If you’re looking to invest in a good short term rental, the Airbnb cap rate is the most important metric you should pay attention to.
Are you new to real estate investing? You might have come across the term cap rate, but you’re still unsure what it means exactly. To maximize your profits, you need to pay attention to this metric. Also, remember that you should only put your money in markets where the rental properties’ cap rates are high enough to justify such an investment.
Table of Contents
- What Is a Cap Rate?
- How to Find Cities With High Average Airbnb Cap Rates
- Top 10 Cities With the Highest Airbnb Cap Rate
- What Are the Risks of Using Airbnb Cap Rates?
- Frequently Asked Questions
The cap rate is a widely used tool for evaluating real estate investments because it helps investors determine the profitability of a property and compare it to other investment opportunities. A higher cap rate indicates a potentially more lucrative investment, while a lower cap rate suggests a lower potential return.
In this article, we will tell you everything you need to know about capitalization rate as a metric for measuring a rental property’s return on investment. You will also discover how to find cities with high average Airbnb cap rates. Then, at the end of the article, we will look to answer some of your burning questions about Airbnb cap rates.
We will also give you a list of the top 10 cities for investing in good short term rentals in the United States based on each market’s Airbnb cap rate.
What Is a Cap Rate?
Cap rate, which is short for capitalization rate, is the most commonly used financial metric for measuring the potential success of rental property investment. It is a metric that tells you the percentage of your property’s value that will be generated from your rental income each year.
How to Calculate the Cap Rate
To calculate it, you will need to know the following:
- The property’s market value
- Monthly or annual rental income that the property is expected to generate
- All one-time and recurring expenses that will incur
Using the above values, you can then calculate your net operating income by subtracting the annual expenses from the annual rental income and any other sources of profit related to the property.
Afterward, you can use the formula below to calculate the property’s cap rate:
Cap Rate = (Net Operating Income / Market Value) x 100%
So, for example, if you’re analyzing a rental property that is valued at $500,000, and its expected annual NOI is $20,000, the calculation would be as follows:
Cap Rate = (20,000 / 500,000) x 100% = 4%
What it means is that the property will generate an annual profit that is equal to 4% of its price. It, in turn, means that it will take 25 years for the property to pay for itself (100% divided by 4%) based on its current rental income and market value.
Luckily, you can also use a cap rate calculator to make the process much easier, especially when trying to analyze several properties at once. If you’re looking for a great cap rate calculator to use, look no further than Mashvisor’s tool, as it is the most efficient, especially when it comes to Airbnb rentals.
Learn More: Real Estate Investing for Beginners—How to Calculate Cap Rate
What’s the Difference Between Cap Rate and Cash on Cash Return?
Cash on cash (CoC) return is another popular metric used for analyzing the returns of a rental property. However, unlike the cap rate, the cash on cash return metric relies on the amount of cash you want to invest in the property instead of its market value. It makes CoC return a useful metric to use when you want to take out a mortgage to purchase the property.
For example, if you want to calculate the CoC for a rental property that costs $100,000, but you want to use a mortgage to pay for 60% of its price, you would only include the $40,000 in your calculation.
Calculating the CoC is similar to calculating the cap rate, except you will be using the cash value as stated above. What it tells you is the rate of return that your rental income will generate compared to the amount of cash that you’ve paid for the property.
What Is an Airbnb Cap Rate?
In the previous section, we talked about the cap rate in general, which is used for both traditional and short term rental properties.
But what is the difference between traditional and Airbnb cap rates? Well, the answer is that they’re both calculated the same, and they involve similar steps.
The difference, however, is in the results that you can expect from each metric, which are affected by all the usual differences between the two investment strategies.
For example, while traditional rentals come with a lower potential for annual profit, their rental rates are more stable and their vacancy rates are generally lower. It results in a lower average cap rate but a far less volatile five-year and 10-year forecast.
On the other hand, the Airbnb cap rate can change drastically based on seasonality, and it’s much harder to predict its long term value due to the expected volatility.
Another thing to remember when calculating the real estate cap rate for an Airbnb rental is that your monthly cap rate can vary greatly from your annual cap rate.
An example would be a beach house rental, which will see peak occupancy during the summer season. At this point, the rental rate can also be adjusted and increased to match the new demand. The Airbnb cap rate during the said period will be drastically higher than for the rest of the year.
However, due to the flexibility of short term rentals and your ability to only rent them out during peak seasons, the lower cap rate during the rest of the year may not be as valuable to you.
Related: How to Evaluate an Airbnb Investment
What Does Average Airbnb Cap Rate Mean?
When it comes to determining what a good cap rate for Airbnb is in a specific market, most real estate investors will use Airbnb comps.
Airbnb comps involve comparing many short term rentals in a certain market and identifying the average rental rates and the median property price to get the average cap rate of that market. By doing this, you should be able to identify properties that are performing above or below average in terms of their rate of return on investment.
Similar to when you analyze a single property, Airbnb comps are very dependent on seasonality since short term rentals mostly attract guests who visit areas during specific seasons of the year.
Airbnb comps will tell you what the average Airbnb cap rate is in a certain market. This is useful when you want to compare different markets with one another or when you’re trying to diversify your portfolio. It brings us to our next point regarding the cap rate:
What Is a Good Cap Rate for Airbnb?
There is no specific number for the question, what is a good cap rate for Airbnb? But in general, a good cap rate for an Airbnb property is from 8% to 12%. A cap rate that is lower than 8% means the investment has low risk but also low returns, while a cap rate that is higher than 12% means high returns but high risk.
The cap rate can vary depending on various factors, such as location, property type, and local regulations. For example, a property in a highly desirable location with a strong rental demand may have a lower cap rate due to higher market values.
On the other hand, a property in a less popular location may have a higher cap rate due to lower market values and lower operating costs.
In addition to location, the type of property also plays a significant role in determining the cap rate for an Airbnb property. For instance, a single-family home may have a lower cap rate than a multi-unit apartment building due to higher operating expenses such as property management, maintenance, and utilities.
Additionally, the investment strategy impacts the cap rate. Investors who prefer to purchase distressed properties and renovate them may expect a higher cap rate due to lower purchase prices and higher expected returns.
Related: Mashvisor—The Best Airbnb Income Calculator
How to Find Cities With High Average Airbnb Cap Rates
Finding cities with high average Airbnb cap rates requires research and analysis. Here are some steps to help you identify such cities:
- Determine the Criteria: Start by determining the criteria for the cities you are thinking about investing in. This can include factors such as population size, location, tourist attractions, local regulations, and average property values.
- Gather Data: Once you have identified your criteria, gather data on cities that meet these criteria. This can include information on the number of Airbnb listings, occupancy rates, average daily rates, and local regulations. You can obtain this information from sources such as Airbnb’s website, real estate websites, and local tourism boards.
- Calculate Cap Rates: Once you have collected the necessary data, calculate the cap rates for each city. To calculate the cap rate, divide the property’s net operating income by its market value and multiply the result by 100. This will give you the cap rate as a percentage.
- Analyze the Data: Once you have calculated the cap rates for each city, analyze the data to identify cities with the highest average cap rates. Look for patterns or trends in the data that may indicate which cities are the most profitable for Airbnb investments.
In conclusion, finding cities with high average Airbnb cap rates requires research, data analysis, and careful consideration of various factors. By following the steps outlined above, you can identify cities that offer the best investment properties to add to your Airbnb portfolio.
Mashvisor Tools to Help You Find Cities With High Average Airbnb Cap Rates
As a real estate platform, Mashvisor was designed to help real estate investors like you who want to invest in long term and Airbnb rental properties. The platform includes several tools to help you analyze each market and find the best-performing rental investment properties in any market in the United States.
With a major focus on traditional and Airbnb cap rate analytics, Mashvisor eliminates the need to manually obtain data on each property before using a spreadsheet to do comps and reach a conclusion. The Airbnb cap rate calculator that the platform offers is an easy-to-use dynamic tool that allows for a great deal of customization to get the most accurate calculations in real time.
Other tools that Mashvisor offers are Market Finder, Real Estate Heatmap, and Property Finder.
Mashvisor’s Market Finder tool can help you find cities with high average Airbnb cap rates by providing them with detailed market analysis. The tool uses AI-powered algorithms to analyze data such as property values, rental rates, occupancy rates, and local regulations to determine the most profitable cities for Airbnb investments.
It also lets you filter by various criteria, such as Mashmeter Score, school rankings, and crime and safety, making it easy to find properties that meet your investment goals.
Additionally, the tool provides a heat map that visually represents the Mashmeter Score for different neighborhoods in a city. This helps you quickly identify areas with high potential for profitable investments.
Real Estate Heatmap
Mashvisor’s real estate heat map tool can help you find cities with high average Airbnb cap rates by providing a visual representation of the data. The tool uses color coding to show the cap rates and other metrics for different neighborhoods in a city. This makes it easy for you to identify which parts of a city have high potential for profitable Airbnb investments.
The heatmap also lets you filter by various criteria, such as property type, rental income, and listing price, giving you a more customized view of the market. By using Mashvisor’s real estate heatmap tool, you can save time and make more informed decisions on where to invest your money for the highest potential return.
Mashvisor’s Property Finder tool can help you find properties with high Airbnb cap rates in up to 10 cities at once by sorting the listings starting with the highest returns. The tool uses data such as cash on cash return to help you identify properties that are likely to be profitable.
Additionally, it lets you filter properties by various criteria, such as property type, preferred rental strategy, and price range, making it easy to find properties that meet your investment goals.
By using Mashvisor’s Property Finder tool, you can efficiently and effectively evaluate individual properties and identify the best investment opportunities in up to 10 markets. Thereby saving you precious time and resources.
Mashvisor’s Airbnb calculator can help you find properties with high potential Airbnb cap rates. It works by providing accurate data on the potential return on investment for individual properties. It uses a mathematical model that factors in data such as rental income, occupancy rates, and expenses to calculate the cap rate and other metrics for an Airbnb property.
While the calculator automatically estimates the metrics based on nearby rental comps, you can adjust the figures to get a customized projection.
Start your 7-day free trial with Mashvisor to easily identify cities with high Airbnb cap rates.
Top 10 Cities With the Highest Airbnb Cap Rate
To showcase the power of Mashvisor’s data, we have compiled a list of the top 10 cities in the US Airbnb market in terms of cap rate.
In addition to having a high cap rate, the markets on this list are considered affordable and have an above-average number of listings for sale.
The cities on this list are based on Mashvisor’s location report as of March 2023. The list comprises cities with a median property price of less than $1 million, at least 100 Airbnb listings, an Airbnb rental income of at least $2,000, and an Airbnb occupancy rate of 50% upward.
1. Northlake, IL
- Median Property Price: $323,180
- Average Price per Square Foot: $217
- Days on Market: 139
- Number of Airbnb Listings: 120
- Monthly Airbnb Rental Income: $4,269
- Airbnb Cash on Cash Return: 8.29%
- Airbnb Cap Rate: 8.44%
- Airbnb Daily Rate: $171
- Airbnb Occupancy Rate: 53%
- Walk Score: 33
2. Columbia Heights, MN
- Median Property Price: $294,482
- Average Price per Square Foot: $142
- Days on Market: 22
- Number of Airbnb Listings: 314
- Monthly Airbnb Rental Income: $3,724
- Airbnb Cash on Cash Return: 8.06%
- Airbnb Cap Rate: 8.21%
- Airbnb Daily Rate: $158
- Airbnb Occupancy Rate: 58%
- Walk Score: 82
3. Bridgeton, MO
- Median Property Price: $264,711
- Average Price per Square Foot: $136
- Days on Market: 23
- Number of Airbnb Listings: 120
- Monthly Airbnb Rental Income: $3,291
- Airbnb Cash on Cash Return: 7.69%
- Airbnb Cap Rate: 7.83%
- Airbnb Daily Rate: $154
- Airbnb Occupancy Rate: 58%
- Walk Score: 3
4. Rileyville, VA
- Median Property Price: $332,031
- Average Price per Square Foot: $192
- Days on Market: 15
- Number of Airbnb Listings: 155
- Monthly Airbnb Rental Income: $3,733
- Airbnb Cash on Cash Return: 7.57%
- Airbnb Cap Rate: 7.69%
- Airbnb Daily Rate: $236
- Airbnb Occupancy Rate: 56%
- Walk Score: 10
5. Harahan, LA
- Median Property Price: $398,200
- Average Price per Square Foot: $209
- Days on Market: 57
- Number of Airbnb Listings: 111
- Monthly Airbnb Rental Income: $4,022
- Airbnb Cash on Cash Return: 7.46%
- Airbnb Cap Rate: 7.57%
- Airbnb Daily Rate: $137
- Airbnb Occupancy Rate: 59%
- Walk Score: 56
6. Harpers Ferry, WV
- Median Property Price: $384,688
- Average Price per Square Foot: $239
- Days on Market: 64
- Number of Airbnb Listings: 118
- Monthly Airbnb Rental Income: $3,956
- Airbnb Cash on Cash Return: 7.17%
- Airbnb Cap Rate: 7.27%
- Airbnb Daily Rate: $187
- Airbnb Occupancy Rate: 51%
- Walk Score: 0
7. Columbia, MO
- Median Property Price: $277,834
- Average Price per Square Foot: $144
- Days on Market: 81
- Number of Airbnb Listings: 252
- Monthly Airbnb Rental Income: $2,758
- Airbnb Cash on Cash Return: 7.16%
- Airbnb Cap Rate: 7.34%
- Airbnb Daily Rate: $138
- Airbnb Occupancy Rate: 58%
- Walk Score: 30
8. Lyons, IL
- Median Property Price: $269,543
- Average Price per Square Foot: $210
- Days on Market: 88
- Number of Airbnb Listings: 173
- Monthly Airbnb Rental Income: $3,164
- Airbnb Cash on Cash Return: 7.11%
- Airbnb Cap Rate: 7.27%
- Airbnb Daily Rate: $166
- Airbnb Occupancy Rate: 53%
- Walk Score: 65
9. Broadview, IL
- Median Property Price: $251,790
- Average Price per Square Foot: $208
- Days on Market: 83
- Number of Airbnb Listings: 307
- Monthly Airbnb Rental Income: $3,189
- Airbnb Cash on Cash Return: 7.04%
- Airbnb Cap Rate: 7.18%
- Airbnb Daily Rate: $164
- Airbnb Occupancy Rate: 59%
- Walk Score: 77
10. Crystal, MN
- Median Property Price: $272,519
- Average Price per Square Foot: $165
- Days on Market: 56
- Number of Airbnb Listings: 208
- Monthly Airbnb Rental Income: $3,110
- Airbnb Cash on Cash Return: 6.95%
- Airbnb Cap Rate: 7.08%
- Airbnb Daily Rate: $163
- Airbnb Occupancy Rate: 52%
- Walk Score: 59
The cities mentioned above are great places for Airbnb investment because they offer investors the potential for higher returns on their investments. Also, these cities with high Airbnb cap rates have strong demand for short term rentals. This is due to factors like tourism, business travel, or events, which help ensure consistent occupancy rates and rental income.
Start searching for properties with a high Airbnb cap rate in the United States to maximize your return on investment.
Airbnb Cap Rates: What Are the Risks?
While Airbnb can be a lucrative investment opportunity, there are several risks associated with it that can affect the cap rate of the property. Some of these risks include:
Regulations and Legal Issues: Many cities and localities have imposed regulations and restrictions on short term rentals, including Airbnb. These regulations can impact the profitability of an Airbnb investment and reduce the number of potential renters, thereby decreasing the cap rate.
Seasonal Fluctuations: Airbnb rental demand can be seasonal, and rental rates can fluctuate significantly based on the time of year. Therefore, Airbnb properties may experience periods of low occupancy, resulting in lower rental income and cap rates.
Property Damage and Maintenance: Unlike traditional rentals, Airbnb properties can experience a higher level of wear and tear, especially when a lot of guests have stayed there. Additionally, cleaning and maintaining an Airbnb property can be more time-consuming and expensive than a long term rental, reducing the property’s net income and cap rate.
Competition: As Airbnb stays as popular as ever, more property owners are listing their homes, leading to increased competition. This can drive down rental rates and affect the cap rate of the property.
Dependence on Airbnb: Lastly, owning an Airbnb property means that you are dependent on the platform’s continued success. Any changes to Airbnb’s business model, policies, or reputation could negatively impact your rental income and cap rate.
These risks could impact the profitability of the investment. This is why it’s essential to thoroughly research the local regulations, seasonal demand, and competition in the area before investing in an Airbnb property.
Final Thoughts on Airbnb Cap Rate
In conclusion, Airbnb cap rates vary widely depending on a multitude of factors, including local regulations, tourism demand, and property prices. Investors looking to find cities with high average Airbnb cap rates can use Mashvisor’s tools, which include the Market Finder, Property Finder, Airbnb calculator, and heatmap.
By leveraging these AI-powered tools, investors can save time and make more informed investment decisions based on accurate and up-to-date data.
Schedule a demo with Mashvisor to discover how you can use this platform to find an investment property with a high cap rate.
Frequently Asked Questions
What Does 7.5% Cap Rate Mean?
A 7.5% cap rate is a real estate investment term that refers to the expected rate of return on an investment property for sale.
If a property or investment has a 7.5% capitalization rate, that means the owner can expect to receive 7.5% of the property’s value in annual gross income. For example, if an investment property is valued at $300,000 and has a cap rate of 7.5%, the owner can expect to earn an annual return of $22,500.
What Is a Good Cap Rate for VRBO?
A good cap rate for VRBO (vacation rental by owner) properties is subjective and can depend on various factors such as location, property type, and the cost of borrowing.
The average cap rate for VRBO properties in the United States is around 8% to 12%. However, it is essential to note that this can vary significantly depending on the specific market and property. Factors such as seasonal demand, occupancy rates, competition, and operating expenses can all impact the cap rate of a VRBO property.
However, anything between 8% and 12% is considered worth investing in. In terms of specific locations, the median cap rate for vacation homes varies widely across different areas, with some areas showing rates as high as 9.2%.
What Is a Typical Cap Rate on a Rental Property?
The typical cap rate on a rental property varies depending on various factors such as location, property type, and cost of borrowing. However, a good cap rate hovers around 8% to 12%.
It is important to note that a good cap rate does not necessarily mean a safe cap rate, and property investors should consider multiple factors before making investment decisions.