What Is Cash on Cash Return in Short-Term Rentals?

Updated : Mar 17, 2025

When diving into short-term rental investments, any savvy investor knows the importance of understanding their return on investment (ROI). However, calculating ROI can be challenging, given the many variables in managing a rental property. 

This is where “Cash on Cash Return” (CoC) becomes incredibly valuable. It’s a clean and straightforward way to measure how much money you’re making relative to how much you’ve invested—offering clarity amidst the complexities of short-term rental hosting. 

So, before discussing how this metric works for short-term rentals, let’s first define Cash on Cash Return.

Cash on Cash Return Definition: What Are We Talking About?

Cash on Cash Return measures a property’s annual pre-tax cash flow as a percentage of the total cash invested into the property. 

It’s one of the easiest ways to understand how well your short-term rental investment performs, especially when figuring out how much cash you earn after expenses.

Think of it as a benchmark for how much money you make relative to how much you’ve put into the deal. 

If you’re in short-term rentals, this means factoring in the property’s purchase price and all the other costs that come with owning and operating the property.

So, let’s break it down even further.

Cash on Cash Return Formula: How Is It Calculated?

The formula for Cash on Cash Return is pretty simple. Here’s how you calculate it:

• Annual Pre-Tax Cash Flow: This is the money you make from renting out the property after deducting your operating expenses like cleaning, utilities, property management fees, insurance other than Aircover, and any loan payments.
• Total Cash Invested: This includes the initial cash down payment on the property, any upfront renovations, and other out-of-pocket costs.

Let’s put this into an example to see how it works.

Imagine you’ve bought a short-term rental property for $300,000. You put down a 20% payment, so your initial cash investment is $60,000. 

After factoring in costs like mortgage payments, utilities, property management fees, and other expenses, you make $12,000 in annual pre-tax cash flow from your rental.

Now, let’s apply the formula:

Cash on Cash Return = {(12000 / 60000) x 100} = 20%

That means your cash-on-cash return is 20%. 

In other words, for every dollar you’ve invested in the property, you earn 20 cents back each year.

This can be a great starting point for evaluating how your short-term rental is doing. But the next question is, what does it mean? Is 20% good? And how does this compare to other investments?

What Is a Good Cash-on-Cash Return in Short-Term Rentals?

Now that you know the basics of Cash on Cash Return, let’s discuss what constitutes a good CoC.

In short-term rentals, a “good” cash-on-cash return can vary depending on the market, property type, and overall investment strategy. 

However, investors generally look for a return of around 8-12% for a solid investment in short-term rentals. 

Anything higher can be a sign of higher risk, but it could also indicate that you’ve found a particularly profitable property or have managed to keep your expenses low.

On the flip side, if your cash-on-cash return is under 8%, you should reassess your investment strategy. 

A lower CoC could mean you’re not maximizing your potential profit or signal that your property’s expenses are eating into your returns.

But don’t stop there—Cash on Cash Return is just one piece of the puzzle. It’s a great metric to compare against other types of investments. For instance, the stock market might average an annual return of 7-10%. 

You probably outperform the stock market if you get 15% or higher from your short-term rental. However, remember that the stock market has much less involvement and risk than a property.

Risks to Keep in Mind

While aiming for a high Cash on Cash Return (CoC) can be exciting, it’s important to keep some risks in mind:

1. Market Fluctuations: Demand can drop with low seasons or economic changes, affecting occupancy and pricing.
2. Regulatory Hurdles: New local laws or zoning restrictions could limit your ability to rent out your property.
3. Maintenance Costs: Regular upkeep is crucial—unexpected repairs or frequent guest turnover can eat into profits.
4. Guest Issues: While most guests are great, a few may cause damage or break house rules, leading to extra costs or bad reviews.
5. Rising Competition: More listings mean more competition; standing out requires extra effort in pricing or unique offerings.

Balancing the potential for high returns with these risks is key to a successful investment strategy!

How to Improve Your Cash on Cash Return

If your Cash on Cash Return isn’t where you want it to be, don’t worry—you can always improve it. Here’s how:

1. Increase Rental Rates

Research the market and see if you can increase your nightly rates. This is especially important if the market has shifted or demand for short-term rentals has increased in your area. A good pricing strategy will help you increase rates without pricing yourself out of the market.

PriceLabs Dynamic Pricing can help you set competitive yet optimized nightly rates. By analyzing market demand, competitor pricing, and local events, PriceLabs adjusts your rates automatically to ensure you maximize revenue while staying competitive. This takes the guesswork out of pricing and ensures you can adjust prices in real time to maximize occupancy and revenue.

2. Lower Operating Costs

Review your expenses and see any areas where you can cut costs. This could mean finding more affordable cleaning services or handling property management duties yourself.

While PriceLabs primarily focuses on optimizing revenue, it can indirectly help you manage costs. By improving your booking efficiency with better pricing and occupancy rates, you’ll reduce the chances of having long vacancy periods where you’re not generating income. 

3. Increase Occupancy Rates

The more often your property is booked, the better your cash-on-cash return. Consider optimizing your listing on platforms like Airbnb and Vrbo or offering discounts for extended stays to keep the calendar full.

With PriceLabs’ advanced pricing and occupancy management features, you can ensure your property is priced effectively to maintain a high occupancy rate. PriceLabs uses a hyper-local algorithm to predict demand based on seasonality, local events, and competitor rates.

By optimizing your pricing for demand, you can increase your booking frequency while maintaining attractive rates for guests. This helps to keep your calendar full without overpricing or underpricing.

4. Renovate or Upgrade

Small upgrades—like fresh paint, new furniture, or even adding amenities like a hot tub—can make your property more attractive to guests and justify higher rental rates.

Although PriceLabs doesn’t directly handle renovations, it can help you maximize the return on any upgrades you make. For example, once you’ve made improvements, such as adding a hot tub or new furniture, PriceLabs can help you set higher rates reflective of the added value.

By keeping track of the market trends and competitive rates in your area, PriceLabs ensures your new improvements translate into higher revenue.

Also read: The Best Airbnb Amenities to Boost Your Occupancy Rate, ADR, and RevPAR

5. Refinance Your Loan

If interest rates drop or your credit score improves, refinancing your loan could reduce your monthly payments and improve your cash flow.

With PriceLabs, you can get a detailed analysis of your rental’s revenue potential, which could support your case when negotiating with lenders.

You can have a stronger argument when seeking refinancing options to reduce monthly payments and increase your cash flow by showcasing how your property is performing and how much revenue you generate.

Turning Metrics into Money: Cash on Cash Return in Action

When evaluating the profitability of short-term rental investments, Cash on Cash Return is a key metric that helps you assess whether you’re making a wise decision. It provides a simple and effective way to measure how much you’re earning relative to how much you’ve invested.

Remember, what’s considered a good cash-on-cash Return can vary depending on your goals and market conditions, but understanding this metric will allow you to compare different investment opportunities and make informed decisions.

So, knowing your Cash on Cash Return is essential, whether you’re just getting started with short-term rentals or a seasoned investor looking to maximize your return. It’s your benchmark for success and a powerful tool in your investment toolbox.

By focusing on the factors that influence your returns—like rental income, expenses, and property financing—you can improve your cash-on-cash Return and, ultimately, build a more profitable short-term rental business.