Key Takeaways
- 1Cap Rate = NOI / Purchase Price x 100. It measures property profitability without financing.
- 2Typical STR cap rates range from 4-10% depending on market tier (coastal/urban vs. emerging/rural)
- 3Cap rate is best for comparing properties. Use cash-on-cash return to evaluate your actual investment returns.
- 4Cap rate can be misleading for STRs because it assumes stable annual income, which seasonal rentals rarely produce
Cap rate is one of the most common metrics in real estate investing, but applying it to short-term rentals requires adjustments most investors miss. STR revenue is more volatile than traditional rentals, and a good cap rate in one market type means something very different in another.
Cap Rate Basics
Capitalization rate (cap rate) measures a property's profitability based on its income relative to its purchase price. It strips out financing entirely, so you can compare properties on an apples-to-apples basis regardless of how they're funded.
Cap Rate =
(Net Operating Income / Purchase Price) × 100
Net Operating Income (NOI) is your gross revenue minus all operating expenses. Operating expenses include platform fees, cleaning, utilities, insurance, property taxes, maintenance, and supplies. NOI does not include mortgage payments or debt service.
Example Calculation
$30,000 / $400,000 = 7.5% cap rate
Cap Rate Benchmarks for Short-Term Rentals
Here's how to interpret cap rates for STR properties:
Cap Rate vs. Cash-on-Cash Return
This is where most investors get confused. Cap rate and cash-on-cash return measure different things, and they can tell very different stories about the same property.
Cap rate ignores financing entirely. It tells you how the property performs as a standalone asset. A $400,000 property with $30,000 NOI has a 7.5% cap rate whether you pay cash or put 20% down.
Cash-on-cash return accounts for your actual cash invested and your mortgage payments. It tells you what return your invested dollars are earning. This is the metric that matters for comparing investments to each other. For a deep dive, see our guide to cash-on-cash return for Airbnb.
Same Property, Two Metrics
$10,800 / $112,000 = 9.6% cash-on-cash return
In this example, favorable financing turns a 7.5% cap rate into a 9.6% cash-on-cash return. That's the power of leverage. But higher interest rates or a larger down payment would shift the numbers significantly. Use cap rate to filter deals and cash-on-cash to evaluate what your money actually earns.
Why Cap Rate Can Be Misleading for STRs
Cap rate works well for traditional rentals where income is predictable month to month. Short-term rentals are different. Here's why you need to interpret cap rate carefully:
STR revenue is volatile
Seasonality, regulation changes, and market shifts can swing revenue 30-50% year over year. Cap rate assumes stable NOI.
Seasonal markets distort the picture
A beach house earning $80,000 in summer and $10,000 in winter shows a decent annual cap rate. But the off-season cash drain can be painful. Always check your break-even occupancy alongside cap rate.
Revenue projections vary widely
Cap rate is only as good as your NOI estimate. Use conservative revenue projections based on comparable properties, not optimistic forecasts from data tools.
Regulation risk is real
A 4% cap rate beach house in an unregulated market might actually outperform an 8% cap rate suburban rental if the suburban city passes STR restrictions.
How to Calculate Cap Rate for Your Property
Follow these steps to calculate a realistic cap rate for any STR property:
Estimate Gross Revenue
Research 5-10 comparable listings. Use realistic occupancy (55-65% for most markets, not the 75-80% sellers claim). Multiply average nightly rate by occupancy by 365.
Calculate All Operating Expenses
Include platform fees (3-5%), cleaning, utilities, insurance, property taxes, maintenance reserve (5%), and supplies. See our complete STR expense breakdown for every line item.
Subtract Expenses from Revenue
This gives you NOI. Do not include mortgage payments. Operating expenses for STRs typically run 35-50% of gross revenue.
Divide NOI by Purchase Price
Multiply by 100 to get the percentage. Our Deal Analyzer calculates this automatically along with cash-on-cash return and break-even occupancy.
Cap Rates by Market Type
Cap rates vary significantly by market type. Here's what to expect:
| Market Type | Typical Cap Rate | Notes |
|---|---|---|
| Urban apartments | 3-5% | High property costs, strong appreciation |
| Vacation destinations | 5-8% | Seasonal revenue, higher nightly rates |
| Suburban / mid-size cities | 6-9% | Lower costs, moderate demand |
| Rural / emerging markets | 7-12% | Lowest property costs, less predictable demand |
Markets with STR regulations that limit supply often have higher effective cap rates for licensed operators. Fewer competing listings means stronger pricing power for those who can legally operate. For details on what's allowed in specific markets, see our STR regulations guide.
Research cap rates with AirDNA market data
Market data and comps for any STR market