Short-term rentals promise more income. Long-term rentals promise a quieter life. The fair comparison is one $320,000 house and one loan, run both ways, with every number shown. All figures are pre-tax.
The house and the loan
Both versions start from the same purchase:
- Purchase price: $320,000
- Down payment at 20%: $64,000
- Loan: $256,000 at 7.25% for 30 years
- Mortgage payment: $1,746 a month
- Closing costs at 3%: $9,600
In this example the mortgage is the same either way. Only income and running costs differ.
Version one: short-term rental
The assumptions: a $185 average nightly rate, 60% occupancy, 15% of revenue to platform and management fees, and $950 a month in operating costs (property taxes, insurance, utilities, internet and supplies).
$185 × 365 nights × 60% = $40,515 a year, or $3,376 a month
Three bills come out of that monthly revenue:
- Fees at 15%: about $506
- Operating costs: $950
- Mortgage: $1,746
Revenue minus fees minus operating costs minus mortgage = $173 a month
Adding the rounded lines by hand lands a dollar high. The calculator keeps the cents and reports $173 a month. Twelve months of $173 is $2,076. Thin, but positive.
The extra cash for furnishing
Guests expect beds, a stocked kitchen and linens before the first booking. This example budgets $18,000 for furnishing and setup, on top of the down payment and closing costs.
$64,000 + $9,600 + $18,000 = $91,600 cash needed
Earning $2,076 a year on $91,600 is a cash-on-cash return of 2.3%.
Break-even occupancy
Two bills arrive whether or not anyone books: operating costs and the mortgage. That is $950 + $1,746 = $2,696 a month. Break-even occupancy is the share of nights you must fill so revenue after fees covers those bills. A fully booked month would bring in about $4,783 after fees.
$2,696 ÷ $4,783 = 56%
The plan assumes 60%, so the cushion is about 4 percentage points. One slow season can use that up.
Version two: long-term rental
Same house, one tenant, $2,300 a month. The assumptions: 5% vacancy, $3,600 a year in property taxes, $1,500 a year in insurance, 5% of rent each for maintenance and CapEx, and 8% of collected rent for management.
- Gross rent: $2,300 × 12 = $27,600 a year
- After 5% vacancy: $26,220
- Operating expenses: $3,600 + $1,500 + $2,760 for maintenance and CapEx + $2,098 for management = $9,958
- Net operating income (NOI): $26,220 minus $9,958 = $16,262
- Mortgage: $1,746 × 12 = $20,952 a year
The NOI does not cover the mortgage: about $1,355 a month against a $1,746 payment.
$1,746 mortgage minus $1,355 NOI = $391 short every month
Plainly: as a long-term rental, this house loses $391 a month. With the cents kept, the yearly loss is $4,694. On the $73,600 of cash needed ($64,000 + $9,600), that is a cash-on-cash return of −6.4%.
DSCR = NOI ÷ annual mortgage payments = $16,262 ÷ $20,952 = 0.78
A DSCR (debt service coverage ratio) below 1 means the property's income does not cover its loan payments. Lenders that qualify a loan on the property's income commonly look for at least 1.0, and often 1.2 or higher, though the floor and the formula vary by lender. Break-even occupancy here is 112%: the yearly bills ($9,958 + $20,952 = $30,910) exceed a full year of rent, so even a tenant who never leaves does not cover them.
The underlying problem: the cap rate ($16,262 ÷ $320,000) is 5.1% and the loan costs 7.25%. When the cap rate sits below the loan's interest rate, borrowing generally lowers your cash return instead of raising it.
Side by side
- Monthly cash flow: short-term makes $173, long-term loses $391, a $564 difference.
- Cash needed: $91,600 short-term, $73,600 long-term. The $18,000 gap is the furnishing.
- Room for error: about 4 points of occupancy short-term, none long-term.
The trade: income versus work, variability and regulation
- Work. Guests need messages answered, cleanings scheduled and supplies restocked every week. A long-term tenant mostly needs a lease and the occasional repair. Hiring a full-service manager can push fees above the 15% assumed here.
- Variability. While a tenant is in place, the $2,300 rent is the same every month. Nightly revenue moves with seasons, events and competing listings. The 60% is a yearly average, so some months may fall below break-even.
- Regulation. Many cities, counties and HOAs restrict or ban short-term rentals, and rules can change after you buy. If that happens here, the fallback is the version that loses $391 a month.
What this comparison leaves out
- Repair reserves. The long-term numbers set aside 10% of rent, $230 a month, for maintenance and CapEx. The short-term $950 has no such line. Reserve the same $230 and the $173 becomes a loss of $57 a month.
- Furniture replacement. The $18,000 of furnishings wears out. Replacing it is not in these numbers.
- Financing and insurance. Lenders and insurers often treat short-term rentals differently, so get quotes for the use you plan.
- Taxes. Everything here is pre-tax. How each model is taxed is a question for a tax professional.
The honest read: at this price and rate, the long-term version loses money every month and the short-term version barely makes any. Buying it means betting on occupancy holding and local rules staying put.
Run your own numbers
Enter your own nightly rate and occupancy in the short-term rental calculator, then run the same house through the rental property calculator as the fallback. If the fallback's DSCR comes in under 1, know that before you buy the furniture.