Capitalization rate (or cap rate for short) can help determine the profitability of your vacation rental. But the topic can seem confusing and math-intensive to new or even veteran hosts. In this step-by-step guide, we break down how to calculate cap rate, how to know if your cap rate is healthy, and what your cap rate can teach you about your business.

Airbnb Cap Rate: What is a Good Cap Rate for Your Rental Property?

What is a Good Airbnb Cap Rate and How Do You Calculate It?

Airbnb investing may seem lucrative, but the proverbial gold at the end of the rainbow is only within reach when you make smart, strategic investments. What do the best short-term rental (STR) investments have in common? A strong Airbnb cap rate. 

A cap rate, or capitalization rate, is your key to plotting a profitable path. Plainly stated, it can help determine the rate of return on your rental property. Calculating your cap rate in advance is the best way to forecast your income potential, especially because STRs are more competitive than ever. According to our August 2022 market review, 1.38 million listings were available on Airbnb and Vrbo—a record high for the U.S. 

Before making the plunge into Airbnb investing in any market, you’ll first want to understand what a cap rate is, what a good cap rate is for your unique Airbnb, and how to use it to forecast winning investments. 

Whether you're managing a Vrbo or Airbnb or commercial property, the same principle applies: Cap rate remains a top metric by which to measure a real estate investment's profitability and return potential, independent of that property’s financing method.

Because cap rate is tied to your return on investment, you might think that high cap rates are ideal. But cap rates are also a measure of risk. Whether a high or low cap rate is better depends on your risk tolerance. A higher cap rate generally corresponds with a higher-risk investment, while a lower cap rate likely signals a less risky investment. 

What is a good cap rate for a rental property?

A good cap rate hovers somewhere between 8% and 12%, but the real answer is: It depends. While a 10% cap rate might be solid for some rentals, your percentage is not the only factor in determining whether taking on an Airbnb investment is right for you. A good cap rate for you depends on several different factors, like cash flow, property location, and property type. 

Cap rates by city, small town, and destination market will vary.

No two markets (let alone geographies) share the same conditions. Airbnb occupancy rates in destination markets ebb and flow depending on seasonality, while many urban markets see fewer fluctuations throughout the year. Those same destination markets also rely more on the best amenities to bolster their revenue compared to the amenities offered in urban and suburban listings.

The cost of the property also differentiates cap rates for population centers compared to destinations and rural markets. Broadly speaking, property costs more in cities than it does in more rural and destination markets, meaning that the cap rate in population centers will likely be lower than in more sparsely populated markets.

So, if you’re considering buying property in Los Angeles, don’t be too surprised if the cap rate is lower there than in Big Bear Lake, California, just 2.5 hours from the city.

Airbnb has gained attention for many reasons over the years, but one of the booking platform’s biggest draws is that it enables hosts to offer a range of unique property types. From tiny homes to opulent mansions, yurts to condos, guests have more options than ever when it comes to booking their ideal stay.

The property type you offer your guests will greatly influence your cap rate. If you’re providing a single-family home, you may expect a lower cap rate than if you listed a multi-family unit, depending on your market. Simply, more rooms generally mean more revenue potential, which, of course, impacts Airbnb cap rates.

No matter the market, there’s always a level of risk that comes with an Airbnb investment. A cap rate, above everything else, measures that risk. Broadly speaking, lower cap rates reveal lower risk, while higher cap rates show higher levels of risk.

However, a higher cap rate often indicates a more promising Airbnb investment; higher cap rates are associated with higher rates of return. Still, lower cap rates don’t necessarily mean that a potential property won’t be a wise investment. Your purchase price, budget, location, and even neighborhood will impact your bottom line.

Cap rates vary from market to market, which can make them difficult to calculate, especially for those with larger portfolios. STR data tools make it easy to stay on top of cap rates no matter which markets you’re considering investing in or how many properties you’d like to acquire. 

Here are the average cap rates in 2022 we’re seeing in a selection of urban and rural/destination markets across the U.S.:

While average cap rates can tell you a lot about potential investments, they’ll only get you so far. Learning to calculate cap rate for yourself can help you get a clearer idea of your potential return. Start by following the cap rate calculation formula:

Cap rate is the net operating income (NOI) divided by the property asset value and multiplied by 100 to achieve a percentage.

This formula is right for you (and most real estate investors) if you assume that your NOI is the expected annual income from your STR once you’ve accounted for all property management expenses. Be sure to include any taxes and other costs outside of just property management fees.

Also, remember that financing costs like debt services and your mortgage aren’t included in the formula. If you’re unsure of the exact cost of your future property, just substitute the property asset value for your expected purchase price to get a broader estimate.

If you purchase a property for $1,000,000 and your annual NOI is $70,000, your cap rate would be calculated as follows:

Another way to calculate cap rate is by swapping the property asset value for purchase price: Cap Rate = NOI / Purchase Price x 100

While some investors do use this formula, it has a few flaws. Because you’d use older properties’ prices in this case, you’re relying on prices that are too far in the past to give you an accurate estimate.

In almost all cases, these prices will be significantly lower than current values and not present an accurate representation of your earning potential. It becomes even more problematic if you’ve inherited a property, which can further complicate the formula.

Whichever formula you use, remember that while the cap rate is great for getting a better understanding of your property’s earning potential, it should not be the only metric you use to determine that potential. It’s a good starting point, but you should also factor in future cash flows related to property upgrades, the time value of money, and other factors.

Go beyond the standard cap rate calculator.

Although cap rates may sound like a silver bullet, they’re only a small piece of the Airbnb investment puzzle. Whether you decide that a high or low cap rate is ideal for your market, you’ll still need to account for other factors, like future cash flow, to understand what return you can realistically expect, all of which can be difficult to fold into a single equation. Tools like Rentalizer and AirDNA’s Market Comparison tool can help.

Rentalizer provides the most accurate property data available, giving you clear insight into just how much your potential property can earn. No matter your market, simply enter your address, and Rentalizer reveals your new cap rate, potential occupancy rate, ADR, and — most importantly — your annual revenue projection.

But drilling down on your cap rate is just the beginning. Start optimizing your pricing strategy, comparing markets, or researching comps, all of which you can do with MarketMinder. Create a free account to start taking advantage of millions of data points from over 80,000 cities and neighborhoods. 

AirDNA's trusted data tools put more money in hosts' pockets. Isn't it time you elevated your vacation rental business?

Capitalization rate (or cap rate for short) can help determine the profitability of your vacation rental. But the topic can seem confusing and math-intensive to new or veteran hosts. In this step-by-step guide, we break down how to calculate cap rates, how to know if your cap rate is healthy, and what your cap rate can teach you about your business.

Airbnb Cap Rate: What is a Good Cap Rate for Your Rental Property?

Unlock the ultimate Airbnb cheat code.

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