Simple Guide: How to Estimate if a Beach Rental Property Will Make Money

How to Estimate if a Beach Rental Property Will Make Money

Thinking about buying a short-term rental property on Florida’s Emerald Coast? Here’s a simple guide to figure out if your home/condo in Destin, 30A, or Panama City Beach, FL is likely to be profitable.

We’ll break it into a few easy calculations.

First: A note about "Yield". Yield is a vague metric sometimes used to estimate the viability of a rental investment. Yield is calculated this way: Gross Annual Rental Income ÷ Purchase Price x 100. You'll often see 10% cited as a solid "Yield". But yield does not take into account your expenses, which can vary widely from property to property. I recommend investors look a little deeper, and use one of the following methods to estimate profitability.

Step 1: Estimate Annual Rental Income

You can use Rental Projections or Rental History

-OR- Multiply Average Nightly Rate × Number of Nights Booked Per Year

Example:

• $300 per night

• 220 nights per year

$300 × 220 = $66,000 per year

Step 2: Subtract Annual Expenses

Include:

• Property taxes

• Insurance

• HOA fees

• Property management

• Utilities

• Repairs

• Deep Cleaning (Guests usually pay for the cleaning that takes place after they check out)

• NOTE: Mortgage payments are not factored into Cap Rates.

If expenses total $35,000:

$66,000 – $35,000 = $31,000 Net Operating Income (NOI)

NOTE: NOI (Net Operating Income) = Annual Income - Annual Expenses

Step 3: Calculate Cap Rate (If you're paying cash)

Cap Rate = NOI ÷ Purchase Price

If the home costs $600,000:

31,000 ÷ 600,000 = 5.2% Cap Rate

This helps you compare properties. Note: Cap Rates do NOT factor in mortgage payments.

Step 4: Calculate Cash-on-Cash Return (If You Use a Loan)

Cash-on-cash return is especially important if you’re using financing. It measures how much return you earn on the actual cash you invested—not the total property price.

Cash on Cash Return = NOI - Mortgage Payments ÷ total cash invested

Using the same example above:

If your Net Operating Income (NOI) is $31,000

& Your annual mortgage payments total $21,000

And you invested:

• $120,000 down payment

• $20,000 closing/furnishing

Total cash invested: $140,000

$31,000 - (NOI)

-21,000 - (Mortgage Payments)

=$10,000

÷ 140,000 - (Total Cash Invested)

Cash-on-Cash Return = 10,000 ÷ 140,000 = 7.1%

This tells you how hard your actual cash is working.

What’s “Good”?

It depends on your goals, but generally:

• 5-6% cap rate is considered solid

• 8% CoC return is considered solid

• Positive cash flow is important

Final Advice for Beginners

1. Be conservative with income estimates

2. Overestimate expenses rather than underestimate

3. Make sure the property produces positive cash flow

4. Compare multiple properties before deciding

If the numbers work on paper, you’re much more likely to succeed.

Investment Metrics: Some Terms and Abbreviations

• ROI - Return on Investment

• CoC - Cash on Cash Return

• NOI - Net Operating Income

• Cap Rate - Capitalization Rate

AND FINALLY: Don't forget to factor in long-term appreciation. Some properties (ie Luxury condos) may not put much cash back in your pocket annually, but are they in an area that's holding it's value? Will they be more likely to build equity? Ask yourself, "If I hold this property for 5 years, how much could I make per year AND how much could I pocket when I re-sell it?"