Australian property owners face unique challenges, such as seasonal occupancy fluctuations and varied operating costs, which make ROI calculations a bit technical. Accurate calculations can help you make informed decisions and maximise your profitability. In the sections below, we will explore how to calculate ROI and how to optimise it for short-term rental success.

What is the ROI for Short-Term Rental Properties?

The return on investment, popularly ROI, is a measure of the profitability of your short-term rental property compared to its costs. It is a critical metric for evaluating the financial performance of any real estate investment. Below are the key factors that influence ROI:

• Initial purchase price: The cost of the property is a significant determinant of ROI. Higher purchase prices require greater income to maintain profitability.
• Operating expenses: Costs such as maintenance, insurance, property management fees, and utilities reduce net income and can have a huge impact on ROI.
• Occupancy rates: In most parts of Australia, occupancy rates vary based on factors like tourism activities and location. Short-term rental properties in high-demand areas often enjoy better rates, which helps boost ROI.

Step-by-step: Calculating ROI for Short-Term Rentals

There are various ways of calculating the ROI of a short-term rental property. It all comes down to the size and nature of your rental business operation. Below are three main methods you can adopt in your business.

Method 1: Basic ROI Calculation

This method provides a straightforward way to measure overall profitability.

• Formula: ROI = (Net Annual Rental Income / Total Investment) × 100%
• Components:

Net Annual Rental Income: Total rental income minus expenses (e.g., maintenance, utilities).

Total Investment: Includes property purchase price, stamp duty, and upfront costs like legal fees.

• Example:
  • Property purchase price: $500,000
  • Stamp duty and fees: $25,000
  • Net Annual Rental Income: $40,000
  • ROI = ($40,000 / $525,000) × 100% = 7.62%
• Why it is useful: Ideal for investors seeking a quick overview of profitability.

Method 2: Cash-On-Cash Return

Unlike the first method, which focuses more on profitability, this one evaluates the cash yield of your property investment. The goal is to ensure the short-term rental property generates good cash flow to sustain its own operations and ensure profitability in the long run.

• Formula: Cash-on-Cash Return = (Total Cash Invested/ Annual Cash Flow ) × 100%
• Components:

Annual Cash Flow: Net income after operating expenses.

Total Cash Invested: Down payment, closing costs, and initial repairs.

• Example:
  • Down payment and costs: $250,000
  • Annual Cash Flow: $60,000
  • Cash-on-Cash Return = ($60,000 / $250,000) × 100% = 24%
• Who is it for? Popular among investors focusing on cash liquidity.

Method 3: Cap Rate (Capitalisation Rate)

Cap rate focuses on property performance relative to its current/market value.

Formula: Cap Rate = (Net Operating Income / Property Value) × 100%

• Components:

Net Operating Income: Annual income minus operating expenses.

Property Value: Current market value of the property.

• Example:
• • Property value: $500,000
  • Net Operating Income: $35,000
  • Cap Rate = ($35,000 / $500,000) × 100% = 7%
• Who uses it: Professional investors often use it to benchmark property performance.

Do You Know About the Famous 2% Rule?

The 2% rule assesses whether a property’s rental income justifies its purchase price.

• Formula: Monthly Rent / Property Purchase Price × 100 ≥ 2%
• Example:

Monthly rent: $10,000

Purchase price: $500,000

Calculation: ($10,000 / $500,000) × 100 = 2%

• When to Use it: It is a quick screening tool for evaluating the viability of a rental property.

Common Mistakes to Avoid When Calculating ROI

Most property owners and short-term rental investors often make mistakes when calculating the ROI of their rental properties. Here are the common mistakes you should watch out for:

• Overestimating your short-term rental income: Most investors or property owners assume year-round peak season rates during calculations, which can inflate ROI.
• Ignoring hidden costs: Insurance, utilities, and maintenance can reduce income. If you ignore these costs, your estimated ROI will be higher than it should be.
• Overlooking taxes: If you fail to account for short-term rental taxes, your ROI will be outright inaccurate.

Tips to maximise ROI on your short-term rental property

Now that you know how to measure your property’s ROI and the mistakes to avoid, here are a few tips you can implement to maximise the short-term rental ROI:

• Optimise occupancy rates: Use dynamic pricing tools to adjust rates based on demand.
• Enhance property quality: Add amenities like Wi-Fi and a fully equipped kitchen to attract guests.
• Control operating costs: Cut unnecessary expenses and invest in energy-efficient appliances.

To further enhance your short-term rental management, explore our tips, tools, and best practices for managing multiple short-term rentals and maximising your ROI.

Let L’Abode Accommodation Help You—Let Us Calculate the ROI for You

As a real estate investor, understanding the profitability of your property is crucial. While basic management tasks may be simple, calculating ROI and tracking revenue can be challenging.

At L’Abode Accommodation, we specialise in Airbnb management Australia. Our comprehensive ROI calculator helps you assess your property’s performance quickly and accurately, so you can make informed decisions with ease and maximise your investment’s potential.

Need help with your short-term property management? List your home with us today!