STR Deal Underwriting: From ADR and Occupancy to NOI, DSCR and Cash-on-Cash

Revenue Estimate vs. Underwriting

A revenue estimate tells you what a short-term rental might gross. Underwriting tells you whether you should buy it. The gap between the two is where most STR investors lose money: the projection says $78,000 a year, the seller prices the property against that number, and nobody models the 8% lodging tax, the 18% management fee, or the mortgage at today's rates.

Underwriting is the discipline of turning a revenue projection into a defensible bottom line — net operating income, debt service coverage, and cash-on-cash return — and then testing whether that bottom line survives a bad year. This guide walks the exact model, line by line.

If you are still at the estimating stage, start with how to analyze short-term rental properties and come back here once you have ADR and occupancy comps.

Step 1: Lock the Revenue Drivers

Never underwrite a single gross revenue number. Underwrite the two drivers behind it, because those are what you will argue about with a partner, a lender, or yourself in month seven.

Booked Nights = Occupancy % × 365
Gross Revenue = ADR × Booked Nights
Bookings = Booked Nights ÷ Average Length of Stay

• ADR should come from active comparable listings with the same bed, bath, and guest count — not from the top performer in the market.
• Occupancy should be a trailing twelve-month figure. Peak-season occupancy extrapolated across a year is the single most common overstatement in STR underwriting.
• Bookings matter because turnover-based costs scale with stays, not with nights. A five-night average stay produces roughly 50 turnovers at 70% occupancy; a two-night average produces 128.

If a seller hands you a gross revenue figure, back-solve it: divide by your comp ADR to get implied booked nights, then divide by 365. If the implied occupancy is higher than the best comp in the market, the number is marketing, not underwriting.

Step 2: Build the Expense Stack

Group expenses by how they behave. Fixed costs stay flat whether you book 100 nights or 300; variable costs move with revenue or with turnovers. Getting this split right is what makes your downside case honest.

Variable with revenue

• Management: roughly 18% of gross revenue for full-service management, or a smaller co-hosting split. Self-managing is not free — it is your time.
• Platform fees: about 3% on Airbnb host-only pricing, more on other channels.
• Lodging / occupancy tax: commonly around 8%, though it varies widely by jurisdiction. Check the local rate; many investors forget it entirely.
• Capital reserves: around 2% of revenue for capital expenditures plus roughly 0.5% for furniture replacement. Guests wear a property out faster than tenants do.

Variable with turnovers

• Cleaning: cost per turnover × number of bookings. Deduct it even when guests pay a cleaning fee, because that fee is usually already inside gross revenue.
• Consumables and restocking: toiletries, coffee, paper goods.

Fixed annual costs

• Property taxes and STR-specific insurance
• Utilities (budget around $180/month for a typical single-family STR) and internet or streaming (~$50/month)
• Lawn, pool, and pest service
• Linens and towels replacement (~$500 per year)
• Property security subscriptions, noise monitoring, and permit or license renewals
• HOA dues, if any

Step 3: True NOI

Net operating income is gross revenue minus every operating expense, before financing. It is the number lenders underwrite and the number you should use to compare one deal against another, because it is independent of how you choose to finance the purchase.

NOI = Gross Revenue − (Variable Expenses + Turnover Expenses + Fixed Expenses)

Two rules keep NOI honest. First, do not include mortgage interest, principal, or depreciation — those are financing and tax items, not operations. Second, do not net out startup costs like furnishing the property; those belong in your cash invested, not in the annual operating line.

Sanity check the result: if your operating expense ratio lands below roughly 35% of gross revenue, you have probably missed a line item.

Step 4: Debt Service and DSCR

Size the loan the way a lender would. At a 6.5% rate on a 30-year amortization with 20–25% down, annual debt service on a $400,000 purchase runs roughly $22,000–$24,000. Then compute coverage:

DSCR = NOI ÷ Annual Debt Service
Annual Cash Flow = NOI − Annual Debt Service

• DSCR ≥ 1.25x — comfortable. Most STR lenders will underwrite this, and you have room for a soft season.
• 1.00x–1.25x — thin. The property covers debt in a normal year and stops covering it in a bad one.
• Below 1.00x — you are funding the mortgage out of pocket. Only defensible if you are buying for appreciation or a repositioning plan you can actually execute.

Note that DSCR lenders often qualify STRs on market long-term rent rather than short-term projections. Run both: if the long-term rent DSCR is under 1.0x, financing may be harder than your model assumes.

Step 5: Total Cash Invested and Yield

Cash-on-cash return is only meaningful when the denominator is complete. For an STR, total cash invested is more than the down payment:

Total Cash Invested = Down Payment + Closing Costs (~1.5%) + Rehab + Furnishing & Startup (~$1,500+)
Cash-on-Cash Return = Annual Cash Flow ÷ Total Cash Invested

Furnishing a three-bedroom STR to a competitive standard — beds, seating, kitchenware, linens, photography, smart locks — is real capital, and leaving it out can inflate a reported return by several percentage points.

Target 8–12% cash-on-cash at minimum. Below 8%, a long-term rental with a fraction of the operational load will usually deliver a similar result.

Step 6: Conservative and Aggressive Cases

A single case is a guess. Three cases are an underwrite. The clean way to build scenarios is to flex the two drivers — ADR and occupancy — and let expenses follow, rather than arbitrarily haircutting revenue.

• Conservative: ADR and occupancy each 10% below base. Revenue falls roughly 19%, and revenue-linked expenses fall with it while fixed costs do not.
• Base: trailing twelve-month comp performance.
• Aggressive: ADR and occupancy each 10% above base — appropriate only if you can name the reason (added hot tub, better photography, superior pricing tool).

The decision rule is simple: buy on the base case, but only if the conservative case still clears a DSCR of 1.0x and does not require you to fund the mortgage. If the deal only works aggressive, it is not a deal — it is a bet.

Underwriting Mistakes That Kill Deals

• Double-counting cleaning fees as income without expensing the cleaner
• Using peak-season occupancy across all 365 nights
• Omitting lodging and occupancy tax
• Scaling cleaning costs with nights instead of bookings
• Forgetting furnishing and startup capital in cash invested
• Ignoring regulatory risk — a permit cap can zero the revenue line overnight
• Comparing an STR pro forma against a long-term rental pro forma without adjusting for management load

Once your numbers hold up, the natural next step is to flip the model around and solve for price. That is covered in how to back into a short-term rental offer price.

Frequently Asked Questions