# How to Underwrite a Short-Term Rental Property (The Complete Framework) > Underwriting an STR isn't guesswork. Here's the step-by-step framework professional investors use to evaluate whether a property pencils — before making an offer. Canonical: https://www.underwriteapp.com/blog/short-term-rental-underwriting Most investors who lose money on short-term rentals made the same mistake: they projected revenue optimistically and underestimated expenses. The math looked great on paper. Reality was different. Professional STR underwriting exists to prevent this. It forces you to be specific — about revenue, about costs, about financing, about your exit — before you commit capital. This guide walks through the complete STR underwriting framework, step by step. --- ## What Underwriting Actually Means Underwriting is the process of determining whether a property's projected returns justify the risk and capital required to buy it. For short-term rentals, that means answering five questions: 1. How much will this property earn (gross revenue)? 2. What will it cost to operate? 3. What does the debt look like, and what does it cost? 4. What's the cash-on-cash return and DSCR? 5. What are the downside scenarios, and can I survive them? If you can answer all five with specific, defensible numbers, you're underwriting. If you're working from intuition or comp averages, you're guessing. --- ## Step 1: Revenue Projection The starting point is gross annual revenue: estimated occupancy × average daily rate × 365. **Don't use averages.** Market-level ADR and occupancy figures are useful for context, but they don't tell you what *your specific property* will earn. Two properties in the same ZIP code can perform 40% differently based on number of bedrooms, amenities, location within the submarket, and listing quality. **Use comparable listings.** Pull 5–10 actively booked STR comps that match your property on: - Bedroom count (within ±1 bedroom) - Location (within 1 mile if possible) - Amenity profile (pool vs. no pool matters enormously in some markets) - Season (avoid comparing a July month to a December month) From those comps, estimate a realistic occupancy rate (65–75% is healthy for most STR markets) and ADR. Be conservative — assume you'll be in the bottom half of your comps in year one while you build reviews. **Best sources for comp data:** - Rabbu (free basic estimates) - AirDNA Market Minder (market-level occupancy and ADR trends) - Manual comp research using Airbnb's search filter (set dates, look at prices of similar active listings) Underwrite builds its own comp layer — it pulls active comparable listings filtered by bed count, amenities, and the last 90 days of performance, without requiring an AirDNA subscription. Enter a property address and the revenue projection is included automatically. --- ## Step 2: Operating Expense Modeling This is where most amateur underwriters fail. STR expenses are high and easy to undercount. **Standard STR expense categories:** | Expense | Typical Range | Notes | |---------|--------------|-------| | Platform commission | 3–5% of gross | Airbnb host fee; VRBO is similar | | Property management | 0% or 20–35% of gross | 0% if self-managed | | Cleaning | $75–$250/stay | Scales with booking count, not occupancy | | Consumables (soap, paper goods, etc.) | $50–$150/month | | | Insurance (STR policy) | $1,500–$5,000/year | Standard homeowner policy doesn't cover STR | | Property taxes | Local rate | Annual | | HOA fees | If applicable | Some HOAs prohibit STRs — check before closing | | Utilities | $150–$400/month | STRs pay all utilities; guests don't | | Landscaping / maintenance | $100–$400/month | | | Furnishing reserve | 5–10% of gross | STR furniture has 3–5 year replacement cycle | | CapEx reserve | 1–2% of property value | HVAC, roof, plumbing | **A realistic STR expense ratio runs 45–60% of gross revenue.** If your model shows expenses below 40%, you're likely missing something. **The pro move:** Model expenses in two buckets — fixed (don't change with occupancy) and variable (scale with bookings). Cleaning is variable. Insurance is fixed. This lets you build a more accurate sensitivity analysis. --- ## Step 3: Net Operating Income NOI = Gross Revenue − All Operating Expenses (before debt service) This is the number that tells you whether the business itself is viable, independent of how you financed it. A property with $80,000 gross revenue and $45,000 in operating expenses has $35,000 in NOI. **Why NOI matters:** It's the universal measure of investment property performance. It lets you compare different properties, different financing structures, and different markets on an apples-to-apples basis. It's also what DSCR lenders use to calculate your coverage ratio. --- ## Step 4: Debt Service and DSCR Once you have NOI, layer in your financing. **Annual Debt Service** = monthly PITI (principal, interest, taxes, insurance) × 12 Note: if you're including taxes and insurance in your operating expenses already (recommended), use only P+I in debt service to avoid double-counting. **DSCR** = NOI ÷ Annual Debt Service - DSCR > 1.25 = deal covers its debt with margin — good - DSCR 1.0–1.25 = tight but serviceable; you're not losing money but there's little cushion - DSCR < 1.0 = property doesn't cover its debt — you're subsidizing it from other income Most DSCR lenders require 1.0–1.25 minimum. If you're using conventional financing (portfolio loan, Fannie/Freddie), DSCR is still the right measure — your lender may calculate it differently, but the concept is the same. --- ## Step 5: Cash-on-Cash Return DSCR measures the property's coverage. Cash-on-cash measures what you personally earn on the cash you invested. **CoC = Annual Pre-Tax Cash Flow ÷ Total Cash Invested** Annual Pre-Tax Cash Flow = NOI − Annual Debt Service Total Cash Invested = Down payment + Closing costs + Furnishing + Initial CapEx **Benchmarks:** - 8–12% CoC: solid for a primary STR market - 12–20% CoC: excellent; typical of high-yield rural or regional markets - < 6% CoC: below what you'd earn in the market with less work A strong STR in a real market should produce 10–15% cash-on-cash in year one, ramping up as your listing builds reviews and you optimize pricing. --- ## Step 6: Downside Sensitivity The final — and most important — step: model the bad scenarios. | Scenario | What to model | |----------|--------------| | Occupancy drops 15% | Does the property still cover debt service? | | ADR drops 10% | What happens to CoC? | | STR regulations change | Is there an LTR fallback? What's the LTR NOI? | | Owner-managed → PM managed | How does CoC change if you add 25% management fee? | | Rates rise 1% on refi | What's the impact on DSCR? | A deal that's acceptable in every downside scenario is a genuinely good deal. A deal that only works in the base case is a speculation. --- ## Doing This at Scale Running this analysis manually takes 4–8 hours per property — pulling comps, building the expense model, structuring the sensitivity table. Underwrite runs the full underwriting framework automatically: it ingests property data, pulls comparable revenue from real STR data sources, builds the expense model, calculates NOI, DSCR, and CoC, and runs sensitivity scenarios. The output is a complete investment analysis and lender-ready package — in about 15 minutes. **[Run your first analysis free](/signup).** No credit card required.