How to Calculate Vacation Rental ROI (With Examples)

Many Airbnb hosts mistake "Gross Revenue" for "Profit." Getting a $5,000 payout from Airbnb feels great, but if your mortgage, utilities, and cleaning fees equal $4,800, you only made a $200 profit.

To understand if a vacation rental is a good investment, you must calculate its Return on Investment (ROI). In real estate, the most useful metric for STRs (Short-Term Rentals) is Cash-on-Cash Return.

Here is exactly how to calculate it.

Step 1: Total Cash Invested

How much actual cash left your bank account to start this business? (Do not include the total loan amount from the bank).

• Down Payment (20% on a $400k house): $80,000
• Closing Costs: $10,000
• Furnishing & Design: $15,000
• Initial Repairs/Setup: $5,000
• Total Cash Invested = $110,000

Step 2: Gross Annual Revenue

What is the total amount of money the property will generate in a year? You can estimate this using tools like AirDNA or Rabbu.

Let's assume the property rents for an average of $250/night at a 65% occupancy rate (237 nights).

• Gross Annual Revenue = $59,250

Step 3: Annual Operating Expenses

This is where most new hosts fail. You must account for every expense.

• Mortgage (Principal & Interest): $24,000
• Property Taxes: $4,000
• STR Insurance: $2,000
• Utilities (Electric, Water, Internet, Trash): $3,500
• Cleaning Fees (Paid out to cleaners): $8,000
• Consumables (Toilet paper, soap, coffee): $1,000
• Software (PMS, Pricing tool): $500
• Maintenance/Repairs (Assume 5% of gross): $2,960
• OTA Commissions (Airbnb/Booking fees ~15%): $8,887
• Total Operating Expenses = $54,847

Step 4: Net Operating Income (NOI) / Cash Flow

Subtract your expenses from your revenue.

• Gross Revenue ($59,250) - Operating Expenses ($54,847)
• Net Annual Profit (Cash Flow) = $4,403

Note: This number looks small because we included the mortgage payment. While your cash flow is $4,403, your guests are also paying down your $24,000 mortgage every year, building your equity.

Step 5: Calculate Cash-on-Cash Return

Take your Net Annual Profit and divide it by your Total Cash Invested.

• $4,403 / $110,000 = 0.04 (or 4%)

Is 4% a good ROI? In the stock market, you expect 7-10% annually with zero effort. A 4% Cash-on-Cash return on a vacation rental (which requires active management) is generally considered poor.

Most STR investors aim for a Cash-on-Cash return of 15% to 20%.

How to Increase Your ROI

If your projected ROI is too low, you have three levers to pull:

1. Lower the Cash Invested: Buy a cheaper house, or use cheaper furniture.
2. Increase Revenue: Use dynamic pricing, allow pets (charge a pet fee), or add an amenity like a hot tub that justifies a higher nightly rate.
3. Decrease Expenses: This is the easiest lever. The largest variable expense is OTA commissions. By generating direct bookings on your own website, you eliminate the 15% Airbnb/Booking.com fee, adding thousands of dollars directly to your Net Profit.

Further reading

• Airbnb Host Fees Explained
• How to Start an Airbnb
• Direct Booking vs OTA (Revenue Breakdown)

Frequently asked questions

How does BookBed help vacation rental hosts? BookBed is a channel manager that syncs your Airbnb, Booking.com, and direct booking calendars every 60 seconds to prevent double bookings. It includes an embeddable booking widget for commission-free direct bookings, automated guest messaging, and auto-invoicing with VAT reports. Plans start at €9/month.

Is BookBed suitable for small hosts with 1–3 properties? Yes. BookBed's Starter plan is designed for hosts with up to 3 properties at €9/month. It includes two-way iCal sync, a booking widget, Stripe checkout, and email support — everything a small host needs to manage listings professionally.

Does BookBed charge commission on bookings? No. BookBed charges zero commission on all bookings, whether they come through OTAs or your direct booking widget. You pay a flat monthly subscription fee and keep 100% of your booking revenue.