How Do I Calculate Cash-on-Cash Return for an Airbnb?
Cash-on-cash return tells you how much annual pre-tax cash flow the property generates relative to the actual cash you put into the deal. For leveraged STR investors, it is often a more practical decision metric than cap rate because it reflects financing and startup costs.
Use annual pre-tax cash flow over total cash invested
Suppose you buy an STR for $500,000 with 20% down. You invest $100,000 down payment, $12,000 in closing costs, and $28,000 in furniture and setup, for total cash invested of $140,000. If the property throws off $16,800 of annual pre-tax cash flow after mortgage payments and operating expenses, the cash-on-cash return is 12%. That number answers the practical question most investors care about: what is my yearly cash yield on the dollars I actually put in?
Include the ugly startup costs
Hosts often overstate return by ignoring furnishings, design, linens, kitchen stock, permits, initial inventory, and launch marketing. On a furnished STR, those costs can easily add $20,000 to $50,000 above the down payment and closing table cash. If you omit them, the denominator is too small and the projected return looks better than reality. A CPA may not care for tax reporting, but an investor should care for capital allocation.
| Component | Amount |
|---|---|
| Down payment | $100,000 |
| Closing costs | $12,000 |
| Furniture and setup | $28,000 |
| Total cash invested | $140,000 |
| Annual pre-tax cash flow | $16,800 |
| Cash-on-cash return | 12.0% |
After-tax return can look very different
Cash-on-cash is not an after-tax measure. Depreciation may shelter part of the cash flow, while self-employment tax or state tax may reduce it depending on the operating structure. That means two properties with the same 12% cash-on-cash return can produce very different after-tax outcomes. To see the tax side, pair this with /learn/how-is-short-term-rental-income-taxed and /learn/bonus-depreciation-str-properties.
FAQ
Related questions
Many investors target 8% to 12% or better, but the right hurdle depends on market risk, management intensity, and alternative uses of capital.
Traditional cash-on-cash uses annual pre-tax cash flow, so principal paydown is not separately added to the numerator. Some investors track it as a separate wealth-building component.
Not in the standard pre-tax formula. You can build an after-tax return model, but that is a different calculation.