How to calculate ROI on your holiday rental property?

Short-term rentals have become a popular income stream for many Australians, but not all investments perform equally. To make informed decisions, you need to calculate ROI for short-term rental properties before you commit. This guide outlines a practical holiday rental investment strategy that will help you assess profitability and avoid common traps with the goal of boosting long-term returns.

What is the ROI for short-term rental properties?

Return on Investment (ROI) measures how much profit you make from your property compared to what you've spent on it. In the context of short-term rentals, ROI tells you whether the income from bookings outweighs your purchase price and running costs. For property owners, it's one of the clearest indicators of long-term viability.

A strong ROI for short-term rental property can justify additional investment, while a weak return signals a need to rework the strategy. The point in question here is how efficiently your money is working. If you're serious about measuring property performance, ROI is the first number you should understand and update regularly as the market shifts.

Step-by-step guide: How to calculate ROI for short-term rentals

Before you can calculate ROI for short-term rental properties, you need both your income projections and a clear view of your costs. These are the main steps to follow:

• Start with income: Estimate your gross rental income using the average nightly rate and occupancy rate.

• Subtract your expenses: Include everything from cleaning and linen to utilities and platform fees.

• Run the numbers: Apply one of the ROI formulas below to complete your short-term rental income analysis.

Method 1: Basic ROI calculation

The most straightforward way to measure return is by using this formula:

ROI = (Annual Rental Income – Annual Expenses) ÷ Total Investment x 100

Say you earn $80,000 a year from your property and spend $10,000 on expenses. If your total investment were $500,000, your ROI would be 14%. This method gives a quick snapshot of performance and is often a starting point for new investors. For more accuracy, many hosts in Australia use a rental property ROI calculator based on actual bookings, utilities, and updated property costs.

Method 2: Cash-on-Cash Return

This method compares your actual cash investment to the net income your property generates annually.

Cash-on-Cash Return = (Annual Pre-Tax Cash Flow ÷ Total Cash Invested) × 100

Suppose you buy a holiday unit for $600,000. You put in a $120,000 deposit and pay $15,000 in setup costs, total cash outlay: $135,000. After expenses and mortgage payments, the property generates $18,000 in annual cash flow. The formula is:

$18,000 ÷ $135,000 = 13.3%

Cash-on-cash return is a practical way to calculate rental return on investment, especially if you've financed part of the purchase.

Method 3: Cap Rate (Capitalisation Rate)

Cap rate measures the relationship between a property's net income and its current market value.

Cap Rate = (Net Operating Income ÷ Property Value) x 100

If a property earns $35,000 net per year and is worth $600,000, the cap rate is 5.8%. This method helps investors compare properties side by side, regardless of how they were financed. Cap rate is especially useful in markets like Bendigo or Ballarat, where prices vary sharply across suburbs. While it doesn't factor in borrowing costs, it's a common way to evaluate gross rental yield at a glance.

Have you heard about the 2% rule for rental properties?

The 2% rule is a rough benchmark that suggests your property should earn 2% of its purchase price in monthly rent. For example, a $500,000 home should generate $10,000 in rent each month to meet this rule. This is a fast way to spot high-performing properties, but it has limits.

It is more of a metric tool than an accurate ROI method because it doesn't consider expenses, financing, or local market factors. You can feed the 2% rule to your gross rental return calculator to identify red flags early, but it should never replace proper ROI calculations.

Common mistakes to avoid when calculating ROI

Your rental ROI is only as accurate as the numbers behind it. Below are some mistakes that trip up new investors, as well as some experienced ones. Avoiding them could be the difference between steady returns and a long-term loss.

Overestimating income and occupancy

It's easy to get excited by potential earnings, but basing ROI on peak season figures sets you up for disappointment. Local events and holidays don't always reflect the whole year's performance. Popular tools like a vacation rental profit calculator can help, but you must feed them realistic averages, including the low months.

Forgetting the hidden costs

Cleaning, callouts, broken locks, fresh towels; none of these seem like much until they pile up. If it costs money and happens more than once, it needs to be in your ROI calculation. Small leaks in your budget often lead to significant shortfalls later.

See more: How Many Hours Per Week Does it Take to Manage an Airbnb?

Using the wrong property value

Some investors plug in the purchase price from years ago or base ROI on what a friend paid down the road. That's guesswork, and it doesn't work long-term. ROI should reflect what your property is worth now, not what you think it's worth.

Ignoring the need to update

ROI isn't a one-time, set-and-forget metric. Market shifts, interest rate changes, and new operating costs can all impact the figures. You want to review your numbers regularly. If you're managing the property yourself, this guide on how much time it really takes to manage your Airbnb might help you factor in the opportunity cost of running admin tasks.

Tips to maximise ROI on your short-term rental property

Here are five proven ways of boosting ROI on holiday rentals based on what actually works in Australia's short-stay market.

Location: High demand, low seasonality

The right postcode matters. Properties near year-round attractions, transport hubs, or business districts tend to stay booked even when tourism dips. Choose areas with stable visitor traffic and not just seasonal spikes.

Pricing: Use dynamic tools

Use platforms or tools that track local events, school holidays, and competitor rates. This lets you lift rates when demand surges and stay competitive when it cools off.

Prioritise efficiency

Cutting waste starts with how you run things. You want to automate guest messages, schedule smart cleans between check-ins, and use reliable local businesses and partners. These minor tweaks reduce overhead and free up most of your time.

Focus on guest experience

Happy guests write better reviews and will be glad to rebook your property. Ensure you always stock quality basics, be clear with check-in instructions, and fix issues fast. A good stay costs little to deliver and pays off in visibility and trust.

Long-term planning: Review ROI regularly

Markets do shift, so you should adapt your strategy as needed. Check your ROI every quarter and adjust for new costs, occupancy changes, or regulatory shifts to keep your investment on track.

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