Owning a vacation rental should be a good investment—but is yours actually performing well? Many owners don’t truly know their returns because they haven’t analyzed the numbers properly.
This guide covers how to calculate your real ROI and evaluate whether your property is meeting financial expectations.
Understanding Vacation Rental Returns
What Makes STR Different
Vacation rentals differ from traditional real estate investments:
Potential advantages:
- Higher gross rental income potential
- Flexibility to use personally
- Furnished = higher rates
- Multiple revenue opportunities
Potential disadvantages:
- Higher operating costs
- More management intensity
- Income variability
- Regulatory risk
The key question: Does the higher income potential offset the higher costs and effort?
The Three Returns
Vacation rentals offer three types of returns:
- Cash flow: Monthly income minus expenses
- Appreciation: Property value increase over time
- Tax benefits: Deductions that reduce tax burden
A complete analysis considers all three.
Calculating Cash Flow
Step 1: Determine Gross Rental Income
Annual gross rental income:
- Total rent collected
- Cleaning fees collected (if you keep them)
- Any other guest charges
- Don’t include taxes you collect and remit
Realistic estimation for new properties:
- Research comparable properties
- Estimate occupancy rate (be conservative)
- Account for seasonal variation
- Calculate: Average nightly rate × Expected occupied nights
Example:
- Average nightly rate: $175
- Expected occupied nights: 200 (55% occupancy)
- Gross rental income: $35,000
Step 2: Calculate Operating Expenses
Fixed expenses (incur regardless of bookings):
| Expense | Annual Cost |
|---|---|
| Mortgage principal + interest | Varies |
| Property taxes | Varies |
| Insurance (STR policy) | $2,000-$4,000 |
| HOA fees | If applicable |
| Utilities base | $2,000-$4,000 |
| Internet/cable | $1,200-$2,000 |
| Lawn care/maintenance base | $1,200-$3,000 |
| Software subscriptions | $300-$600 |
| Permits and licenses | $200-$500 |
Variable expenses (scale with bookings):
| Expense | Typical Range |
|---|---|
| Cleaning (per turnover) | $80-$150 |
| Supplies and consumables | $15-$30/stay |
| Platform fees | 3-15% of booking |
| Management fees (if applicable) | 15-30% of revenue |
| Maintenance and repairs | 1-2% of property value |
| Utilities variable portion | Increases with use |
Step 3: Calculate Net Operating Income (NOI)
NOI = Gross Rental Income - Operating Expenses
Example calculation:
| Item | Amount |
|---|---|
| Gross rental income | $35,000 |
| Property taxes | -$3,000 |
| Insurance | -$2,500 |
| Utilities | -$3,500 |
| Cleaning (50 turnovers × $100) | -$5,000 |
| Platform fees (10%) | -$3,500 |
| Maintenance | -$2,500 |
| Supplies | -$1,000 |
| Other expenses | -$1,500 |
| Net Operating Income | $12,500 |
Step 4: Calculate Cash Flow (if mortgaged)
Cash flow = NOI - Debt Service (mortgage payments)
Example:
- NOI: $12,500
- Annual mortgage payments: $10,000
- Cash flow: $2,500
This is your actual cash return before tax benefits.
Calculating ROI Metrics
Cash-on-Cash Return
Most relevant for leveraged investments (with mortgage).
Formula: Annual Cash Flow ÷ Total Cash Invested × 100
Total cash invested includes:
- Down payment
- Closing costs
- Initial furnishing
- Renovation costs
- Setup expenses
Example:
- Annual cash flow: $2,500
- Down payment: $60,000
- Closing costs: $5,000
- Furnishing: $15,000
- Total invested: $80,000
Cash-on-cash return: $2,500 ÷ $80,000 = 3.1%
Cap Rate
Measures return regardless of financing.
Formula: NOI ÷ Property Value × 100
Example:
- NOI: $12,500
- Property value: $300,000
Cap rate: $12,500 ÷ $300,000 = 4.2%
Total Return (Including Appreciation)
Real estate returns include appreciation.
Formula: (Annual Cash Flow + Annual Appreciation) ÷ Total Cash Invested × 100
Example:
- Cash flow: $2,500
- Property appreciated: $15,000 (5%)
- Total invested: $80,000
Total return: ($2,500 + $15,000) ÷ $80,000 = 21.9%
Note: Appreciation isn’t realized until sale and is never guaranteed.
Adding Tax Benefits
Depreciation Value
Buildings depreciate over 27.5 years (on paper).
Example:
- Building value (excluding land): $240,000
- Annual depreciation: $240,000 ÷ 27.5 = $8,727
This “loss” reduces taxable income without costing you cash.
Tax savings (depends on your bracket):
- 24% bracket: $8,727 × 0.24 = $2,094 tax savings
- 32% bracket: $8,727 × 0.32 = $2,793 tax savings
Other Deductions
Additional deductions that reduce taxes:
- Mortgage interest
- Operating expenses
- Management fees
- Travel for property management
- Professional services
Total Return Including Tax Benefits
Example:
- Cash flow: $2,500
- Appreciation: $15,000
- Tax savings from depreciation: $2,000
- Total invested: $80,000
Total return: ($2,500 + $15,000 + $2,000) ÷ $80,000 = 24.4%
Benchmarking Performance
What’s a Good Return?
| Metric | Minimal | Acceptable | Good | Excellent |
|---|---|---|---|---|
| Cash-on-cash | 0-2% | 3-5% | 6-10% | 10%+ |
| Cap rate | 3-4% | 5-6% | 7-8% | 9%+ |
| Total return | 8-10% | 12-15% | 18-25% | 25%+ |
Context matters:
- Higher returns often mean more work/risk
- Market conditions affect benchmarks
- Personal use impacts returns
- Tax situation varies
Compare to Alternatives
Is your vacation rental performing better than alternatives?
Other options for your capital:
- Stock market (historical ~10% average)
- Long-term rental (lower returns, less work)
- REITs (passive, liquid, market returns)
- Bonds (lower returns, lower risk)
- Other investments
Personal Use Adjustment
If you use the property personally, adjust your analysis:
Method 1: Opportunity cost
- Estimate what you’d pay for similar accommodation
- Add that value to your return
Method 2: Pure investment view
- Count personal use days as lost revenue
- Analyze purely financial return
Your true return depends on how you value personal use.
Improving Your Returns
Increasing Revenue
Strategies:
- Optimize pricing (dynamic pricing tools)
- Improve listing quality (photos, description)
- Expand to additional platforms
- Target higher-paying segments
- Add value-added services
Potential impact: 10-30% revenue increase
Reducing Costs
Strategies:
- Negotiate with vendors
- Reduce utility costs (smart thermostats)
- DIY appropriate tasks
- Efficient turnover processes
- Preventive maintenance
Potential impact: 5-15% expense reduction
Increasing Occupancy
Strategies:
- Seasonal pricing strategy
- Flexible minimum stays
- Target different segments by season
- Marketing and visibility improvements
Potential impact: 5-15% occupancy increase
Evaluating Major Investments
When considering improvements (hot tub, renovation, etc.):
Calculate:
- Investment cost
- Expected revenue increase
- Payback period
- Ongoing maintenance cost
- Impact on property value
Example hot tub analysis:
- Cost: $5,000 installed
- Rate increase: $25/night
- Additional bookings: 10 nights/year
- Annual revenue increase: $25 × 200 nights + $175 × 10 nights = $6,750
- Payback: Under 1 year (good investment)
When Returns Don’t Meet Expectations
Diagnose the Problem
Revenue issues:
- Below-market rates?
- Low occupancy?
- Poor listing quality?
- Weak reviews?
Expense issues:
- Higher than market costs?
- Inefficient operations?
- Deferred maintenance catching up?
- Management fees too high?
Market issues:
- Market softening?
- Increased competition?
- Regulatory changes?
- Economic factors?
Consider Your Options
If underperforming:
-
Improve operations
- Better marketing
- Cost optimization
- Professional management
-
Change strategy
- Long-term rental
- Medium-term (30+ days)
- Different target market
-
Sell
- Reinvest in better-performing asset
- Exit while market is favorable
-
Hold for appreciation
- Accept lower cash returns
- Bet on property value growth
Understanding your true returns requires careful analysis. Contact us to discuss how professional management could improve your vacation rental’s financial performance.
