What is a good cap rate for Airbnb?
Definition and Tips
Cap rate is useful when it comes to evaluating investment properties. Cap rate tells you how lucrative an investment property is.
Cap rate = “net operating income” / “current property value”
Notice that this doesn’t take total investment into account, but current property value. It’s not the metrics to understand the ROI of real estate investment against stocks or other forms of investments. If that is what you want to know, you need to use “cash on cash return” or “net rental yield”, and see if it’s worth buying an investment property or buying an index fund.
However, it is the metric to use to compare between other similar rental properties. This shows how good the expected return is compared to the market value of the property.
Another use case is comparing the average cap rates of different markets to understand which market has high property prices or low rental income on average. This can be an indicator of the affordability of renting in the market.
🤔 What is a good cap rate for Airbnb?
20%+ is a high cap rate for a short-term rental property. For a property valued at $500,000, if the monthly net income is above $4,200, you can say this property gives a solid return. A typical cap rate is 7-15% for a short-term rental property. This is typically twice higher than long-term rental, and 1.5 times higher than multi-family rental.
Know that a high cap rate is not always good. Often, a low cap rate could be an indicator of high property appreciation potential. The low cap rate is caused by high property prices, and it is because people are buying and holding at high prices, believing the property will appreciate further.
🔢 How to calculate cap rate for Airbnb?
for example, if:
Average daily rate: $500
Yearly revenue: $127,750 = $500*365*0.7 (Excluding cleaning fees)
Total Operating Income = $97,750 ($127750-$30000)
📝 3 tips to find high cap rate investment properties?
Find a location with high tourism demand. The short-term rental cap rate depends on the short-term rental occupancy rate. In a market, there are areas that are particularly preferred by tourists over locals. A common example is the downtown area or beachfront properties. Residents don’t like living in high-traffic and crowded areas due to security, and privacy, among many other reasons, but for tourists, they want to see more locations and go out more frequently during their short stay. The same goes for beachfront properties. People are willing to pay an absurdly high fee to stay in a beachfront property for a few nights. This is a cool experience that they can only have once in a while.
You can use Airbtics to see the short-term rental occupancy rate of different neighborhoods.
Find the market with affordable housing. Cities like New York City and San Francisco suffer from housing shortages and high property prices. It is not a surprise that Airbnb is highly restricted in those two markets. Just like that, many big cities with housing problems aren’t good places to invest in short-term rental property. Start in a city or a town where housing for locals isn’t a big issue.
Increase occupancy rate. 95% is a typical occupancy rate for long-term rentals. However, for short-term rental, it is around 50-70%. Luckily, there are many ways to improve the occupancy rate. Here are some ways.
- Add desirable amenities (e.g. hot-tub, heated pool, pet-friendly, kids-friendly, etc)
- Get good reviews
- Last-minute or early-bird discount pricing
- Build your short-term rental brand on Instagram
- Get repeat guests by offering them a discount
