Cash-on-cash return is the single best metric for comparing short-term rental investments. It tells you exactly what your invested dollars are earning, making it easy to compare different properties or even different asset classes. Yet most investors either don't calculate it or don't know what a “good” number looks like. For a broader overview of STR returns, see our guide to short-term rental ROI.
What Is Cash-on-Cash Return?
Cash-on-cash return measures the annual return on the actual cash you invested. It's calculated by dividing your annual net cash flow by your total cash invested (down payment plus closing costs). The result tells you what percentage of your cash investment you're getting back each year in profit.
The Formula
Cash-on-Cash Return =
(Annual Net Cash Flow / Total Cash Invested) × 100
Let's break down the components:
- Annual Net Cash Flow: Total rental income minus all STR expenses (mortgage, taxes, insurance, utilities, cleaning, platform fees, maintenance, etc.)
- Total Cash Invested: Down payment + closing costs (~3% of purchase price)
Example Calculation
$9,800 / $98,000 = 10% cash-on-cash return
What's a Good Cash-on-Cash Return?
Here's how to interpret your cash-on-cash return:
Cash-on-Cash Return vs Cap Rate vs ROI
Many investors confuse these three metrics. They measure different things and are useful in different situations.
| Metric | Formula | Includes Financing? | Best For |
|---|---|---|---|
| Cash-on-Cash | Net Cash Flow / Cash Invested | Yes | Evaluating your actual returns |
| Cap Rate | NOI / Purchase Price | No | Comparing properties to each other |
| ROI | Total Return / Total Investment | Varies | Long-term total return (includes appreciation) |
Cap Rate: Good for Comparing Properties
Cap rate (Net Operating Income / Purchase Price) strips out financing so you can compare properties on an apples-to-apples basis. A $300,000 property earning $21,000 NOI has a 7% cap rate regardless of whether you pay cash or put 25% down. This makes cap rate ideal for filtering potential deals. But it tells you nothing about what your actual cash will earn, because most investors use leverage. A property with a 6% cap rate might deliver 12% cash-on-cash with favorable financing, or just 4% with a high interest rate. For a deeper dive on cap rates specifically, see our guide to Airbnb cap rates.
ROI: Useful but Inconsistent
“ROI” means different things to different people. Some include appreciation, some don't. Some factor in principal paydown, some don't. This inconsistency makes it hard to compare numbers from different sources. Cash-on-cash is specific: it measures cash in versus cash out, period.
When to Use Each Metric
Use cap rate when screening deals and comparing properties in the same market. Use cash-on-cash when evaluating what your invested dollars will actually earn. Use ROI when considering long-term total returns including appreciation and equity buildup. For day-to-day deal analysis, cash-on-cash is the most actionable metric.
How One Variable Changes Everything
Small changes in your deal terms have an outsized impact on cash-on-cash returns. Here is the same $350,000 property at different interest rates, with all other variables held constant.
| Interest Rate | Monthly Mortgage | Annual Cash Flow | Cash-on-Cash |
|---|---|---|---|
| 5.5% | $1,490 | $13,320 | 13.6% |
| 6.5% | $1,659 | $11,292 | 11.5% |
| 7.5% | $1,836 | $9,168 | 9.4% |
| 8.5% | $2,019 | $6,972 | 7.1% |
Based on $350,000 purchase, 25% down ($87,500), $10,500 closing costs, $98,000 total invested. Annual gross revenue of $48,000 with 35% expense ratio (excluding mortgage). A 3% interest rate difference cuts your cash-on-cash return nearly in half.
This is why the same property can be a great deal for one investor and a mediocre one for another. Your financing terms, down payment amount, and expense assumptions all dramatically shift the result. Use our Deal Analyzer to model different scenarios with your actual numbers.
What Affects Your Cash-on-Cash Return
Down Payment Size
More down payment means lower monthly mortgage and higher cash flow, but also more cash invested. Counterintuitively, a smaller down payment often yields higher CoC (more leverage) but riskier margins.
Interest Rate
Higher rates crush cash-on-cash returns. A 1% rate increase on a $250,000 loan adds roughly $150/month to your mortgage, directly reducing cash flow.
Occupancy and Nightly Rate
These drive your revenue. Being optimistic here is the #1 way investors get burned. Use conservative estimates based on comparable properties. Our Deal Analyzer calculates your break-even occupancy to show how much cushion you have.
Get market data with AirDNAOperating Expenses
Cleaning, utilities, insurance, maintenance, platform fees: they all add up. Underestimating expenses is the #2 way investors get burned.
Furnishing Costs
Furnishing is a separate startup expense. Use our Furnishing Budget calculator to estimate these costs. Our Deal Analyzer calculates CoC using down payment + closing costs, the standard for comparing deals.
Common Mistakes to Avoid
Using inconsistent investment definitions
Our Deal Analyzer uses down payment + closing costs. Some investors also include furnishing. Just be consistent when comparing deals.
Using projected occupancy that's too optimistic
New listings often take 3-6 months to ramp up. Year one occupancy is usually lower than steady-state. Be conservative.
Not accounting for all expenses
Maintenance reserve, supplies, software subscriptions, professional photos, minor repairs: the small stuff adds up to thousands per year.
Comparing CoC across different markets without context
An 8% CoC in a high-appreciation market like Austin may be better than 12% in a stagnant market. Consider total return potential.