What is a Good Cap Rate for Vacation Rentals?

When investors discuss the profitability of a vacation rental, they throw around terms like ROI, Cash-on-Cash Return, and Cap Rate.

While Cash-on-Cash return measures how hard your actual cash is working, Cap Rate (Capitalization Rate) evaluates the profitability of the property itself, regardless of how you financed it.

Here is exactly what Cap Rate is, how to calculate it for an Airbnb, and what constitutes a "good" cap rate in 2026.

What is Cap Rate?

Cap Rate is a formula used to estimate the investor's potential return on a real estate investment if the property were purchased entirely in cash (no mortgage).

It allows you to compare a $200k cabin in the woods to a $800k beachfront condo on an apples-to-apples basis.

The Formula:

Cap Rate = Net Operating Income (NOI) ÷ Current Market Value of Property

How to Calculate It (An Example)

Let's assume you are looking at buying a $500,000 property to turn into a short-term rental.

Step 1: Calculate Gross Revenue Based on AirDNA data, you project the property will generate $65,000 in gross revenue (nightly rates + cleaning fees) per year.

Step 2: Calculate Operating Expenses (Excluding Mortgage) Remember, Cap Rate assumes you bought the house in cash. Therefore, you do not include the mortgage payment in this calculation. You do include: Property taxes, insurance, utilities, cleaning fees, maintenance, software, and Airbnb host fees. Let's assume total operating expenses are $25,000.

Step 3: Calculate Net Operating Income (NOI) $65,000 (Revenue) - $25,000 (Expenses) = $40,000 (NOI)

Step 4: Calculate the Cap Rate Divide the NOI by the purchase price of the property. $40,000 ÷ $500,000 = 0.08 (or 8%)

What is a "Good" Cap Rate for a Vacation Rental?

Because short-term rentals require active management and carry more regulatory risk (e.g., a city could ban Airbnbs tomorrow), investors demand a higher Cap Rate than they do for traditional long-term rentals.

• Long-Term Rental (Standard Lease): A good cap rate is typically 4% to 6%.
• Short-Term Rental (Airbnb/VRBO): A good cap rate is typically 8% to 12%.

If a vacation rental is projecting a 5% cap rate, it is generally considered a bad investment. You are taking on the stress of hospitality management for the same return you could get from a passive long-term tenant.

Why Cap Rate is Flawed for STRs

While Cap Rate is a useful baseline metric, it has a major blind spot for the vacation rental industry: It ignores furnishing costs.

When you buy a long-term rental, you rent it empty. When you buy a short-term rental, you must spend $10,000 to $30,000 furnishing it before you can generate a single dollar of revenue. Cap Rate does not factor this startup cost into the equation.

This is why most STR investors rely more heavily on Cash-on-Cash Return, which accounts for down payments, mortgages, and furnishing costs.

Further reading

• How to Calculate Vacation Rental ROI (Cash on Cash)
• How to Start an Airbnb
• Airbnb Pricing Strategies

Frequently asked questions

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