Cash-on-Cash and Cap Rate

Two standard investment metrics. One is useful here. The other lies about short-term rentals in a specific and predictable way.

Cash-on-cash

This is the number that tells you whether the down payment would have done better somewhere else. It is also the number that looks worst in year one and much better in year four, once your review base supports real pricing — so judge it across a hold period, not a season.

Capiche? Now the one that misleads.

Why cap rate lies here

$30,540 NOI on a $420,000 purchase is a 7.3% cap rate, which sounds excellent next to an apartment building.

It is not comparable, for three reasons:

• Cap rate assumes a stable income stream. STR income is seasonal, management-intensive and regulation-sensitive. A 7.3% STR cap rate carries risk an apartment cap rate does not.
• It is usually calculated without real management. Strip in a proper 18–22% management fee instead of a co-host rate and the same house is closer to 5.5%.
• It ignores the furnishing. Your $28,000 of contents depreciates and gets replaced. A building does not come with a five-year sofa replacement cycle.