What Is a Good Cash-on-Cash Return for a Vacation Rental?

Key Takeaways

• Cash-on-cash return measures annual ROI as a percentage of initial cash investment, providing insight into property profitability and efficiency of cash flow utilization.
• Cash-on-cash return is a valuable metric for STR investors because it offers a clear picture of the annual cash flow's relation to your initial investment. This helps you evaluate profitability to make informed investment decisions.
• Various factors—like location, purchase price, and rental income—impact what is a “good” cash-on-cash return.

Real estate investors want to see an actual return on their investment. Why else would they invest in the first place? Metrics like cash-on-cash return (also called CoC) provide a no-nonsense look into how each dollar works for you, showing how much an investment earns compared to the actual cash invested. 

In this article, we'll take a closer look at why cash-on-cash return is a crucial real estate investing metric. We’ll also learn how to calculate this metric and know for sure what is a good cash-on-cash return when investing in short-term rental properties.

What Is Cash-on-Cash Return?

Cash-on-cash return measures the annual return on investment (ROI) as a percentage of the initial cash investment of a property. It's a fundamental metric that real estate investors use to evaluate an investment property’s profitability, taking into account the total cash invested rather than the property's overall value.

Investors can use cash-on-cash return metrics to:

• Measure annual ROI as a percentage of total cash invested
• Evaluate profitability based on actual cash expenditure
• Consider the impact of factors like down payment, closing costs, and operating expenses
• Indicate how efficiently annual cash flow is utilized in the investment
• Assess the feasibility and potential profitability of an investment.

As Host Financial’s Adam Windham puts it, “A ‘good’ cash-on-cash return is always a relative number that is different for every investor and investment type.” 

Why Is Cash-on-Cash Return an Important Metric for Real Estate Investors?

Unlike other real estate investing metrics that focus on an investment property’s overall performance—such as the cap rate or internal rate of return (IRR)—cash-on-cash return provides a clear picture of annual cash flow and its relationship to the initial cash investment.

Investors rely on cash-on-cash returns to make decisions about an investment’s feasibility and potential profitability, both of which are important when considering financing options. 

Calculating this metric helps investors determine the actual return on their investment based on 

how much cash they've put into the property, accounting for factors like down payment, closing costs, and operating expenses. 

Cash flow is a must in short-term rental properties, so learning to understand and maximize cash-on-cash return makes a huge difference in building a successful and lucrative investment portfolio. 

How to Calculate a Good Cash-on-Cash Return in Real Estate

If you’re not sure how to start your cash-on-cash calculation for a property, fear not. We're going to demystify this essential metric step by step. 

Determining what is a good cash-on-cash return will depend on total income and whether or not you need a loan to invest. Let's say you're eyeing a cozy short-term rental property. Here’s how to crunch the numbers to find the CoC:

Cash-on-Cash Return Formula With a Loan

• You buy a $400,000 property using a 30-year fixed conventional home loan. 
• The down payment is $100,000, and the closing costs and startup expenses needed to make it renter-ready amount to $20,000. Your total initial investment is $120,000. 
• The gross rental revenue for your rental property is $75,000.
• The annual cost of insurance, utilities, cleaning, maintenance, and other operating expenses equals $20,000. 
• Your monthly mortgage payment (including interest payments) is $2,200, totaling $26,400 a year. 

Calculate your net operating income (NOI). Subtract your operating expenses from your gross rental revenue. 

Gross rental revenue - operating expenses = Net operating income

$75,000      -       $20,000         =          $55,000 

NOI doesn't traditionally take into account your annual mortgage payment, but we do want to include it in our calculation for CoC in cases where a loan was used to purchase the property:

$55,000      -       $26,400       =          $28,600 

Now, calculate cash-on-cash return. Divide net cash flow by total cash invested. 

(Net income/cash invested) * 100  = cash-on-cash return 

(   $28,600   /   $120,000   ) * 100  =  23.8%

The cash-on-cash return on your $120,000 investment is 23%.

Cash-on-Cash Return Formula Without a Loan

If you were able to purchase the $400,000 property in cash, your initial investment costs would amount to $420,000 (which includes $20,000 for closing costs and getting the property ready for renters). 

Let’s assume your gross rental revenue remains $75,000 and your operating expenses remain $20,000.

Calculate net operating income. Subtract the annual operating costs from gross annual revenue. 

Gross rental revenue - operating expenses  = Net operating income

         $75,000            -              $20,000        =           $55,000 

Now calculate cash-on-cash return. Divide net cash flow by total cash invested.

(Net income/cash invested) * 100  = cash-on-cash return 

(   $55,000   /   $420,000   ) * 100  =  13%

The cash-on-cash return on your $420,000 total investment would be 13%. Note that, in this case, the cash-on-cash return is the same as the cap rate. The difference between cap rate and cash on cash return is the fact that the latter allows you to factor in a mortgage payment if it pertains, whereas the former does not. The next section of this article breaks down the differences between these metrics.

Voila! You’re now ready to calculate your cash-on-cash return like a pro. There’s just one more step: weighing cash-on-cash return and risk. 

In the examples above, you can see that a lower down payment can boost the expected cash-on-cash return of property. However, it also boosts your monthly mortgage payment. If your actual rental revenue is less than you predicted, the cash-on-cash return can more easily swing into the red (a net loss) with a high mortgage payment. 

That doesn’t mean you should put all your cash into your next property, but it does mean that it’s critical to invest using accurate data on projected rental revenues. The more accurate your projections, the more accurate your cash-on-cash return calculation will be. 

Cash-on-Cash Return vs. Cap Rate vs. IRR

Real estate investing metrics help to tell a story about each investment opportunity. Understanding the differences between cash-on-cash return, capitalization (cap) rate, and internal rate of return (IRR) will be key to mastering the game. 

Here’s how each metric plays a unique role.

While CoC return focuses on a rental property’s immediate cash flow, the cap rate provides a snapshot of its overall return relative to the property’s market value. Meanwhile, IRR takes into account the time value of money and provides a holistic view of the investment's performance over its holding period.

Equity Dividend Rate (EDR) is another metric that some investors use, often in tandem with the others mentioned here. The equity dividend rate calculates the cash dividends to be distributed to equity investors.

Together, these metrics give investors a comprehensive toolkit to analyze investment properties,

with each metric providing valuable insights into different aspects of its profitability and performance.

What Is a Good Cash-on-Cash Return for a Short-Term Rental Property?

A good cash-on-cash return for a short-term rental property is generally 10% or more, but a “good” return depends on many factors.

“Assuming a 20% down payment and a 7.5% interest rate, and investment in renovation, design, quality amenities, and assuming typical expenses, a good CoC return would be 10-14% for a self-managed property,” says Taylor Jones, Head of Acquisitions at Techvestor. “While higher returns are possible, most investors should be happy in that range.”

That figure changes slightly for investors who don’t finance their properties. 

“For an investment property where you’re not having to factor in the impact of debt financing, a good CoC return would be 10% or more for a self-managed property,” according to Jones.  

While these are helpful benchmarks, a cash-on-cash return worth investing in depends on your strategy.  

“The above offers a general idea of what’s considered a good CoC return but what is considered a ‘good’ return can vary greatly depending on location, the purchase price of your investment property, your initial down payment, the current lending environment, and how you plan on operating your short term rental,” Jones says. “Those promising higher guaranteed returns in today's investment environment, as of the beginning of 2024, are probably not adequately accounting for upfront costs or sufficient operating expenses.”

Our Airbnb calculator can help you evaluate what is a good cash-on-cash return based on your investment interests and financial situation. Our calculator lets you plug in the purchase price, operating expenses, and startup costs to evaluate CoC returns and cap rates for any property in any real estate market. 

Cities with the Highest Cash-on-Cash Return for Short-Term Rentals

To help you get a better sense of good cash-on-cash returns throughout the US, we’ve compiled the top 10 cities with the highest cash-on-cash returns for the following: coastal/mountain destinations, large metropolitan cities, mid-size cities, and small/rural cities. 

CoC estimates for each city are provided assuming that net operating costs make up 30% of annual rental revenue and that no financing is used (the investment property was fully paid for in cash).

Destination Mountain/Coastal Cities

Topping the list for mountain and coastal cities is Broken Bow, Oklahoma, with a 14.6% cash-on-cash return. The remaining nine cities on the list all fall within about 1 percentage point of each other, yielding between 11.3% and 12.4% cash-on-cash return.

Large Cities 

A lot of people might assume large cities offer the best returns, but this group yields the lowest average cash-on-cash return compared to the others. Interestingly, the vast majority of the top 10 cities on this list are in the south—only Cleveland and Milwaukee represent the Midwest, and only Pittsburgh represents the mid-Atlantic.

Mid-Sized Cities

The 10 mid-sized cities with the highest cash-on-cash return varied significantly, varying from 9.5% to 16.8%. Similar to large cities, the South dominates the list.

Small Cities/Rural 

Mid-sized cities had the most variation in cash-on-cash return, with the lowest—El Paso, Texas—at 7.1% and the highest—Logan, Ohio—at 18.1% Logan also represented the city with the highest cash-on-cash return overall.   

By understanding the unique features, applications, and limitations of cash-on-cash return, investors can make better, more informed decisions when investing in real estate.

Maximize Returns by Investing in Profitable Places

Understanding and optimizing your cash-on-cash returns is crucial for any savvy investor venturing into the Airbnb market. The calculation provides a clear snapshot of the profitability of your investment, allowing you to make informed decisions about where and how to allocate your resources. While the property you pick influences the equation, so does your investment location. 

Local market conditions, demand fluctuations, and the regulatory landscape can all sway property values—and what makes a good cash-on-cash return. Choosing the right location for your Airbnb investments is a critical way to maximize returns. Find the most promising markets of the year by exploring AirDNA’s 2024 Best Places to Invest.