When evaluating the potential of a short-term rental property, one of the most common questions real estate investors ask is: “What is a good cap rate?” Understanding the cap rate—or capitalization rate—is a key part of making informed investment decisions. It helps measure the return on investment (ROI) and plays an essential role in comparing properties across different markets.
At The Short Term Shop, we empower investors to buy, sell, and learn short-term rentals in more than 20 top vacation markets across the U.S. In this guide, we’ll walk you through what a good cap rate is for short-term rentals and how to use it to evaluate your next investment.
What Is Cap Rate?
Cap rate is a metric used to assess the profitability of a real estate investment, calculated as:
Cap Rate = (Net Operating Income / Property Purchase Price) x 100
- Net Operating Income (NOI) is your rental income minus expenses like taxes, insurance, property management, and maintenance (excluding mortgage payments).
- Property Purchase Price is the cost of the property, including closing costs and upfront repairs.
The cap rate gives you a percentage return based on the income the property generates before financing.
What Is a Good Cap Rate for Short-Term Rentals?
Unlike long-term rentals, short-term rentals (STRs) can generate higher nightly rates and, therefore, potentially higher returns. However, they often come with increased operating costs and seasonality.
A good cap rate for a short-term rental generally falls in the range of 8% to 12% or more. Here’s how it typically breaks down:
- 8% – 10%: Solid return with manageable risk, common in stable vacation markets.
- 10% – 12%+: Excellent return, often found in emerging markets or properties with strong year-round demand.
- Below 8%: Still profitable, but may have limited upside or come with higher costs.
Keep in mind that what’s considered “good” can vary depending on location, market trends, and your investment goals.
Factors That Affect Cap Rate for STRs
Several variables can influence your cap rate in a short-term rental investment:
1. Location
Vacation demand is highly seasonal and location-dependent. Properties in year-round destinations like Orlando or the Smoky Mountains tend to have more stable income streams, supporting higher cap rates.
2. Occupancy Rate
High occupancy boosts rental income and improves your cap rate. Using professional photography, strong reviews, and optimized listings can drive bookings and performance.
3. Nightly Rate
Dynamic pricing tools can help you adjust your rates based on demand, special events, and seasonality—all of which affect your gross rental income.
4. Operating Costs
Short-term rentals often have more expenses than long-term properties, such as:
- Cleaning and turnovers
- Property management
- Utilities
- Furnishings and supplies
Keeping these costs in check is key to maintaining a healthy cap rate.
5. Regulations and Licensing
Local short-term rental laws can impact profitability. High licensing fees or rental restrictions may reduce NOI and lower your cap rate. That’s why it’s important to invest in STR-friendly markets—a specialty of The Short Term Shop.
Why Cap Rate Shouldn’t Be the Only Metric
While cap rate is an excellent way to evaluate cash flow potential, it’s not the only factor to consider. Here are a few additional metrics smart investors use:
- Cash-on-Cash Return: Considers mortgage payments and shows your actual ROI based on your cash investment.
- Appreciation Potential: Some properties may offer lower cash flow but significant long-term value growth.
- Tax Benefits: STRs often qualify for depreciation and other deductions that improve net profitability.
How to Find High Cap Rate Properties
Not every listing shows clear income potential. That’s where local expertise matters. At The Short Term Shop, we specialize in helping investors find short-term rental properties in proven, high-yield vacation markets.
Our team uses real-time data, market analysis, and firsthand experience to:
- Identify high-performing areas
- Estimate accurate rental income and expenses
- Analyze cap rate and cash-on-cash returns
From the Smoky Mountains to the Texas Hill Country and Florida Panhandle, we help our clients target properties that match their risk tolerance and income goals.
Final Thoughts
A good cap rate for a short-term rental typically ranges between 8% and 12%, depending on market conditions and your investment strategy. But remember, cap rate is just one piece of the puzzle. To make a smart and profitable investment, it’s crucial to evaluate the full financial picture.
With The Short Term Shop, you’re not alone in this journey. We offer expert guidance in buying, selling, and learning the ins and outs of short-term rental investing. Our agents are local market experts, and our systems are designed to support you from your first showing to your first booking—and beyond.
Ready to Start or Grow Your STR Portfolio?
Let The Short Term Shop help you discover vacation rental properties with strong cap rates in the top short-term rental markets across the country.
Call us today or email info@theshorttermshop.com to schedule your personalized consultation.
Whether you’re looking for your first STR or expanding a thriving portfolio, we’re here to guide you every step of the way.
