Before You Buy a Short-Term Rental: 5 Numbers You Must Know

A beautiful cabin with a mountain view can still be a terrible investment.

It’s easy to fall in love with the property, its amenities or an impressive rental projection. But before making an offer, you need to determine whether the property can realistically support its expenses, qualify for financing and accomplish your investment goals.

The asking price and projected revenue are important, but they don’t tell the entire story.

Before buying a short-term rental, review these five numbers.

1. Realistic Gross Rental Income

The first number is the property’s realistic gross rental income.

The important word isrealistic.

A seller may provide an impressive rental history. A property manager may offer a projection. An online rental-data platform may produce another estimate.

These numbers can all be different.

Before relying on a revenue figure, ask:

• Was the property professionally managed?

• Was it available to rent throughout the entire year?

• Did it have unusually strong amenities?

• Was the income based on actual performance or only a projection?

• Were owner stays or extended maintenance periods excluded?

• How does the property compare with similar rentals nearby?

A five-bedroom cabin with an indoor pool should not be evaluated the same way as a basic five-bedroom cabin without comparable amenities.

Rental income is the starting point, but it should never be accepted without context.

2. True Operating Expenses

Gross revenue is not the same as profit.

The second number you need is the property’s total operating expenses. This is where many projections become overly optimistic.

Depending on the property, expenses may include:

• Property taxes

• Insurance

• Utilities

• Internet service

• Cleaning

• Repairs and maintenance

• Property management

• Booking-platform fees

• Guest supplies

• Pest control

• Lawn care

• Pool or hot-tub maintenance

• Homeowners-association fees

• Permit or licensing expenses

• Replacement reserves

A property can generate substantial revenue and still produce disappointing cash flow when the expenses are underestimated.

Insurance deserves special attention. Never assume that the current owner’s premium will automatically be available to you. The cost can vary based on the property, location, coverage and how the home will be used.

Request an insurance quote before removing important contract protections.

3. Total Monthly Housing Payment

The third number is the property’s estimated monthly housing payment.

This generally includes:

• Principal

• Interest

• Property taxes

• Insurance

• Homeowners-association dues, when applicable

Your payment depends on more than the purchase price.

It can change based on your down payment, interest rate, credit profile, reserves, loan structure and the type of property you’re purchasing.

This is why I don’t recommend evaluating an investment with only a generic online mortgage calculator. You need numbers based on your actual financing scenario.

The lowest advertised interest rate is not automatically the best financial option, either.

Paying additional points may reduce your interest rate, but you should calculate how long it will take to recover that upfront cost. If you plan to refinance or sell before reaching the break-even point, paying more upfront may not make sense.

4. Debt-Service-Coverage Ratio

The fourth number is the debt-service-coverage ratio, commonly called the DSCR.

In simple terms, the DSCR compares the property’s qualifying rental income with its required housing payment.

For example, if the applicable monthly rental income is $6,000 and the required housing payment is $5,000, the ratio would be 1.20.

That means the qualifying income is 120% of the housing payment.

Different programs and lenders may calculate qualifying income differently. Depending on the loan program and property, the analysis may involve:

• Current lease income

• Long-term market rent

• Eligible short-term rental history

• Third-party rental projections

• Appraisal-supported rental analysis

A property’s actual cash flow and its qualifying DSCR are not necessarily the same thing.

That distinction is critical.

A property could look profitable in your personal spreadsheet but fail to qualify under a particular lender’s guidelines. It could also qualify for financing while producing less spendable cash flow than you expected.

We need to evaluate both the financing and the investment.

5. Cash-on-Cash Return

The fifth number is your estimated cash-on-cash return.

Cash-on-cash return compares the property’s projected annual cash flow with the total amount of cash you invested.

Your total investment includes more than your down payment. It may also include:

• Closing costs

• Lender costs

• Inspections

• Appraisal fees

• Initial repairs or renovations

• Furniture

• Appliances

• Guest supplies

• Operating reserves

• Money spent preparing the property for guests

Suppose you invest $150,000 in total and expect the property to produce $15,000 in annual cash flow. That would represent an estimated 10% cash-on-cash return.

However, that calculation is only useful when the income and expense assumptions are realistic.

You should also stress-test the investment.

Ask yourself:

• What happens if revenue is 10% lower than projected?

• What happens if insurance is more expensive than expected?

• What happens if the property needs a major repair during the first year?

• Can I cover the payment during a slower rental season?

• Do I have adequate reserves after closing?

If the investment only works under perfect conditions, it may not be the right property.

Qualifying for Financing Is Only One Test

Investors sometimes assume that if a property qualifies for financing, it must be a good investment.

That isn’t necessarily true.

The lender evaluates whether the property and borrower meet the program’s qualification requirements. The investor must also determine whether the property fits their financial goals, risk tolerance and long-term strategy.

Before moving forward, review:

1. Realistic rental income

2. True operating expenses

3. Total monthly housing payment

4. Qualifying debt-service-coverage ratio

5. Estimated cash-on-cash return

A property doesn’t have to be perfect. But you should understand its strengths, weaknesses and potential risks before making a major financial commitment.

Your goal isn’t simply to buy a short-term rental.

Your goal is to buy one that fits your strategy, financial capacity and long-term plan.

Watch the Full Video

I explain all five numbers in this video:

Before You Buy a Short-Term Rental: 5 Numbers You Must Know

Have a Property in Mind?

Send me the property address, asking price and any available rental projections. I’ll help you review the financing side of the deal before you move forward.

VisitLisaStepp.comand selectReview My Deal.

Lisa Stepp-Seritt
Senior Loan Officer
More than 24 years of mortgage experience
NMLS #680403
Powered by Mpire Financial
Company NMLS #2108504

Information is for educational purposes only and is not a commitment to lend. Loan programs, rates, terms and qualification requirements are subject to change. Equal Housing Opportunity.