Even in the fast-changing world of vacation rentals, the humble cap rate is still one of the clearest ways to size up a property’s income potential. In simple terms, it’s your net operating income (NOI) divided by the property’s value—a quick snapshot of expected return without factoring in financing.
Investors use it to compare properties on equal footing, especially when looking at deals in different markets. It shines when you want an unlevered, apples-to-apples comparison, but it’s less useful if you’re analyzing highly leveraged deals or markets with unusual expense structures.
Below, we’ll walk step-by-step through how to calculate cap rate for vacation rentals, and how to make sure your numbers reflect the realities of short-term rental operations.
What Is Cap Rate?
Cap rate—short for capitalization rate—is just a fancy way of saying, “How much return could this property generate if you bought it outright, no mortgage involved?” Think of it as a snapshot of potential performance before debt or taxes enter the picture.
The formula is straightforward:
Cap Rate = Net Operating Income (NOI) ÷ Property Value
The result is a percentage that tells you the property’s unlevered return. A higher cap rate usually means higher potential returns—but often with higher risk. Lower cap rates suggest steadier, lower-yield investments, which might appeal in more stable or competitive markets. What counts as “good” really depends on the local market, property type, and your personal risk tolerance.
The Big Key: Getting NOI Right for Vacation Rentals
If your cap rate is going to mean anything, you have to get Net Operating Income (NOI) right. At its core, NOI is just your total rental revenue minus your operating expenses—and that’s it. No mortgage payments, no income taxes, no big-ticket capital improvements. Those stay out of the equation.
For short-term rentals, operating expenses often include:
- Property taxes
- Insurance
- Utilities
- Routine maintenance
- Guest supplies and restocking
- Cleaning and turnover costs
- Platform or merchant fees
- Booking software subscriptions
- HOA or condo dues
- Licensing fees
- Professional management fees
Leave out mortgage principal and interest, income taxes, and reserves for big future repairs—track them separately for other return metrics. And remember: lodging or occupancy taxes are typically paid by guests and passed straight through to the city or state. Don’t count them as income, and always double-check your local tax rules.
Gather the Right Inputs for an STR
Before you can calculate a cap rate, you need solid numbers—guesswork won’t cut it. Start by projecting your Average Daily Rate (ADR) and occupancy for each season, then roll that up into annual revenue. Don’t stop at room nights—factor in other income streams like pet fees, parking, or gear rentals.
From there, subtract realistic operating costs: platform fees, cleaning and turnover, utilities, restocking, property management, and anything else you’ll actually spend to keep the place running.
Finally, sanity-check your projections against local comps and market data tools. And don’t forget to stress-test your numbers for both peak and slow seasons—because in the short-term rental world, the difference between July and January can make or break your returns.
Step-by-Step: Example Cap Rate Calculation
Step 1: Estimate Your Annual Gross Booking Revenue
Start with your Average Daily Rate (ADR) and multiply it by your Occupancy Rate and 365 days. This gives you your projected annual revenue. Don’t forget to add any extra income streams—like pet fees, parking, or equipment rentals—that your property generates.
Step 2: Subtract Your Operating Expenses
From that revenue, subtract all ongoing operating costs: cleaning and turnover, property management fees, utilities, supplies, property taxes, insurance, HOA dues, platform service fees, and any required licenses. These are the day-to-day costs of keeping your vacation rental running.
Step 3: Arrive at Your Net Operating Income (NOI)
The result after subtracting expenses from revenue is your NOI—the key number for your cap rate calculation.
Step 4: Divide NOI by the Property Value
Take your NOI and divide it by either the current market value or your purchase price. Multiply by 100 to express it as a percentage—this is your cap rate.
Example: If your ADR is $250, occupancy is 65%, and you bring in $10,000 in extra fees, your annual revenue might be around $69,125. Subtract $25,000 in expenses, and your NOI is $44,125. If the property value is $550,000, your cap rate is roughly 8%.
STR-Specific Nuances That Change NOI
When you’re running the numbers for a vacation rental, a few short-term–rental quirks can seriously sway your NOI. Keep these in mind:
- Seasonality & demand shocks – Don’t just take your best month’s revenue and multiply by 12. Model income month-by-month so you capture slow seasons, shoulder seasons, and unexpected dips. This keeps your projections realistic.
- Platform & payment fees – Airbnb, Vrbo, Stripe, and PayPal all take their cut. These fees belong in your operating expenses—leave them out, and your NOI will look better than it really is.
- Cleaning, linens & restocking – STRs have far more turnover than long-term rentals. Budget for frequent cleans, laundry service, and replacing worn-out essentials like towels, sheets, and kitchen basics.
- Local lodging tax compliance – Some taxes are collected and remitted automatically by platforms, but not all. Know which are true pass-throughs and which you’re responsible for paying.
Cap Rate vs. Cash-on-Cash vs. IRR (and When to Use Each)
Think of these three metrics as different camera lenses for looking at a deal. Cap rate is the wide-angle shot—it shows the property’s unlevered yield based on net operating income divided by its value. No financing in the mix, so it’s great for comparing properties side by side.
Cash-on-cash return zooms in on your actual money in the deal. It’s the levered return—annual pre-tax cash flow divided by your cash invested—and it’s heavily influenced by your loan terms, down payment, and financing strategy.
Then there’s IRR (internal rate of return), which is like a time-lapse view. It factors in the time value of money over your entire hold period, making it especially handy for multi-year vacation rental projections where you expect changing income, expenses, and a future sale.
What’s a “Good” Cap Rate for Vacation Rentals?
There’s no magic number that works everywhere. A “good” cap rate in one market could look terrible—or too good to be true—in another. That’s because cap rates are hyper-local, shaped by things like demand seasonality, local regulations, operating costs, and even the competition down the street.
A beach town with year-round tourism might have lower cap rates because properties are in high demand, while a rural lake market could show higher cap rates but come with more vacancy risk. Instead of chasing a nationwide benchmark, look at recent sales and performance data for similar vacation rentals in your target area. Local comps will give you a far clearer picture than any one-size-fits-all rule.
Common Mistakes to Avoid
Even seasoned investors can trip up when running the numbers on a vacation rental. Here are a few pitfalls to steer clear of:
- Counting mortgage payments in NOI: Your net operating income should only include income and operating expenses—not debt service. Mortgage principal and interest come after you’ve calculated NOI.
- Ignoring seasonality and shoulder-season occupancy: Peak-season numbers look great, but they won’t tell the full story. Build in realistic occupancy for slower months so your projections hold up year-round.
- Treating pass-through lodging taxes as revenue: Lodging and occupancy taxes that guests pay (and you remit) aren’t income—they’re just passing through your hands. Leave them out of your revenue line.
- Underestimating cleaning/turnover and platform fees: Short-term rentals come with frequent cleanings, restocking, and platform service fees. Skimping on these estimates can make a deal look better on paper than it really is.
Advanced: Using Cap Rate to Back Into Value (Income Approach)
Cap rate isn’t just for figuring out returns, you can flip the formula to estimate what a property might be worth. If you already know the local market’s typical cap rate, just take your net operating income (NOI) and divide it by that percentage.
For example, if your NOI is $60,000 and the market cap rate is 8%, the math is $60,000 ÷ 0.08 = $750,000.
This “income approach” is a handy way to sanity-check an asking price or figure out a fair offer. It’s not the only factor you should consider—location, condition, and growth potential still matter—but it’s a quick, numbers-based way to see if a deal’s in the right ballpark.
The Bottom Line
Calculating cap rate for vacation rentals isn’t just a formula, it’s a way to make smarter, more informed investment decisions. By focusing on accurate NOI, factoring in the unique costs of short-term rentals, and comparing against local market benchmarks, you can spot properties that offer the right balance of risk and reward.
If you’d rather spend your time growing your portfolio than managing every booking, turnover, and expense, RedAwning’s property management services team can help. We handle everything from marketing and guest communication to maintenance and financial reporting—so your NOI stays strong, your cap rate stays competitive, and your returns keep coming.
Frequently Asked Questions (FAQs)
Should I include furniture or setup costs in cap rate?
Nope. Furnishing, décor, and setup costs are one-time expenses. They don’t belong in a cap rate calculation because cap rate focuses on ongoing operating income. Those costs are better factored into a cash-on-cash return or IRR analysis when you’re looking at your total investment over time.
1. Is property tax in NOI?
Yes. Property taxes are part of your operating expenses and should be included in NOI. What you don’t include is income tax—you calculate that separately.
2. Does Airbnb always collect lodging taxes?
Not everywhere. In many cities and states, Airbnb automatically collects and remits lodging taxes. But in others, you’ll need to handle some or all of the taxes yourself. Always check your local rules.
3. Do I use purchase price or market value in the formula?
If you just bought the property, use the purchase price. If you’re analyzing an existing property you own, use its current fair market value for a more accurate reflection of yield.
4. What’s a “good” cap rate for a vacation rental?
It depends entirely on your market, property type, and risk tolerance. In some high-demand areas, a 5% cap rate might be solid; in others, you might target 8% or higher. Compare against local comps, not national averages.
5. Should I include mortgage payments in NOI?
No. Cap rate is an unlevered metric, so you don’t include debt service. If you want to factor in your loan, look at cash-on-cash return instead.
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