Your price-to-rent ratio worked wonders for long-term rentals, but in the world of Airbnbs, it takes a backseat to other real estate metrics. Yield is a similar but more commonly used performance indicator in the STR world. We talk about how yield differs and what it can tell you.

Price-to-Rent Ratio: What It Means for STR Investors (And Why Yield Is A Better Metric)

Short-term rental investments require metrics tailored to their unique market dynamics and revenue patterns.

Yield (annual earnings ÷ property price) is the inverse of price-to-rent and is a more commonly used metric in the short-term rental industry.

Understanding different yield levels (high, moderate, low) can help investors align their STR strategy with specific goals, balancing cash flow, appreciation, and risk tolerance.

The price-to-rent ratio is a go-to metric for real estate investors in the long-term rental market. It’s reliable, easy to understand, and helps gauge whether a property is worth the investment.

If you're familiar with this metric from long-term rentals, you might wonder how well it translates to the short-term rental market. Does it still provide the same insights, or is a new approach needed when shifting to STRs? In fact, there's a similar—but more useful—metric for STRs that we'll introduce to help you make smarter investment decisions.

Knowing where the price-to rent ratio metric excels—and where it falls short—can make all the difference.

The price-to-rent ratio is a foundational metric in real estate investing, primarily for long-term rentals. It’s calculated by dividing the property’s listing price or current market value by the average annual rent. You can use the listing price for a for-sale or recently sold home while it’s still a good indicator of value. If the property has undergone renovations, though, then you’ll want to use an updated assessment of property value in your price-to-rent equation.

For example, a home priced at $300,000 with an annual rental rate of $24,000 would have a price-to-rent ratio of 12.5. This number helps real estate investors quickly gauge whether a property offers good rental returns relative to its price, with a low ratio generally signaling better investment potential.

At the market level, the price-to-rent ratio can be used by using median sales price or home value and median annual rent instead of property-level figures to assess broader trends. Investors can compare different markets and identify areas where median home prices are relatively low compared to the median annual rent, offering stronger returns. This makes it a useful tool for scanning entire regions or cities for potential opportunities.

In the context of short-term rentals (STR), this real estate metric becomes price-to-earnings. You adapt the price-to-rent ratio by substituting annual STR earnings in place of median annual rent. For vacation rentals, however, this metric is less commonly used. 

If you're determined to use the price-to-earnings ratio for STRs, remember to use actual or potential annual STR earnings in place of traditional rental income.

Understand the investment potential of any address in the world.

Is Price-to-Rent Ratio Important for STR Investors?

Yield is the inverse of price-to-earnings, and it's the metric STR real estate investors should use instead. Simply put, it's the percentage you get when you divide your annual earnings by the home price or value. This straightforward calculation provides a clear picture of your return on your rental property investment:

Yield = (Annual Earnings ÷ Property Price/Current Market Value) x 100

Any instance in which you’d use price-to-earnings, you can use yield. The metrics communicate a similar message, but packaged differently. Price to earnings captures the number of years it will take an investor to earn back their initial investment. For a ratio of 12.5, a dozen years of consistent annual earnings will cover the property value at the time of purchase. 

The inverse of price-to-earnings gives you a yield of 12.5%. Yield shows you the percentage of your property value that short-term rental earnings cover annually. 

Let's break the yield calculation down into practical steps:

Calculate your Gross Annual Rental Income—this is the total revenue your STR generates in a year, before any expenses.

Divide that by your investment property’s purchase price or market value.

Multiply by 100 to get your yield percentage

“While price-to-earnings and yield offer similar information, yield stands out as the more useful metric because of its ubiquity in the industry.”

While price-to-earnings is common jargon in the world of long-term real estate investing, it’s not as commonly used to assess investment potential for vacation rentals.

AirDNA’s powerful yet easy-to-use tools make hosting and investing a breeze. This means having every insight you need, all in one place, always up-to-date.

4 Ways Yield Helps You Make Smarter Investment Decisions

Yield Shows You How Quickly You Can Expect Returns

Yield gives you a clear idea of how fast your investment will pay off. A higher yield means you’re generating more income relative to your home price, which translates to a quicker return on investment (ROI). This is especially important for real estate investors looking for strong cash flow or planning to grow their portfolio rapidly.

Example: A property with a 10% yield will generate 10% of its purchase price in revenue annually, meaning you could cover your property cost in 10 years or less, depending on operational factors.

Yield Helps You Compare Different Markets and Properties

One of the greatest strengths of yield is its ability to act as a comparison tool. By calculating the yield on different properties or across various markets, you can make apples-to-apples comparisons and identify where your investment dollars will work hardest.

Example: A property in a high-tourism market like Miami might have a 7% yield, while a property in a less popular but affordable market could have a 12% yield. Yield helps you decide whether the higher revenue in Miami justifies the cost, or if the lower-cost property offers better returns despite the greater risk.

Yield Takes the Guesswork Out of Evaluating Risk

Every investment in the real estate market carries risk, but yield helps you assess how much risk you’re taking on. A high yield might seem appealing, but it could also signal volatility or a saturated market. On the flip side, a low yield may indicate a stable, high-value market with strong appreciation potential.

Example: A low-yield property in a premium area like Aspen may not generate immediate returns, but the long-term value of holding property in such a market could reduce overall risk, especially if the area's appreciation outpaces other regions.

Yield Provides Flexibility for Different Investment Strategies

Whether you’re focused on generating cash flow or building equity for future gains, yield can guide your strategy. High-yield properties can be great for short-term income, while low-yield properties in high-demand areas might be better for long-term appreciation.

Example: If you're in it for quick cash flow, high-yield properties in smaller, less saturated markets may fit your strategy. On the other hand, if you’re looking for long-term gains, a lower-yield property in a blue-chip market could offer higher returns over time through property value appreciation.

For-Sale properties in the AirDNA dashboard provide property prices and projected revenue, which are the figures you need to calculate yield or price-to-earnings on your own. 

Note that the cap rate is calculated for you. The cap rate is essentially net earning potential. It takes into account operating expenses, so it’s lower than yield. In the case of the for-sale property in Panama City, Florida featured above, projected yield is 11% while the projected cap rate is 7.2%.

For existing short-term rentals or other properties that aren’t currently for sale, AirDNA can provide information on actual earnings or revenue earning potential, respectively. Calculating yield would require sourcing property value elsewhere, such as Zillow.

High, Moderate, and Low Yields: What They Mean for STR Investors

Yield is a powerful tool for evaluating potential STR investments, but understanding how different yield levels affect your strategy is key to making the right decisions. High, moderate, and low yields each present unique opportunities and challenges, depending on your goals as an investor. 

A price-to-earnings ratio or yield of 10% can be considered middle of the road, but that value can vary considerably depending on the home values and performance in a market. Let’s break down what each yield range typically signifies in the STR market.

A high ratio or a high yield indicates that a property generates strong earnings relative to its purchase price in an affordable housing market with low median home prices. While this can seem like a dream scenario for cash flow-driven real estate investors, high yields often come with certain trade-offs.

Pros: Properties with high yields typically offer strong cash flow and a faster return on your initial investment. These properties may perform well in markets with high demand or lower entry costs, making them attractive to investors seeking quicker income.

Cons: High yields can sometimes signal higher risk. These properties may be located in markets prone to volatility, seasonal fluctuations, or stiff competition. The income might be less predictable over time, and property values may not appreciate as much in the long term, limiting equity growth.

High-yield investments are ideal for investors prioritizing cash flow, but it’s important to be mindful of market dynamics and potential risk factors.

Moderate yield is often considered the sweet spot for many STR investors. It represents a balance between income generation and long-term appreciation potential, offering a more stable investment profile.

Pros: Properties with moderate yields tend to offer steady cash flow without the extremes of high-risk or low-risk investments. These properties are often located in markets with consistent demand, where occupancy rates are more predictable and property values have room to grow over time. This makes them appealing for investors looking for both immediate returns and future appreciation.

Cons: While moderate yield investments offer stability, the return on investment might not be as rapid compared to high-yield properties. Investors may need to be more patient when it comes to seeing significant gains, as the balance between cash flow and appreciation develops over time.

For investors seeking a balanced approach—one that doesn’t sacrifice short-term returns or long-term growth—moderate yield properties are often the most attractive option.

Low-yield is often found in higher-cost housing markets, such as Cape Cod. Cape Cod has a 6% yield because the housing market is expensive and the visitor base is stable and affluent. Low yield markets are where property prices are steep, but long-term appreciation or strategic benefits could outweigh the lower income. This approach is more suited for investors with a long-term vision.

Pros: Low-yield properties are typically located in premium housing markets where property values tend to appreciate over time. These investments can offer advantages such as tax benefits, prestige, and lower maintenance demands. Investors might also experience greater property value growth, providing equity gains that can significantly increase the property’s worth over the years.

Cons: The downside of low yield is the reduced immediate cash flow. Investors will often need to wait longer to recoup their initial investment, making these properties less appealing for those seeking quick returns. However, for those focused on long-term wealth building, low yield can still be a valuable part of an investment portfolio.

Low-yield properties are well-suited for investors who prioritize long-term appreciation and are willing to trade immediate income for greater potential value growth over time.

Each yield level has its place, depending on your goals—whether you’re aiming for immediate cash flow, steady growth, or long-term appreciation. The key is aligning the right yield strategy with your investment objectives.

Best Cities for STR Investments Based on Yield

AirDNA’s annual Best Places to Invest report is your go-to resource for exploring insights on Airbnb investment opportunities. Our rankings of promising short-term rental markets takes into account a number of factors, not the least of which is yield. Below are the top 10 best places to invest, but we encourage you to read the full report for a longer list of destinations and more detail.

Other STR Real Estate Market Metrics to Consider

While yield is a crucial metric for STR investments, it's not the only number you should be crunching. Here are other key metrics to round out your analysis:

Capitalization rate, or cap rate, is similar to yield but it uses net operating income instead of gross revenue potential. 

Cap Rate (%) = (Net Operating Income / Purchase Price) * 100

Cap rate is a stronger metric than yield because it gives investors a more realistic idea of earning potential (net vs gross). The more data to inform revenue projections, the better. 

When you explore For Sale properties in a given market in the AirDNA dashboard, we provide an estimate of operating expenses, net operating income, and cap rate. Our operating expenses estimate includes management fees, lodging tax, and property tax. You can customize your estimate in the Financial Calculator to include additional costs such as cleaning fees, maintenance, insurance, utilities, and more. 

Cash-on-cash return is a great complement to yield, especially for investors using leverage. It measures the annual cash flow of a property relative to the actual cash invested.

Cash-on-Cash Return = Net Income/Cash Invested * 100

This metric is particularly useful for real estate investing scenarios involving mortgage payments, as it considers the actual cash outlay rather than the total property value. 

If you used a loan to purchase the property, for example, your net income would take into account both operating expenses as well as annual mortgage expenses. Your cash invested would be the down payment as well as closing costs and any other startup expenses needed to make the space renter-friendly. 

Our article dedicated to cash-on-cash returns explores this topic in greater detail and with examples.

Occupancy rate is a critical metric for short-term rental (STR) investors, providing insights into a property's performance and market demand. It helps gauge how often your property is booked and it can inform pricing and marketing strategies.

Occupancy rate is calculated by dividing the number of reserved days by the total number of available days in a given period. Listings with no reservations are excluded.

Occupancy Rate = Reserved Days / Total Available Days

For example, if a property was available for 150 days and occupied for 75 days, the occupancy rate would be: 75 / 150 = 50%

Plan your STR strategy based on real booking activity and trends—plus, see how things change year over year.

ADR represents the average rental income earned per paid occupied night and is a key indicator of your pricing strategy. It takes into account both nightly rates and any additional fees, like cleaning, to provide a clearer picture of your rental rate and the revenue you're generating from each booking.
ADR = (Total Rental Revenue, including Daily Rates + Cleaning Fees) ÷ Number of Booked Nights

For example, if your total rental revenue (including cleaning fees) for a month was $5,000 and you had 25 booked nights, your ADR would be calculated as:

A higher ADR typically indicates that you're effectively maximizing the value of your property. However, it's important to balance a high ADR with strong occupancy rates, ensuring your pricing isn't too high to deter potential guests.

STR vs. Long-Term Rentals: Key Differences in Investment Strategy

Investing in Airbnb vs. renting long-term properties requires a shift in strategy and mindset. Each approach appeals to different types of investors and comes with its own set of opportunities and challenges. Here are some key differences to consider:

STRs often experience more variable income due to seasonal fluctuations in demand. While this can lead to periods of lower occupancy, it also allows for premium pricing during peak seasons. This can result in higher overall returns compared to long-term rentals.

For example, a beach property might see occupancy rates of 90% or higher during summer months with premium rental prices, but drop to 40-50% in the off-season. In contrast, a long-term rental would provide steady income year-round, but without the flexibility to adjust prices during periods of high demand.

STRs typically require more hands-on management than long-term rentals. This includes:

Managing bookings and guest communications

Adjusting pricing based on demand fluctuations

Ensuring compliance with local STR regulations

While this higher operational intensity can be challenging, it also provides opportunities for hosts to differentiate their properties and maximize returns (especially if you manage your Airbnb remotely). 

STRs often have different tax implications compared to long-term rentals. Some key differences include:

Deductions: STR hosts may be able to deduct a wider range of expenses, including furnishings, supplies, and even travel costs related to managing the property.

Occupancy Thresholds: The tax treatment can change based on how many days you personally use the property versus renting it out.

Local Taxes: Many jurisdictions impose specific taxes on STRs, such as hotel or occupancy taxes.

Given these complexities, it's advisable to consult with a tax professional familiar with STR regulations in your specific market.

Remember, in the world of short-term rentals, not all metrics are created equal. The key to success in evaluating investment properties lies in choosing the right tools for the job and applying them with a deep understanding of the STR market's unique characteristics.

Gain insights into the revenue and occupancy trends in your market.

Price-to-rent ratio falls short for STR investments. Learn why yield is the superior metric.

Price-to-Rent Ratio: What It Means for STR Investors (And Why Yield Is A Better Metric)

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