But I don’t stop there—I’m always exploring new ways to boost cash flow. Recently, I started looking into the idea of using tiny homes as short-term rentals. My research began with YouTube videos, just to see if the strategy is viable before committing to anything.

The Reality of Tiny Homes

Here’s what I found: tiny homes ain’t cheap. Beyond the house itself, you need to buy the land, customization/design of the home, and have high-end amenities to attract paying guests who want that unique experience. Altogether, you’re likely looking at $100,000–$150,000 per unit.

Most videos on the topic focus on the type of tiny home, location, projected nightly rates, and occupancy targets. Then they hit you with the big hook—cash-on-cash return (COC). Many claim 25%–50% COC, which sounds incredible but is often misleading.

Understanding Cash-on-Cash Return

Here’s how COC is calculated:

• Purchase price: $100,000

• Down payment + closing costs: $25,000 invested cash

• Annual net cash flow: $12,000

Formula:

A 48% ROI looks amazing on paper, and it’s easy to see why some investors would get excited. But the calculation often overlooks the real costs of operating a short-term rental.

The Real Expenses of Short-Term Rentals

Beyond your monthly PITI (principal, interest, taxes, insurance), STRs come with significant additional costs which you must cover:

• Utilities (gas, electric, water)

• Internet and cable

• Furniture, décor, and amenities (initial cost spread across the first year)

• Property management fees

• Booking and pricing software, channel manager fees

• Cleaning and housekeeping

• Supplies (toiletries, paper goods, cleaning products)

• Lawn care and garbage service

• Routine and unexpected maintenance

For example, this month one of my STR properties needed:

• $3,000 septic repair

• $1,500 plumbing repair

• $1,000 tree removal

That $5,500 bill will take me two months of bookings to recoup.

Across our STR portfolio, these operating costs average about 60% of gross income, leaving a 40% net margin. Still profitable, but far less glamorous than the inflated COC numbers often advertised.

A More Grounded Metric: Cap Rate

Instead of chasing COC hype, I prefer to evaluate deals with the cap rate formula:

Net income / Current Property Value

Example:

• Gross monthly income: $2,500

• Expenses: 60%

• Net monthly income: $1,000 ($12,000 annually)

• Current value: $100,000

$12,000 net / $100,000 = 12% cap rate

Now, if the property appreciates in two years to $110,000 and you increase your NOI to $15,000:

$15,000 net / $110,000 = 13.6% cap rate

Cash-on-cash return looks sexy and can be useful, but it’s often presented in a way that oversimplifies the reality of calculating returns on rental properties.

Cap rate provides a clearer, more realistic picture of long-term profitability.

In the end, you need to decide for yourself which ROI approach works best for you.