What is Cap Rate for Short-Term Rentals? The Investor's Guide to Capitalization Rate
Cap rate (capitalization rate) is the go-to metric for comparing STR property values. Learn the formula, good benchmarks, and how it differs from cash-on-cash return.
Cap rate is one of the most fundamental metrics in real estate investing — and one of the most misapplied for STRs. Because STR properties generate significantly more revenue than comparable long-term rentals, the cap rate calculation takes on new importance.
What Is Cap Rate (Capitalization Rate)?
Cap rate is the ratio of a property's Net Operating Income (NOI) to its current market value or purchase price. It expresses a property's expected annual return as a percentage, assuming an all-cash purchase with no financing.
Cap Rate = Net Operating Income (NOI) ÷ Property Value × 100
Cap Rate Example for a Short-Term Rental
You're evaluating an STR property at $500,000. It generates $80,000 in annual gross rental income. After all operating expenses of $32,000, the annual NOI is $48,000.
Cap Rate = $48,000 ÷ $500,000 × 100 = 9.6%
What Is a Good Cap Rate for an STR?
- Under 4%: Low — common in expensive urban/coastal markets; appreciation-driven thesis
- 4–6%: Average — solid cash-flow potential in mid-tier markets
- 6–8%: Good — strong cash-flow market; most serious STR investors target this range
- 8–10%: Excellent — high yield; verify regulations and market demand are sustainable
- 10%+: Exceptional — scrutinize assumptions; high cap rates sometimes signal higher risk
Cap Rate vs. Cash-on-Cash Return
Cap rate ignores financing — best for comparing properties on equal footing. Cash-on-cash return accounts for your specific mortgage terms and measures actual return on invested cash. Use cap rate when comparing acquisition opportunities. Use CoC to evaluate actual investment performance given your financing.
The STR Cap Rate Advantage Over Long-Term Rentals
A property that rents long-term for $2,500/month might generate $75,000+/year as a well-managed STR. If operating expenses are $28,000 either way, the STR produces $47,000 NOI vs. the LTR's $2,000 NOI on a $500,000 property — a 9.4% cap rate vs. 0.4%.
Evaluate STR cap rate instantly with Milo AI — start free with MagicBnB.
About MagicBnB
MagicBnB is the portfolio intelligence platform for short-term rental operators. Connect your Hospitable or Hostfully PMS and bank account through Plaid to track true net profit, ADR, occupancy, and all the metrics that matter — per property, not just in aggregate. Milo, your AI Revenue & Profit Manager, answers questions about your portfolio in plain English. Use the Deal Analyzer to underwrite new acquisitions before you commit. Free plan available — 5 deal analyses included. Start at magicbnb.io.
