Cash Flow or Cash on Cash Return – Factors to consider when searching for your next short-term rental

When searching for cash flowing or cash on cash return for short term rental properties, there’s a multitude of factors that go in to finding the right investment.

When searching for cash flowing or cash on cash return for short term rental properties, there’s a multitude of factors that go in to finding the right investment. These can include location, purchase price, financing options, rental income, operating expenses, rehab expenses, occupancy rates and property management, if needed.

What is cash flow or cash on cash return? Investors typically use both metrics together to evaluate the financial performance of a rental property and determine if it is a good investment.

  • Cash flow refers to the amount of money that a property generates after all expenses have been paid, including mortgage payments, property taxes, insurance, utilities, and maintenance costs. It is the net income that is generated by the property each month or year. Cash flow is a measure of the actual income generated by the property.
  • Cash on cash return, on the other hand, is a rate of return that measures the annual pre-tax cash income that an investor receives from an investment property, compared to the amount of cash invested in the property. It is calculated by dividing the annual pre-tax cash flow by the amount of cash invested. Cash on cash return is a measure of the return on investment, taking into account the amount of cash invested in the property.

In addition to these factors should be a way of researching the data of comparable properties to more accurately determine potential cash flow or cash on cash returns. You’ll want to get a closer look at the valuation, revenue, occupancy rates, and average daily rates, to accurately determine the net operating income or cash flow of an investment property. STR Insights platform does just that. We help you to analyze existing properties in order to make better data-driven decisions that fit your investment strategy.

You also need to ask yourself specific questions when searching a cash flowing or cash on cash return for a given property.

  • What type of amenities will I provide? A hot tub, a pool, kayaks or standup paddle-boards, a fire pit/fireplace, and maybe a game room?
  • Am I in close proximity to the beach, a ski resort, hiking trails, or a lakefront?
  • Will my investment region better serve couples or large families?
  • Will my property be affected by seasonality - warm weather all year round or snow sports?
  • How saturated is my market with current short-term rentals?
  • Are there restrictions and regulations that I need to understand prior to making this investment?

Recently, there have been a number of investors seeking out small towns with ski resort that have great cash flow due to the low cost of entry and cost of doing business - Boyne Falls, Michigan is just one example. Whereas some individuals might look to find a property in Bonita Springs, Florida - a fast growing vacation beach destination with a higher cost of entry but a lower yield of cash flow, but still cash flowing nonetheless.

You have to ask yourself… What are my cash flow or cash on cash return goals? What is my budget and what is my overall cost of doing business? How will these factors contribute to a high or low cash flow. It should also be noted that if you have a W-2 income in addition to your short-term rental income, you’ll be eligible for a number of tax benefits that can contribute to your net income at the end of the year. Regardless of where you’re looking to purchase a property you have to define your own investment strategy and what type of cash flow goals you’re looking for.

Written by
Chris Kite
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