digest
Short Summary
Main recommendation: Analyze vacation rental deals using cash-on-cash return as the key metric, with a benchmark of at least 15 percent, rather than cap rate. The speaker compares a two-bedroom property (about $65,000 annual income, roughly 40+ percent cash-on-cash if he were able to get a better interest rate (hypothetical, not his actual deal terms)) against a four-bedroom property (about $110,000 gross, roughly 55 percent cash-on-cash), showing that larger properties often yield higher returns because many expenses stay similar.
Key Points
- Cash-on-cash return is the most important tool for analyzing short-term rentals, with at least 15 percent as the speaker's benchmark.
- Cap rate matters less for short-term rentals because they are appraised using residential sold comps rather than income.
- Income projections can come from AirDNA data, PriceLabs market dashboards, and checking what neighboring listings earn (the "enemy method"); the two-bedroom projection already includes vacancy.
- Expenses such as taxes, insurance, and utilities don't scale much with size, so the four-bedroom property shows a higher return.
- The speaker's two-bedroom example: $499,000 price, $5,416 monthly income, about $3,500 monthly expenses, $1,871 monthly cash flow.
- The speaker's four-bedroom example: $750,000 price, about $9,100 monthly gross income, roughly 55 percent cash-on-cash.
Details Worth Noting
- Concrete instructions: Use the BiggerPockets Rental Income Calculator on biggerpockets.com. Enter purchase price, closing costs, down payment (10 percent used), interest rate (3.5 percent used), and annual income projection. Build expenses monthly: property taxes, insurance, 3 percent maintenance, about 1 percent CapEx for recently rehabbed properties, 1 percent management fee for the two-bedroom and 3 percent for the four-bedroom (the speaker self-manages but uses Airbnb's 3 percent listing fee as a reference), utilities, internet entered in the HOA field, and cleaning fees (about $125 per clean for the two-bedroom and $200 per clean for the four-bedroom, averaging five cleans per month). Then compare cash-on-cash return against the 15 percent benchmark, and test different interest rates.
- The two-bedroom property was listed at about $499,000 with closing costs around $6,500, and the speaker's estimated monthly costs included insurance about $166, electricity about $150, water and sewer about $50, and internet about $100.
- The four-bedroom property was priced around $750,000 with closing costs about $7,500, electricity about $199, water and sewer about $650, and internet about $100.
- The speaker uses electric fireplaces to avoid pilot light problems and related maintenance calls, and provides streaming services to guests.
- Approximately 85 percent of the speaker's bookings for the four-bedroom property come from Airbnb.
- The speaker notes that the 55 percent figure is unusually high and that a lower interest rate would raise returns further.
Bottom Line: Cash-on-cash return, built from carefully estimated income and expenses, is the metric to use when judging whether a short-term rental deal is worth buying, and larger properties can deliver disproportionately higher returns in the same market.
