A couple years ago I created this quadrant worksheet after numerous buyers asked me, “Can I make money on my mountain real estate investment?”
And the answer is, of course, it depends.
Monetary Variables
While there are many variables that determine the financial parameters of a real estate investment, the two largest monetary variables are:
- Mortgage payment (if any)
- Property manager’s split
Cash, Financing, and Property ManagEment
This quadrant shows four different scenarios of ownership and the different estimated financial returns or payments required. Listed in the order of making the most money, versus the most subsidization, here are the 4 ownership options in this analysis.
- Pay Cash, No Property Management Company
- Pay Cash, Yes Property Management Company
- Finance 80%, No Property Management Company
- Finance 80%, Yes Property Management Company
I recently updated this quadrant to reflect increased real estate pricing in our market and to reflect a generic condo purchase instead of a specific property. Since a nice, updated Keystone 2 bedroom unit would sell for around $700,000, I used that number as the purchase price. I used $800 a month for HOA dues and estimated $40,000 gross annual rental income which is a reasonable prediction. I estimated other expenses for maintaining the condo and plugged those in too!
Watch this video to hear more of the explanation, or continue reading below:
So how does the MONEY look?
If you paid $700,000 cash for this property and managed the rentals on your own generating $40,000 of gross annual rental income, you would be ahead $2,204 a month or $26,448 annually. This would be a 3.77% cash on cash return out of the gate, before considering any tax advantages or appreciation.
If you paid cash and hired a property manager to manage the rentals, and assuming that property manager takes a 30% cut, your annual income is $14,450 or a 2% cash on cash return.
But let’s face it. How many people have $700,000 cash? And with interest rates as good as they are, people want to keep their cash and leverage their real estate.
But once you introduce a mortgage into the equation, you are now not bringing home any money and you are subsidizing this property. (Remember, though, this simple analysis does not take into consideration tax benefits so the actual outlay would likely be less depending on your tax situation. If you want to see a 10 year hold analysis, check out this spreadsheet).
With an 80% loan at 3%, you will pay $1,162 a year or just under $100 a month, if you are managing the rentals on your own. Bring in a property manager, and you will be paying just over $1,200 a month or $14,450 annually to pay for the unit.
The final answer to the question of whether you can make money on your mountain property is, “Yes.”
You can always generate short term rental income on your property when you aren’t using it. Whether or not you can cover your expenses depends on your mortgage and property manager (along with other considerations too).
Considerations For Buying Short Term Rental Properties
Some things to consider when buying mountain properties with the best rental potential:
- Maximum sleeping capacity (See sheet of local government rules)
- Great locations (close to slopes or towns)
- Hot tub/Amenities
- Beautiful photography for your rental listing
- Updated look – no one wants a bedspread from 1985.
We look forward to helping you find your perfect mountain place!
Reach out and contact me with any questions!