As with any investment, a short-term rental must be able to prove ROI. There is no across-the-board number for a “good” ROI on a real estate investment, but on average, it is recommended to aim for an ROI above 15%.
ROI = (Annual Rental Income − Annual Operating Costs) ÷ Mortgage Value
Here’s a simple example: A client purchases a long term rental property for $180,000 and pays an additional $20,000 in closing fees and maintenance/repair costs. For a long-term rental, they would set a monthly rent amount—let’s say $3,400 per month, with utility costs of $16,800 annually. If they divide annual income ($48,00-$16,800) by the mortgage value ($300,000), the yearly ROI would be just over 8%. Whether 8% is a “good” or “bad” number is completely dependent on their specific financial situation and the property in which they’ve chosen to invest. (Of course, there are insurance, tax and maintenance costs to consider, but that’s another conversation.)
However, with a short-term vacation rental, occupancy can fluctuate wildly, so it is hard to say what the exact income would be. You can come close by exploring other rentals in the area to make some educated comparisons and doing some preliminary research to try to come close to estimating annual occupancy rates. Generally, short-term vacation rentals have a higher profit margin. The potential is there for high ROI, but it is a higher risk and dependent on a variety of external factors.