Cap Rate
Capitalization rate (cap rate) is a fundamental real estate investment metric calculated by dividing a property's Net Operating Income (NOI) by its current market value or purchase price. It expresses the expected annual return as a percentage. In the vacation rental industry, a good cap rate typically ranges from 5–8% for established markets, with top-performing STR properties achieving 8–12%. Cap rate helps investors compare properties across different markets and price points, and is a key metric for evaluating whether a vacation rental investment will be profitable.
Frequently Asked Questions
What is a good cap rate for a vacation rental?
A good cap rate for vacation rentals is typically 5–8% in established markets, with top performers hitting 8–12%. However, a higher cap rate often comes with higher risk. Compare cap rates within the same market and property type for meaningful benchmarking.
How do you calculate cap rate for a vacation rental property?
Cap rate is calculated by dividing the property's annual Net Operating Income (NOI) by its current market value or purchase price, then multiplying by 100 to express it as a percentage. For example, a property generating $45,000 in annual NOI with a market value of $500,000 has a cap rate of 9%. NOI should include all rental revenue minus operating expenses (management fees, cleaning, maintenance, utilities, insurance, taxes) but exclude mortgage payments and income taxes.
Why do vacation rental cap rates differ from traditional rental cap rates?
Vacation rental cap rates are typically higher than traditional long-term rental cap rates (which average 4-6%) because STRs generate significantly more gross revenue per night but also carry higher operating costs and more revenue volatility. A vacation rental might earn 2-3x the annual revenue of a comparable long-term rental, but operating expenses including cleaning, furnishing, management, and platform commissions are substantially higher. The higher cap rate also reflects the additional risk from regulatory changes, seasonal demand fluctuations, and market competition.
What cap rate should I target when buying a vacation rental investment property?
For vacation rental investment properties, target a cap rate of 5-8% in established markets with stable regulations and consistent demand. Properties achieving 8-12% cap rates are considered top performers but often carry higher risk -- they may be in emerging markets, seasonal destinations, or areas with regulatory uncertainty. Always compare cap rates within the same market and property type for meaningful analysis, and factor in potential revenue growth and appreciation alongside the cap rate when making investment decisions.
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