What Is a Cash-on-Cash Return for Short-Term Rentals?

Summary

What is a cash-on-cash return?

A metric that shows your annual return as a percentage of your initial investment. Calculate it by dividing your net cash flow (revenue minus all expenses) by your total cash invested. For example: if you invested $100,000 and generated $28,600 in net cash flow, your cash-on-cash return would be 28.6%..

Why it matters

Cash-on-cash return shows how efficiently your investment generates cash flow. It helps short-term rental owners evaluate profitability and compare investment opportunities.

Who should know it

Short-term rental investors, property managers, and anyone making decisions about property investments and cash flow optimization.

Where you'll see it

In property performance evaluations, investment analyses, and discussions about ROI for short-term rentals.

Cash-on-Cash Return Overview

A cash-on-cash return (CoC return) is a financial metric that measures the profitability of a short-term rental property by comparing the annual pre-tax cash flow to the total cash invested in the property. 

Here's how it works: if you put $50,000 down on a property and earned $5,000 in cash flow your first year, your cash-on-cash return would be 10%. Unlike metrics that look at the property's total value, this one focuses specifically on the money you've invested – like your down payment, closing costs, and any renovations.

How Is Cash-on-Cash Return Calculated?

To calculate cash-on-cash return, divide your net income by your total cash invested, then multiply by 100. Here's the formula:

Cash-on-Cash Return = (Net Income ÷ Total Cash Invested) × 100

Net income is your rental revenue minus all expenses:

• Rental revenue from guests
• Minus operating expenses (utilities, cleaning, maintenance, etc.)
• Minus mortgage payments (if financing)

Total cash invested includes:

• Down payment
• Closing costs
• Initial setup costs (furnishing, repairs, etc.)

For example: If you bought a $400,000 property with $120,000 total invested ($100,000 down payment + $20,000 in closing/setup costs), and generated $75,000 in revenue with $46,400 in total expenses ($20,000 operating + $26,400 mortgage), your net income would be $28,600. This gives you a cash-on-cash return of 23.8% ($28,600 ÷ $120,000 × 100).

Why Is Cash-on-Cash Return Important? 

For short-term rentals, cash-on-cash return is useful because it helps you see how well your property performs with regular bookings. This metric is especially valuable for:

• Evaluating profitability: It shows how efficiently your cash investment generates income.

For example, calculating the cash-on-cash return helps assess the value of a vacation rental by showing how much income it generates compared to the cash invested. 

• Comparing properties: It allows investors to weigh short-term rentals against other investment options like long-term rentals or stocks.
• Planning finances: It helps set realistic financial goals and monitor performance over time.

What Is a Good Cash-on-Cash Return?

A good cash-on-cash (CoC) return for a short-term rental property is typically 10% or more, assuming standard financing, expenses, and quality investments in design and amenities. 

However, there are some factors that affect a “good” CoC return:

• Location: High-demand tourist areas generally yield better returns.
• Financing terms: Down payment size, interest rates, and loan terms impact your return.
• Management style: Self-managed properties tend to have higher returns than those managed by third parties.
• Operating costs: Expenses like cleaning, maintenance, and utilities can reduce profitability.
• Market conditions: Economic trends, seasonal demand, and local regulations can also play a role.

Ultimately, what’s considered good depends on your investment goals and market strategy. Read more about what a good cash-on-cash return is for a vacation rental property.