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Analyzing A Short Term Rental – Estimating Cash On Cash Returns

When analyzing a short term rental property, it is important to be able to estimate cash on cash returns. This allows you to understand whether something is a good investment or not. When you estimate your cash on cash returns, there are a few things you will need to first do.
Before reading this post, read the first two posts I had at the links below:
Now that you understand how to input those values, it is time to look at the last variables I have added to my analysis spreadsheet.
Ability To Increase Nightly and Occupancy Rates
There are two additional factors that are important to understand. These are your base night minimum rate and occupancy rate increases. I have added the ability to see what the impact of these variables are to your overall cash flow and cash on cash returns. The below snapshot shows how the inputs look on the excel file.
Occupancy and Nightly Rates
The beauty of the sensitivity analysis spreadsheet I have created is you can completely customize it. I have given the ability to analyze the property at 4 different occupancy levels. I have also given you the ability to analyze four different nightly rates.
What The Short Term Analysis Numbers Look Like
Here is a snapshot of what the final output looks like!
Nightly Rate Analysis
The numbers I have input in the above scenario are a real analysis done on a property recently. Let’s break down what we are looking at.
In the rows, I have grouped together the nightly rates. Taking an isolated look at one snip from the top, we can analyze what the minimum nightly rate returns look like.
Min Night Cash Returns
In the above screenshot, we can see the ‘Min Price Per Night’ is $111. Now moving to the right, we can see four different rows analyzing the property at 4 different occupancy rates. For this example, those occupancy rates are 70%, 75%, 80%, 85%.
The next column details out expenses. For this example, the expenses are $1,894 per month. This includes everything detailed out in the previous understanding expenses post.
Next, we get to income. This is where the nightly rate and occupancy rates come into play. At a 70% occupancy rate, you can see income generated of $2,331. At 75%, 80%, and 85% occupancy rates, the income increases to $2,498, $2,664, and $2,831 respectively.
The next column details out the monthly cash flow generated at each of the occupancy rates. The next column details out your cash on cash return. To understand more of what cash on cash (CoC) return means, feel free to click the link above. To have your cash on cash return calculate properly, you will need to input how much cash you invested in the purchase of the property (or renting/furnishing, etc.). High cash flow is great, but not if your cash on cash return isn’t high. I currently target 15-20% CoC return on short term rental properties.
Last but not least, you have the yearly cash flow! And just like that, you have successfully run the numbers for a short term rental property! You can see this same analysis performed on the rows below for the increased nightly rates.
Key Takeaways:
  • Understanding all components of analyzing a short term rental allows you to effectively run the numbers.
  • Occupancy levels and nightly price have a significant impact on cash flow. The ability to alter these to be conservative when you run the numbers allows for a great perspective. The better you get at getting a higher occupancy and higher nightly rental rates, the more cash you will see.
  • Cash on Cash return is one of the most important numbers to understand. The higher the cash on cash return, the better!

Interested to utilize my Short Term Rental Analysis Spreadsheet? You are in luck, I am currently offering a discounted price of $10 for the file! 

If you are interested in receiving this file, fill out the form below and I will email it to you!

Don’t forget @TheYoungRetireeBy33 3 Core Principles:
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Financial Independence Core Principle #3: Eliminate Your Largest Expense By House Hacking

Third and final core principle. House hacking is by far the most powerful way to begin your investing journey. When you think about getting ahead in your investment journey, eliminating your largest expense by house hacking becomes powerful. For 99% of people, the largest monthly expense you have is housing. If you are able to eliminate your largest expense by house hacking, you will put yourself in a position to aggressively save.
What Is House Hacking?
Let’s first answer what house hacking is. I go into much further detail on house hacking and different ways to house hack in this previous post. In the most simple terms, house hacking refers to purchasing a single family or multi family home and renting out portions of it. There are many different strategies to go about doing this, but the concept is to reduce your living expenses. The best house hackers are able to live for free or even make a little bit of money from their home.
Common Excuses to Not House Hack
What are the most common excuses I receive when I tell people that I house hack?
  • I have a family and wouldn’t feel comfortable house hacking.
  • Renting is just more simple and I don’t want to deal with a home.
  • I enjoy living on my own and don’t want to live with others.
  • Roommates? Yeah, I graduated from college already and I am a grown adult. I want my independence.
  • I don’t have the money to buy a home.
  • I don’t make enough to buy a home right now.
Cool, so what I hear is you have a fixed and limited mindset. Awesome. Just make sure you are aware that all the above excuses are those of people having a fixed mindset. These are all excuses and not valid.
Have a family and don’t think it is safe? Buy a multi-family property and you will have your own space. Even a single family home with a detached 1/1 unit would do.
Don’t have the money? Money is abundant and available these days. Stop making this excuse. If you had to raise $20,000 tomorrow to get in a deal that could pay off hundreds of thousands of dollars, would you be able to get the money? It isn’t the fact that you don’t have money, it is that it’s easier to make this excuse.
I don’t make enough money. Interesting, did you know lenders can help qualify you for a loan with the rental income counted as part of your income? Stop with the fixed mindset.
Why Is House Hacking A Core Principle
House hacking is a core principle because I simply don’t see why you wouldn’t do it. It makes too much sense to do. There are many different ways to effectively house hack. Any and all excuses you could have for not house hacking are just that, excuses.
I wish I knew about house hacking even when going to college. I would have bought a property in Buffalo, Arkansas and then Bethlehem, PA when I lived in each. Now that I have learned and successfully house hacked my first property, it is time for more.
How Am I Currently House Hacking
Want to hear the full story about how I got started house hacking? Checkout my recent podcast I was interviewed on where I speak about exactly this.
When I moved to Florida, I purchased a single family home in a nice area. I had no intention of house hacking at the time because I had never heard of it. I knew I wanted to buy a home versus renting an apartment. I was tired of paying someone else’s mortgage. I stumbled into house hacking when a friend of mine asked to come down for a few months. From there, I took it and ran with it.
My current house hacking strategy is renting out by the bedroom. I live in the master bedroom in my home and have three other bedrooms I rent out to young professionals living in the area. I bring in $2,400 per month in rent on a mortgage of $1,650. After all expenses, I typically make $100-200 per month. That is right, I get paid for the privilege of living in my own home!
My Next House Hack – Changing My House Hacking Strategy
For my second house hack, I plan to leverage a different strategy. I am planning to buy a multi-family property where one of the units is a 1/1. The goal is to get one of the following:
  • Single family home with a detached 1/1 unit
  • Duplex with one unit being a 1/1
  • Triplex of any kind with one unit being a 1/1
This next house hack will be a big step in my continued venture in investing in my financial independence. I am excited for the next steps in my journey and hope you seriously look into house hacking.
Key Takeaways:
  • Your largest expense is typically housing. For that reason, you should look to eliminate your largest expense by house hacking!
  • Stop making excuses on why you can’t house hack. I can find a reason why every excuse is not valid.
  • There are many strategies. Each can be used depending on your life situation and market you live in. Don’t think there is only one way to do this successfully.