one specifically at which one we're going to do a cash out refinance. And we're going to be able to have about a 70 to 80% ROI every year after that. Now again, this number could improve quite substantially if we are able to outperform our most conservative projections, which there's a very good chance we will be able to do. And that 258% ROI is something that we are only going to be earning for the year for the first year.

Though, that being said, the return on investment in year two at about 70 to 80% is still exceptionally strong. So all that being said, it's a really, really great strategy to start investing in short term rentals. If you're looking to build your wealth long term, it's all something that you can do with relatively minimal money up front. There's creative ways to structure a deal and ways you can partner with people. So you actually don't have to have a tremendous amount of money in order to actually get started. Now that being said, it is easier if you do have some money set aside that you're looking to invest. Now, if you think about it, the average investment return if you look at the average rate of return that you're getting on investment, when you invest into the market average over a long period of time is about 8%.

So if you're able to earn 258% in year one, that's obviously incredible. And that being said, it is a lot more active to be buying properties for short term rental than it is to just be dumping your money into a stock. So it's all about the individual investor, what you're looking for in your investment. Personally, I don't mind putting a little bit of extra time and energy into my investments. If I know that they're going to yield me a much more substantial return. So again, I don't get the luxury of just being able to put money into a stock and set it and forget it. There is more involved like for example, just having to learn how To buy properties and having to do different things, as far as actually managing the property, there's lots of different solutions, you can partner with people in order to minimize the amount of effort you're putting in.

And so if you have more money, and you want to just go ahead and hire or partner with people, in order to reduce the amount of time you're gonna be putting in, obviously, the return will be reduced. But with 258% return, there's a lot of margin there to be handing other things off and still be getting a substantial return with a minimal amount of time. Again, all that just depends on your individual perspective and goals. As an investor, what you're looking to get out of the property, whether you prefer to be more hands on and increase your ROI, or whether you'd prefer to take a slightly decreased return on your investment, but take a much more passive role. At the end of the day, it's never going to be quite as passive as if you're just dumping your money into stocks.

But it can be relatively passive or more active, if you'd like it to be. So yeah, I hope that's been really interesting for you and help helpful for you to envision what their turn possibilities really are in short term rental. Now, again, if you want to learn more about this, and you want to get a more in depth breakdown of how all this works, and you think that working together with me hand in hand to invest in a property for short term rental might be a good fit. And I'd highly recommend you just let me know in the comment section down below, and we can get in touch.

Or you can reach out to me on social media, Instagram, Facebook, or you can reach out to me by email, you can either just email me back if you already have my email, or you can go to the about section on our YouTube channel here and find my email there and reach out to me that way. Again, it's gonna be a very, very small, intimate group of people I'm going to be working with, it's not going to be a great fit for everyone. But I am going to be working with just a handful of people to help them get started investing in properties for short term rental.

So if that sounds like something that's up your alley, something you'd be interested in, then please be sure to reach out. Now with all that being said, I know a lot of you here on the channel are not in a position where you're looking to actually buy properties for short term rental and you rather earn an income managing properties on Airbnb and short term rental without having to put money into a down payment into renovation costs into furnishing or even into renting any properties. So if you want to get started managing other people's properties on Airbnb and short term rental, and get started without investing any of your own money at all into getting the business off the ground and getting your first couple of properties, then I highly recommend you check out the free training, it's linked in the description down below, I'm going to walk you through how I got started and how I was actually able to build a six figure income in under 12 months from managing other people's properties on Airbnb.

That's exactly how I built myself up to the position I'm in today, we're actually am able to invest in buying properties for myself for short term rental. So if you want to get started that way, and that's something you're interested in to get your feet wet, get yourself started in the game without investing heavily in actually buying properties or renting them or anything like that, I highly recommend checking out that free training, it's linked in the description down below is completely free. You don't have to have any experience whatsoever, or any kind of technical background or skills in order to get started and succeed with it. I've worked with over 500 students now teaching them how to do this.

So I guarantee you that you can do this as well if you have the right training, the right tools, and the right amount of work ethic that you're going to put into it. So again, I highly recommend checking that out in the description down below. If you have any thoughts, any questions, any concerns, anything you'd like me to talk about in upcoming videos, just let me know in the comment section down below. If you liked this video and got value from it, just please take a quick second to hit that like button and let me know it does help me out tremendously with YouTube's algorithm.

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