Understanding return on investment isn't just about spreadsheets - it's about making confident decisions that protect your capital and generate wealth. This guide breaks down the essential metrics every STR investor needs to master.
Whether you're analyzing your first deal or your tenth, these frameworks will help you separate the opportunities from the money pits.
Key ROI Metrics for STR Investors
Before diving into calculations, understand what each metric tells you - and its limitations:
| Metric | What It Measures | Best For |
|---|---|---|
| Cash-on-Cash Return | Annual cash flow vs. cash invested | Comparing leveraged investments |
| Cap Rate | NOI vs. property value | Comparing unleveraged values |
| NOI | Revenue minus operating expenses | Property operating efficiency |
| Total ROI | All returns including equity and appreciation | Long-term wealth building |
Cash-on-Cash Return: The Investor's Favorite
Cash-on-cash return (CoC) is the most practical metric for STR investors because it measures what you actually care about: how much cash you're earning relative to the cash you invested.
The Formula
Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested
Total Cash Invested includes:
- Down payment
- Closing costs
- Renovation/repair costs
- Furnishing and setup costs
- Initial reserves (if required by lender)
Annual Pre-Tax Cash Flow = Gross Revenue - All Expenses - Debt Service
What's a Good Cash-on-Cash Return?
Context matters: a 10% CoC in a stable, appreciating market may be better than 15% in a risky, regulatory-uncertain area.
Cap Rate: Understanding Property Value
Capitalization rate helps you understand what you're paying for the income stream, independent of financing.
Cap Rate = Net Operating Income (NOI) / Property Value
For STRs, cap rates typically range from 6-12%, depending on location and property type. Higher cap rates indicate higher risk or lower demand markets.
Cap rate doesn't include debt service. A property with a great cap rate can still have negative cash flow if over-leveraged.
Revenue Projections: Getting It Right
Accurate revenue projection is the foundation of all ROI analysis. Here's how to build realistic estimates:
Key Revenue Components
- Average Daily Rate (ADR): What you charge per night on average
- Occupancy Rate: Percentage of available nights booked
- RevPAR: Revenue per available rental night (ADR x Occupancy)
Seasonal Revenue Pattern (Example: Beach Property)
Building Your Revenue Model
- Research comparable listings - Find 10-15 similar properties and track their pricing and calendars
- Account for seasonality - Most markets have high, shoulder, and low seasons
- Use conservative occupancy - New listings typically achieve 60-70% of established listing occupancy in year one
- Cross-reference with data tools - AirDNA, Mashvisor, and AllTheRooms provide market-level data
Run your analysis at 80% of projected revenue. If the deal works at that level, you have built-in safety margin.
Expense Analysis: The Often-Underestimated Side
Most failed STR investments share a common thread: underestimated expenses. Here's a comprehensive breakdown:
Typical STR Expense Breakdown
| Expense Category | % of Revenue | Notes |
|---|---|---|
| Property Management | 15-30% | 0% if self-managing |
| Cleaning | 8-15% | Typically passed to guest |
| Platform Fees | 3-15% | Airbnb ~3%, VRBO ~8% |
| Utilities | 5-10% | Higher with hot tubs/pools |
| Insurance | 2-4% | STR-specific policies cost more |
| Maintenance/Repairs | 3-8% | Higher turnover = more wear |
| Supplies/Consumables | 2-4% | Toiletries, coffee, paper goods |
| Property Taxes | Varies | Location dependent |
Case Studies: Real Numbers
Case Study 1: Mountain Cabin - Gatlinburg, TN
| Metric | Amount |
|---|---|
| Purchase Price | $425,000 |
| Down Payment (25%) | $106,250 |
| Closing + Furnishing + Setup | $45,000 |
| Total Cash Invested | $151,250 |
| Annual Gross Revenue | $78,000 |
| Operating Expenses (35%) | $27,300 |
| Annual Debt Service | $24,600 |
| Annual Cash Flow | $26,100 |
| Cash-on-Cash Return | 17.3% |
Case Study 2: Beach Condo - Gulf Shores, AL
| Metric | Amount |
|---|---|
| Purchase Price | $285,000 |
| Down Payment (20%) | $57,000 |
| Closing + Furnishing + Setup | $28,000 |
| Total Cash Invested | $85,000 |
| Annual Gross Revenue | $52,000 |
| Operating Expenses (40% - includes HOA) | $20,800 |
| Annual Debt Service | $17,500 |
| Annual Cash Flow | $13,700 |
| Cash-on-Cash Return | 16.1% |
Analysis Tools & Resources
These tools can help you build accurate projections:
- AirDNA: Market data, revenue projections, and competitive analysis
- Mashvisor: Property-specific ROI estimates and market comparison
- AllTheRooms: Alternative data source for validation
- STR Insights: Free revenue estimation tools
- Spreadsheet templates: Build your own with the formulas above
ROI Analysis Checklist
- Calculate total cash investment (include ALL costs)
- Research comparable listings for revenue estimates
- Account for seasonality in projections
- List all expense categories realistically
- Run analysis at 80% of projected revenue
- Calculate cash-on-cash return and cap rate
- Compare to alternative investments