Return on Investment (ROI)
A family of measures for how much gain you get relative to what you put in. In STR conversations it often means total return (cash flow + appreciation + loan paydown + tax benefits) divided by equity — but many people casually use “ROI” to mean cash-on-cash or a simple profit multiple.
Definition
What is Return on Investment (ROI)?
Return on investment (ROI) is not one universally standardized formula in real estate. At the simplest level, ROI is (Gain − Cost) ÷ Cost, expressed as a percentage or a multiple. The ambiguity is what counts as “gain”: some investors include only distributed cash; others mark property appreciation to market annually; others add estimated principal paydown and tax savings from depreciation.
For short-term rentals, ROI is often discussed alongside cash-on-cash return. Cash-on-cash is a clean annual metric: pre-tax cash flow divided by cash invested. Total ROI is broader: it can include appreciation over a hold period, equity created by amortization, and the net effect of taxes. A property with modest annual cash-on-cash can still show excellent ROI if the market appreciates — and the reverse is also true.
When comparing deals or reading marketing materials, ask which ROI definition is used. If someone quotes “40% ROI” on a flip-style timeline, they may mean profit on invested capital over 18 months. If someone quotes ROI on a rental, they may mean an IRR-style multi-year figure. Aligning definitions prevents bad comparisons.
Real-world example
Scenario
You invest $120,000 cash to buy and furnish an STR. After five years you sell. Cumulative pre-tax cash flow was $45,000. Sale proceeds net of selling costs return $165,000 after paying off the remaining loan balance.
Calculation
Total gain vs initial cash: ($45,000 cash flow + net sale outcome vs starting basis). A simplified view: if net equity back is $210,000 on $120,000 invested, total multiple ≈ 1.75× before tax.
Result
That is a strong headline ROI — but it depended on sale timing, leverage, and tax treatment. Chalet’s calculator focuses on annual cash flow and key ratios; use ROI language deliberately when you include appreciation and exit.
Why it matters for STR investors
ROI is the language investors use when they ask whether an STR was worth it versus alternatives (stocks, other markets, doing nothing). Being precise about what is in the numerator and denominator keeps decisions honest.
Key points
- Clarify whether ROI includes appreciation, loan paydown, and taxes
- Cash-on-cash is the clean annual cash ROI; total ROI is broader
- Do not compare ROI across deals unless the time horizon and leverage match
- Marketing ROI figures often exclude stress scenarios — run your own
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