Cash-on-cash return for a short-term rental: a worked example
When you buy a short-term rental with a mortgage, the number that matters most in the first few years is not what the property is worth on paper. It is how much cash the property puts back into your pocket each year relative to the cash you actually put in. That ratio is called the cash-on-cash return, and it answers one question: for every dollar of my own money tied up in this deal, how many cents come back to me as profit each year?
What cash-on-cash return measures
Cash-on-cash return compares two numbers:
- The total cash you invested to get the property into a rentable state — your down payment, closing costs, and any furnishing or setup spend.
- The annual cash flow the property generates after all operating costs and mortgage payments are paid.
It is a pure arithmetic ratio. It does not account for how much the property has gone up in value, how much of your mortgage principal you have paid down, or what taxes you owe. It simply divides one dollar amount by another so you can see, at a glance, whether the cash coming back justifies the cash going out.
The formula in plain words
- Add together every dollar of your own money that went into acquiring and setting up the property: down payment plus closing costs plus furnishing and setup. This is your total cash invested.
- Subtract your annual operating costs (cleaning, supplies, utilities, insurance, platform fees, repairs) from your annual booking revenue. The result is your net operating income.
- Subtract your annual mortgage payments (principal and interest) from the net operating income. The result is your annual cash flow.
- Divide the annual cash flow by the total cash invested. The result is your cash-on-cash return, expressed as a percentage.
Example numbers
The figures below are a worked example for illustration, not market data.
| Item | Normal year | Slow year (revenue 10% lower) |
|---|---|---|
| Down payment | $64,000.00 | $64,000.00 |
| Closing costs | $9,600.00 | $9,600.00 |
| Furnishing and setup | $18,000.00 | $18,000.00 |
| Total cash invested | $91,600.00 | $91,600.00 |
| Annual booking revenue | $52,000.00 | $46,800.00 |
| Annual operating costs | $27,500.00 | $27,500.00 |
| Net operating income | $24,500.00 | $19,300.00 |
| Annual mortgage payments | $18,400.00 | $18,400.00 |
| Annual cash flow | $6,100.00 | $900.00 |
| Monthly cash flow | $508.33 | $75.00 |
| Cash-on-cash return | 6.7% | 1.0% |
In the normal year, every dollar of invested cash returns about 6.7 cents in annual profit. In the slow year, where revenue drops by 10%, that figure falls to 1.0 cent per dollar. The property still generates positive cash flow, but the margin is thin.
What the number leaves out
Cash-on-cash return is a useful snapshot, but it is not the whole picture. It does not include:
- Appreciation. If the property value rises, that gain is not reflected in the ratio until you sell.
- Loan principal paid down. Part of each mortgage payment reduces what you owe; that builds equity but is not "cash back" in the way the ratio measures.
- Taxes. Income tax, property tax treatment, and any deductions or credits all change your actual take-home, and they depend on your personal circumstances.
- Your own time. Hours spent managing listings, coordinating cleanings, and handling guest messages have a real cost that this calculation does not capture.
None of these omissions makes the number wrong; they simply mean it is one lens among several.
Why to recompute it each year
Revenue shifts with seasonality, local events, and competition. Operating costs drift upward as supplies get pricier or a platform changes its fee schedule. Your mortgage balance changes, and so does the split between principal and interest. Because every input can move, the cash-on-cash return you calculated at purchase will not match the number you produce two years later.
Recomputing it annually with your actual figures — revenue, costs, and mortgage payment from the prior year — gives you a running sense of whether the deal is performing as expected or drifting. If the number is falling year over year, you can trace which input changed and decide whether to adjust pricing, cut a cost, or refinance.
This is general bookkeeping math, not tax, investment or financial advice.
The STR Host Profit Tracker does this arithmetic for one short-term rental: enter your own numbers and it shows annual net income, cash-on-cash return and cap rate.