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.
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, closing costs, and furnishing 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 expenses (mortgage, taxes, insurance, utilities, cleaning, platform fees, maintenance, etc.)
- Total Cash Invested: Down payment + closing costs + furnishing costs + any initial repairs
Example Calculation
$11,000 / $110,000 = 10% cash-on-cash return
What's a Good Cash-on-Cash Return?
Here's how to interpret your cash-on-cash return:
Why Cash-on-Cash Beats Other Metrics
Cap Rate Ignores Financing
Cap rate (Net Operating Income / Purchase Price) is useful for comparing properties, but it ignores how you're financing the deal. Most investors use leverage, and your actual returns depend heavily on your mortgage terms. A property with a 6% cap rate might deliver 12% cash-on-cash with favorable financing or 4% with unfavorable terms.
ROI Is Vague and Inconsistent
“ROI” means different things to different people. Some include appreciation, some don't. Some factor in principal paydown, some don't. Cash-on-cash is specific: it measures cash in versus cash out, period.
Cash-on-Cash Shows What Your Money Is Earning
At the end of the day, you want to know: “What is my cash doing for me?” Cash-on-cash answers that directly. It lets you compare an STR investment to stocks, bonds, or another real estate deal on equal footing.
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.
Operating Expenses
Cleaning, utilities, insurance, maintenance, platform fees—they all add up. Underestimating expenses is the #2 way investors get burned.
Furnishing Costs
Often forgotten in the denominator. If you spend $20,000 furnishing but only count your down payment, your CoC looks artificially high.
Common Mistakes to Avoid
Forgetting furnishing in “total cash invested”
That $15,000-25,000 in furniture and setup costs is real money you invested. Include it.
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.