How to Calculate Cap Rate for Vacation Rentals (And Why It Matters)

By: Alex Saclauso | Jul 1, 2025

Calculate Cap Rate for your Short Term Vacation Rental Business

What Is a Cap Rate?

A cap rate or capitalization rate is a real estate metric that indicates the expected return on a rental property based on its income and market value. It's a widely used tool in real estate investment to evaluate how profitable or risky a short-term rental investment might be.

Cap Rate Formula:

Understanding the cap rate of your vacation rental allows you to:

• Compare investment properties quickly
• Evaluate rental income potential
• Assess short-term rental market risk
• Make more accurate forecasts for long-term income

Why Is It Important to Calculate Cap Rate for Your Vacation Rental?

Whether you're a new investor or managing multiple vacation rentals, knowing how to calculate cap rates of your short-term rental gives you a clear financial snapshot.

Benefits of Using Cap Rates:

• Simplifies property comparisons
• Highlights income-generating potential
• Removes emotional bias from investment planning
• Builds the foundation for your short-term rental strategy

Cap rates give you a realistic estimate of your property's profitability, independent of financing. This makes it easier to compare rental properties on equal footing.

When Should You Use a Cap Rate (And When Shouldn’t You)?



Use cap rates when:

• You're buying or evaluating income-generating real estate
• Rental income is expected to be stable and predictable
• Comparing two or more similar vacation rental properties

Avoid relying on cap rates if:

• You plan to flip the property quickly
• The property’s rental income is seasonal or inconsistent
• You're purchasing a home for personal use with no rental income expected

Step-by-Step Guide: How to Calculate Cap Rate of Your Short-Term Rental

Let’s break it down into 3 steps.

Step 1: Calculate Your Net Operating Income (NOI)

NOI = Gross Rental Income – Operating Expenses

Include these in your monthly and annual operating costs:



• Cleaning and maintenance
• Utilities and internet
• Software subscriptions
• Insurance and property taxes
• Marketing and advertising
• Repairs and upkeep
• STR platform or channel management fees
• Administrative or remote management costs

Maximizing your NOI increases your cap rate. Using vacation rental management software can help streamline operations and reduce overhead costs.

Step 2: Estimate Your Current Market Value

You can estimate this using:

• Purchase price (for new STR acquisitions)
• Comparable sales (comps) in your area
• Professional real estate appraisal
• ARV (after-repair value) tools if the property has been renovated

Step 3: Use the Cap Rate Formula

Let’s walk through an example:

Property A:

• Net Operating Income: $42,000
• Market Value: $525,000
• Cap Rate = 8%

Property B:

• NOI: $48,000
• Market Value: $650,000
• Cap Rate = 7.38%

Even though Property B generates more income, Property A has a higher cap rate. That means it offers a better return relative to its price—an important insight for STR investors.

What’s a Good Cap Rate for Short-Term Rentals?

A good cap rate for vacation rentals typically ranges from 4% to 10%:

• 4–6%: Lower risk, slower return
• 7–10%: Higher return, higher risk



What matters most is your personal investment style. Are you looking for high cash flow? Or lower risk and long-term appreciation?

Factors That Influence Cap Rates in STR Markets

1. Location

Market demand for short-term rentals varies by region. Tourist destinations often command higher rates and occupancy.

2. Seasonality

If your STR income depends on specific seasons, it may skew your cap rate unless averaged across the year.

3. Expenses

Uncontrolled or unexpected operating expenses—like repairs, vacancy loss, or property tax hikes—can impact your cap rate quickly.

4. Market Conditions

STR regulations, economic conditions, and travel trends all play a role in affecting occupancy and average daily rate (ADR).

5. Renovation & Upgrade Potential

Properties with high value-add potential may offer lower current cap rates but high future ROI.

Cap Rate vs ROI: What’s the Difference?

Both metrics are essential, but they measure slightly different things:



• Cap rate measures profitability without considering financing.
• ROI (Return on Investment) accounts for mortgage payments, down payment, and cash invested.

Cap rate is a great tool for cash-on-cash comparisons or evaluating properties before financing is secured.

Tools to Help You Calculate Cap Rate

Want to skip the manual math? Use a cap rate calculator. You’ll find plenty of free tools online that plug in:



• Monthly rent or average daily rate (ADR)
• Operating expenses
• Market value

Popular STR platforms and vacation rental software often include income estimators and analytics dashboards to help calculate your cap rate quickly.

Pro Tips for Short-Term Rental Investors



• Use vacation rental data platforms to analyze market trends and property performance.
• Keep records of your operating expenses to estimate future cap rates more accurately.
• Automate wherever possible to increase NOI and improve your long-term cap rate.
• Monitor local regulations—new STR laws can impact your cap rate overnight.

Final Thoughts

Understanding how to calculate cap rates of your short-term rental is a non-negotiable skill for today’s STR investors. While the cap rate formula is simple, interpreting what the number means and how to improve it can make or break your investment success.

Calculate wisely. Compare carefully. Automate strategically.



Whether you’re running one Airbnb or managing a dozen short-term rentals, mastering the capitalization rate gives you the edge you need in a competitive market.

Frequently Asked Questions (Cap Rate FAQ)

Q: Does cap rate include my mortgage?

No. Cap rate is calculated assuming the property was purchased in cash. It does not account for financing or debt service.

Q: Is a higher cap rate always better?

Not necessarily. Higher cap rates can mean higher risk. Balance return expectations with property condition, location, and market volatility

Q: Can I calculate cap rates for Airbnb properties?

Absolutely. Whether it’s Airbnb, Vrbo, or direct bookings, your STR income applies directly to the cap rate formula.

Q: How often should I recalculate the cap rate of my vacation rental?

At least annually—or any time property value or net operating income changes significantly.

Q: Do all investors use cap rate?


Most real estate investors rely on cap rate as a core metric, especially for income-generating properties. It's less useful for primary residences or fix-and-flips.

Book With Home Team Luxury Rentals for the Ultimate Investment and Guest Experience



Now that you know how to calculate cap rates of your short-term rental, it’s time to make your next move with confidence.

At Home Team Luxury Rentals, we combine industry expertise, elevated guest experiences, and top-tier vacation rental property management to help you maximize your returns.

Whether you're a guest looking for an unforgettable luxury stay or a homeowner seeking full-service Airbnb management, we’ve got you covered.

Book direct and enjoy:

• Best rates online (no booking fees!)
• VIP service with direct host communication
• Carefully curated, professionally maintained homes

Explore featured rentals in destinations like St. Petersburg, Nashville, Scottsdale, and more. From indoor slides and private hot tubs to epic backyard games and modern amenities—your dream vacation starts here.

Own a rental property?

Let us manage it. Our turnkey management solutions are designed to maximize your cash flow, enhance your cap rate, and deliver 5-star experiences every time.

📞  727-977-3238
📧  Hello@hometeamvr.com
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Home Team Luxury Rentals—Where Cap Rates Meet First-Class Comfort.