Short-Term Rentals (STRs) offer one of the most compelling investment opportunities in real estate today—but only if you understand how to run the numbers smartly. Many investors focus solely on gross income or cap rates. The savvy ones, though? They calculate cash-on-cash return and factor in the triple wealth-building benefits of real estate: tax deductions, appreciation, and cash flow.

Let’s break this down using a real-world example and show you how to determine if an STR deal really meets your investment goals.

What Is Cash-on-Cash Return?

Cash-on-cash return (CoC) is the ratio of annual pre-tax cash flow to the amount of cash you invested. It tells you what percentage return you’re earning on your actual cash outlay—not the total value of the property.

Formula:

Cash-on-Cash Return = (Annual Pre-Tax Cash Flow) ÷ (Total Cash Invested)

Example: $750,000 STR Property

Let’s say you’re eyeing a beautiful vacation rental listed at $750,000. You plan to finance it with a standard 20% down payment.

💰 Step 1: Initial Investment

Purchase Price: $750,000
Down Payment (20%): $150,000
Closing Costs (Est. 3%): $22,500
Furniture & Setup: $30,000
Total Cash Invested: $202,500

🏦 Step 2: Mortgage Calculation

Assuming a 7% interest rate, 30-year fixed mortgage:

Loan Amount: $600,000
Monthly Mortgage (P&I): ~$3,990
Annual Mortgage Payments: ~$47,880

📊 Step 3: Operating Expenses

Typical STRs have operating expenses including utilities, insurance, taxes, cleaning, repairs, and property management (or co-hosting).

Let’s assume the following:

Property Taxes: $6,000/year
Insurance: $2,000/year
Utilities: $4,800/year
Repairs & Maintenance: $3,600/year
STR Management (20% of revenue): Varies
Cleaning Fees: Typically paid by guests

Let’s say your operating expenses (excluding debt) total $16,400/year.

📈 Step 4: Break-Even Analysis

To break even, your STR must generate at least enough income to cover:

Mortgage Payments: $47,880
Operating Expenses: $16,400
Total Break-Even Revenue: $64,280/year (~$5,357/month)

💡 Step 5: Desired Return – 20% on Capital

If your goal is a 20% cash-on-cash return on the $202,500 invested, your property must produce:

Target Return = $202,500 x 20% = $40,500/year in pre-tax cash flow

To get that, you’d need to generate enough income to cover:

All expenses ($64,280)
Plus your return target ($40,500)
Total Revenue Target: $104,780/year (~$8,732/month)

🧠 The Hidden Wealth: Triple Benefits of STR Investing

Even if a property generates less than $40,500 in raw cash flow, you may still hit—or exceed—your return target when you account for these 3 powerful wealth-building levers:

1. Tax Deductions

As a short-term rental investor, you can deduct:

Mortgage interest
Property taxes
Insurance
Repairs & maintenance
Furniture depreciation (bonus depreciation under certain tax strategies)
Travel expenses for managing the property

These can significantly reduce your taxable income and increase your real return on investment.

2. Appreciation

Real estate appreciates over time. Even a conservative 3% annual appreciation on a $750,000 home is:

$22,500/year in equity gain

This is not included in your cash-on-cash calculation—but it adds directly to your net worth.

3. Cash Flow

If your STR generates $20,000/year in net cash flow (after all expenses), your base cash-on-cash return is:

$20,000 ÷ $202,500 = 9.87%

But…

Add back:

Appreciation: $22,500
Tax Savings (let’s estimate): $8,000

Total Effective Return: $20,000 + $22,500 + $8,000 = $50,500

Now you’re looking at an effective return of:

$50,500 ÷ $202,500 = 24.94%

This exceeds your 20% target—even though the raw cash flow alone was under.

🧮 Summary Table

Final Thoughts: Smart Investing Is Strategic Investing

Smart STR investing isn't about guesswork—it's about calculating true returns. Don’t just look at nightly rates and occupancy. Instead, break down the numbers, understand your return drivers, and don’t underestimate the compounding power of appreciation and tax advantages.

Looking for a 20% return? Work backward: calculate your total cash invested, then determine how much net income the property must produce annually to hit your number. Use that as your revenue target—and don’t settle for less.

Pro Tip: Platforms like StayHocha.com make it easier to find high-performing STRs in top vacation markets. It’s a free platform built for real investors and hosts—not just lookers. Give us a call and let us help you project your revenue to make smarter decisions.

Smart STR Investing: How to Master the Numbers and Maximize Returns

What Is Cash-on-Cash Return?