Short-term rentals (STRs) on platforms like Airbnb and VRBO can generate higher yields than long-term leases. However, operating expenses are steep. Learn the formulas that professional investors use to evaluate vacation property ROI.
Gross Revenue vs. Net Operating Income (NOI)
Many novice investors look only at gross monthly booking revenues. True analysis requires calculating Net Operating Income (NOI). Airbnb properties carry significant operating costs (furnishing, cleaning services, platform booking fees, utility caps, and property management fees, often totaling 30% to 50% of gross revenues).
Rental Cashflow Yield Estimator
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Cap Rate vs. Cash-on-Cash Return
To evaluate a property deal, run these formulas:
- Cap Rate: Divide annual NOI by the purchase price. Helps compare properties independent of debt structures.
- Cash-on-Cash Return: Divide annual cash flow (NOI minus mortgage) by your total cash invested. Tells you your actual out-of-pocket return.
For example, if you place $50,000 down on a $250,000 vacation home and generate $3,500 in annual net cash flow, your Cash-on-Cash return is exactly 7.0%.
🔗 Tools: Analyze your property parameters with our Investment Property ROI Calculator or compare renting vs buying opportunity costs using the Rent vs Buy Tool.