The formula is the same — the inputs are not
Cash-on-cash return is annual pre-tax cash flow divided by total cash invested, the same as for any rental. What changes with a short-term rental (STR) is both halves of that fraction. Revenue per night is usually far higher than a long-term lease would produce, but the expense load is heavier and the cash you must put in up front is larger.
On the investment side, STRs require furnishing and setup — beds, kitchenware, linens, decor, smart locks, and a starter stock of supplies — often $10,000 to $30,000 that a long-term rental never needs. That cash belongs in your denominator and can meaningfully lower the return, so do not leave it out.
Model the real operating costs
STR expenses that quietly erode cash flow include: cleaning between stays, platform fees (which vary by platform and fee model), management (STR managers commonly charge 20–30% of revenue, versus 8–10% for long-term rentals), utilities and internet (you pay them, not the tenant), consumables (toiletries, coffee, paper goods), plus higher maintenance and wear from frequent turnover.
Seasonality is the biggest trap. A property that rents 90% of nights in summer may sit at 40% in the off-season. Model a realistic annual occupancy and average daily rate rather than annualizing a peak month, and hold back a reserve for the slow season.
A quick example
Suppose you buy with $60,000 down, $9,000 in closing costs, and $21,000 to furnish — $90,000 of cash invested. The property grosses $70,000 a year at a realistic 55% occupancy. Subtract about $37,000 in operating costs (cleaning, fees, management, utilities, supplies, and maintenance) and $24,000 in annual mortgage payments, and you are left with roughly $9,000 of pre-tax cash flow. That is $9,000 ÷ $90,000 = a 10% cash-on-cash return.
Run your own figures in the calculator below, and stress-test the occupancy assumption first — a 55% year versus a 70% year can swing the return by half. On the tax side, remember cash-on-cash is a pre-tax metric; STRs with an average stay of seven days or less can unlock cost segregation and non-passive loss treatment that improves your after-tax result well beyond the headline number.
Frequently asked questions
Do short-term rentals have higher cash-on-cash returns?
They can, because nightly revenue is higher — but only after accounting for cleaning, platform and management fees, utilities, furnishing costs, and seasonal vacancy. Some underwrite well and some do not.
Should furnishing costs count as cash invested?
Yes. Furniture, appliances, and setup supplies are real out-of-pocket cash and belong in the denominator of your cash-on-cash calculation, alongside the down payment and closing costs.
What occupancy rate should I use for a short-term rental?
Use a realistic full-year average for your market, not a peak-season figure. Blending strong and slow months — often somewhere around 50–65% depending on location — keeps the return estimate honest.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.