“ROI” gets thrown around constantly in STR communities, but most people are measuring the wrong thing or comparing metrics that don't match. Here's how to understand what a “good” return actually looks like and which number you should focus on. For a step-by-step framework for evaluating deals, see our Airbnb investment analysis guide.
The ROI Confusion: Which Metric Matters?
When someone says “I'm getting 15% ROI,” they could mean three completely different things:
Cap Rate
Net Operating Income / Purchase Price
Ignores how you financed the property. Useful for comparing properties, but doesn't tell you what your cash is actually earning.
Cash-on-Cash Return ✓
Annual Cash Flow / Total Cash Invested
This is the one to focus on. It tells you what your actual invested dollars are earning each year. Best for comparing different deals.
Total ROI
Includes appreciation, equity paydown, and tax benefits
More complete picture, but harder to calculate and relies on assumptions about future appreciation.
For the rest of this article, when we say “ROI,” we mean cash-on-cash return, the most practical metric for evaluating deals. For a deeper dive into this metric, see our complete cash-on-cash return guide.
Cash-on-Cash Return Benchmarks for STRs
Here's how to interpret cash-on-cash returns:
Why STR Returns Vary Wildly
You'll hear about investors getting 20%+ returns while others struggle to break 5%. The variance comes down to several factors:
Market Selection
A cabin in a popular vacation destination can yield 15%+ while a city apartment in an oversaturated market struggles at 6%. Location matters enormously.
Regulations
Restricted STR markets (limited permits, strict rules) often have higher returns because supply is capped. Getting a permit in a restricted area can be a competitive advantage.
Self-Manage vs Property Management
Property management takes 20-25% of revenue. Self-managing adds 3-5 percentage points to your cash-on-cash return, but costs your time. Consider a co-host arrangement as a middle ground.
Financing Terms
A cash buyer and a leveraged investor will see very different returns on the same property. Lower interest rates and smaller down payments can boost CoC, but also increase risk.
What Directly Affects Your Returns
Purchase Price
Overpaying kills returns. A property that works at $350,000 might not work at $400,000. Don't fall in love. Run the numbers at your actual purchase price.
Down Payment
More down payment means lower monthly mortgage and higher cash flow, but also more cash invested. Counterintuitively, a smaller down payment often yields higher cash-on-cash returns (more leverage), but with thinner margins and more risk.
Occupancy Rate
This is the variable most people get wrong. Optimistic occupancy assumptions are the #1 way investors get burned. Use conservative estimates (55-65%) based on comparable properties, not seller projections. Our Deal Analyzer calculates your break-even occupancy so you can see exactly how much margin you have.
Get accurate occupancy data with AirDNA
Market data and comps for any STR market
Expense Management
Controlling cleaning costs, utility usage, and maintenance can add 1-2 percentage points to your return. Small savings compound across hundreds of turnovers. See our complete expense breakdown to make sure you're accounting for everything.
Example: Same Property, Different Financing
Let's see how down payment affects cash-on-cash return on a $400,000 property generating $12,000 annual cash flow with 20% down, and $9,500 with 25% down (higher mortgage payment):
20% Down Payment
25% Down Payment
Both scenarios achieve similar cash-on-cash returns. The 25% down investor has more cash flow but also more capital tied up. The 20% down investor keeps $20,000 to deploy elsewhere.
The Hidden Returns: Beyond Cash Flow
Cash-on-cash return only tells part of the story. Real estate also builds wealth through:
Equity Buildup
Every mortgage payment includes principal that builds your equity. On a $300,000 loan, you might pay down $5,000-7,000 in principal during year one. That money is yours, not the bank's.
Appreciation
If your $400,000 property appreciates 3% annually, that's $12,000/year in equity gain. But appreciation isn't guaranteed. Some markets stay flat or decline.
Tax Benefits
Depreciation can shelter income from taxes. Interest, property taxes, and operating expenses are deductible. Consult a CPA for your specific situation.
When you factor in principal paydown, potential appreciation, and tax benefits, a property with 8% cash-on-cash might actually deliver 15-20% total return. But cash flow is what pays your bills. Don't count on appreciation you can't spend.