Cash-on-Cash Returns • DADU Investment

Curious about the potential returns of investing in a Detached Accessory Dwelling Unit (DADU)?
Let’s explore two interesting scenarios that showcase how different investment approaches can affect your bottom line.

We’ll follow two investors, Alex and Sam, as they pursue DADU investments using different strategies. Their examples demonstrate how these investments could yield cash-on-cash returns ranging from 10% to over 20%.

Scenario A:
Alex’s Full Cash Investment

Alex has $200,000 in savings to invest in a DADU.

  • Total DADU cost: $400,000
  • Alex’s investment: $200,000 + $7,000 (3.5% fee) = $207,000
  • Annual rental income (before taxes/fees): $48,000
  • Alex’s share of income: $24,000 (50%)
  • Alex’s cash-on-cash return: $24,000 ÷ $207,000 = 11.6% per year

Scenario B:
Sam’s Partial Cash + Borrowed Funds Approach

Sam has $50,000 in cash and decides to borrow the rest.

  • Sam’s cash investment: $50,000
  • Borrowed amount: $157,000 (includes 3.5% fee)
  • Annual HELOC interest (8%): $12,564
  • Sam’s share of rental income: $24,000
  • Net income after HELOC interest: $24,000 – $12,564 = $11,436
  • Sam’s cash-on-cash return: $11,436 ÷ $50,000 = 22.9% per year

CASH ON CASH RETURN • KEY TAKEAWAYS

These scenarios illustrate the potential of DADU investments to generate
attractive cash-on-cash returns, ranging from 10% to over 20%.

These examples highlight the flexibility in investment strategies, from full cash investments to leveraged approaches using borrowed funds. While Alex’s full cash method offers a solid 11.6%, Sam’s leveraged approach demonstrates how a smaller initial investment can potentially yield higher percentage returns (22.9%).

Potential for Attractive Returns

Both scenarios show the potential for substantial cash-on-cash returns, ranging from 11.6% to 22.9%. This illustrates that DADU investments can offer competitive returns compared to traditional investment vehicles.

Leverage Can Amplify Returns

Sam’s scenario highlights how using borrowed funds (leverage) can potentially increase cash-on-cash returns.

 

 

Initial Investment Amount Varies

The scenarios show that DADU investments can be accessible at different entry points. Alex invested $207,000, while Sam started with $50,000 out-of-pocket.

Partnership Opportunities

Both scenarios assume a 50/50 partnership, demonstrating that DADU investments can be structured as joint ventures, potentially reducing individual capital requirements.

 

Consideration of Ongoing Costs

Sam’s scenario illustrates the importance of factoring in ongoing costs like loan interest when calculating returns. 

Market Dependence

The rental income ($4,000 per month) plays a crucial role in these returns, and very realistic in the Greater Seattle Market. We provide research in local rental markets thoroughly to ensure realistic income projections.