For the financially-savvy vacation rental host, knowing their property’s Airbnb Cap Rate is critical. There is a range of financial metrics that you can use to ensure your business is running at its most profitable.
Cap Rate, as in Capitalization Rate, is the rate of return from your vacation rental property. It’s an indicator of how well and how fast your property is returning your initial investment.
What is My Airbnb Cap Rate?
Calculating your Cap Rate is relatively simple. All you need to do is calculate your net operating income for a 12-month period and divide it by your property asset value, then multiply that by 100 to convert it into a percentage.
For example, if my net operating income in one year was $80,000 and my property is worth $2,000,000, then my Cap Rate would be 80,000 / 2,000,000 X 100 = 4%.
Some industry professionals prefer to calculate their Cap Rate by swapping the net operating income for the property purchase price. This has its flaws as older house prices will no longer accurately reflect the property’s value, but it will still give you an indication of how well your property is returning that initial investment cost back into your pocket.
What Does My Airbnb Cap Rate Mean?
If your Cap Rate is 4%, it means your property is returning 4% of your initial investment every year. As a general rule, a Cap Rate of 4% is slightly too low to be seen as profitable. Try to look at it like this – with a Cap Rate of 4%, it will take 25 years to pay off your property value.
Cap Rate can also be seen as a measure of risk, which means higher is not necessarily better in the long run but it does mean that you’ll get your initial property value back quicker.
What Is the Ideal Rate?
As the Airbnb Cap Rate can vary drastically based on a property value, annual earnings, and market popularity, there isn’t a set range for what qualifies as a good Cap Rate.
If you want a general estimate, anything between 5% and 10% would be considered an ideal rate. Professional property investors are usually more willing to take on higher-risk investments, which means they prefer the higher end of the stipulated Cap Rate range.
Airbnb Cap Rate Calculation Examples
|Property 1||Property 2||Property 3||Property 4||Property 5|
|Net Operating Income||$50,000||$20,000||$95,000||$65,000||$10,000|
|Property Asset Value||$550,000||$400,000||$750,000||$800,000||$700,000|
|Investment Potential||Higher Risk||Safer Investment for Non-Professionals||High Risk – Better Suited for Professional Investors||Ideal Risk-to-Benefit Ratio||Low Risk, Low Reward|