Capitalization rate (cap rate) is a fundamental real estate investment metric calculated by dividing a property's Net Operating Income (NOI) by its current market value or purchase price. It expresses the expected annual return as a percentage. In the vacation rental industry, a good cap rate typically ranges from 5–8% for established markets, with top-performing STR properties achieving 8–12%. Cap rate helps investors compare properties across different markets and price points, and is a key metric for evaluating whether a vacation rental investment will be profitable.
Why this matters for property managers
Cap rate lets an investor compare properties and markets on a single return figure, which shapes what to pay and whether a deal clears a target yield. It also frames how income growth or expense creep moves value, since a small change in net operating income shifts the implied price. Relying on an inflated or sloppy figure leads to overpaying, so the inputs behind it deserve as much scrutiny as the result.
Frequently Asked Questions
← Back to Glossary
