The return on investment (ROI) of Airbnb rentals is by far the most important piece of information needed to understand rental property performance. What exactly is real estate investment ROI? It is a metric (or multiple metrics) that tell real estate investors how profitable their investment properties are. One of the most common return on investment metrics is the cap rate.
Capitalization Rate – In a Nutshell
The cap rate (or capitalization rate) of an investment property is a real estate investment ROI that compares a rental property’s net operating income to its current market value. Calculating cap rate on investment property is easily done with an investment property calculator. The capitalization rate calculation is still simple enough to be computed manually as well using the following equation:
Capitalization Rate = (Net Operating Income/Current Market Value) × 100%
Net operating income (NOI) is the difference between the gross rental income of a rental property and its operating costs (taxes, maintenance, etc.). The current market value of a property is the fair market value of the property at the given time.
What Is a Good Cap Rate?
What is considered a good cap rate? Generally, anything around 8%-12%, with anything higher being better. However, it’s worth noting that local dynamics can heavily impact what a good cap rate actually is in a given market. Location (obviously) heavily influences cap rates. The type of property can also play a huge role. Multi-family properties, for example, inherently have lower cap rates than other types of properties such as single-family homes.
Related: Location, Location, Location – Is Location Really All in Real Estate Investing
As a result of all these factors, a good cap rate can vary significantly across the country. For instance, in some areas, a 6% capitalization rate is pretty good.
Capitalization Rate and Short-Term Rentals
One of the few criticisms of capitalization rate is that it is not very useful with short-term rentals. Why? Net operating income heavily depends on annual rental income, which is not always calculated accurately with short-term rentals.
Luckily, Mashvisor is able to accurately project the expected rental income of an Airbnb property. With this valuable piece of information, the cap rate of short-term rentals can be calculated, just as if they were long-term, traditional rentals.
Top 15 Cities for Airbnb Rentals for Capitalization Rate
Here are the top locations for Airbnb cap rate. The capitalization rates on this list are average cap rates in these locations. Your actual cap rate in any of these cities would likely be higher. The cash on cash returns have the same values as the capitalization rates because the properties are assumed to be purchased fully in cash.
If financed through a mortgage, your CoC returns will be higher. Also, like the cap rates, the cash on cash returns on this list are merely averages, actual values will be higher.
1.) Dubuque, IA
- Airbnb Cap Rate: 10.43%
- Airbnb Rental Income: $1,921
- Airbnb Cash on Cash Return: 10.43%
- Median Property Price: $205,250
2.) Traverse City, MI
- Airbnb Cap Rate: 8.83%
- Airbnb Rental Income: $2,865
- Airbnb Cash on Cash Return: 8.83%
- Median Property Price: $348,701
3.) Oakland Park, FL
- Airbnb Cap Rate: 8.18%
- Airbnb Rental Income: $2,507
- Airbnb Cash on Cash Return: 8.18%
- Median Property Price: $247,773
4.) South Bend, IN
- Airbnb Cap Rate: 8.02%
- Airbnb Rental Income: $1,138
- Airbnb Cash on Cash Return: 8.02%
- Median Property Price: $134,999
5.) Wareham, MA
- Airbnb Cap Rate: 7.84%
- Airbnb Rental Income: $2,521
- Airbnb Cash on Cash Return: 7.84%
- Median Property Price: $289,000
6.) Tuscaloosa, AL
- Airbnb Cap Rate: 7.24%
- Airbnb Rental Income: $1,466
- Airbnb Cash on Cash Return: 7.24%
- Median Property Price: $237,618
7.) Mountain View, CA
- Airbnb Cap Rate: 6.37%
- Airbnb Rental Income: $3,585
- Airbnb Cash on Cash Return: 6.37%
- Median Property Price: $1,108,900
8.) Colorado Springs, CO
- Airbnb Cap Rate: 6.36%
- Airbnb Rental Income: $2,245
- Airbnb Cash on Cash Return: 6.36%
- Median Property Price: $320,707
9.) Anaheim, CA
- Airbnb Cap Rate: 6.3%
- Airbnb Rental Income: $4,026
- Airbnb Cash on Cash Return: 6.3%
- Median Property Price: $543,387
10.) Blacksburg, VA
- Airbnb Cap Rate: 6.27%
- Airbnb Rental Income: $2,328
- Airbnb Cash on Cash Return: 6.27%
- Median Property Price: $410,294
11.) Bloomington, IN
- Airbnb Cap Rate: 6.25%
- Airbnb Rental Income: $1,662
- Airbnb Cash on Cash Return: 6.25%
- Median Property Price: $269,787
12.) Waianae, HI
- Airbnb Cap Rate: 6.2%
- Airbnb Rental Income: $3,359
- Airbnb Cash on Cash Return: 6.2%
- Median Property Price: $561,476
13.) Silver Spring, MD
- Airbnb Cap Rate: 6.12%
- Airbnb Rental Income: $2,133
- Airbnb Cash on Cash Return: 6.12%
- Median Property Price: $324,900
14.) Arlington, TX
- Airbnb Cap Rate: 6.1%
- Airbnb Rental Income: $1,904
- Airbnb Cash on Cash Return: 6.1%
- Median Property Price: $253,848
15.) Port Angeles, WA
- Airbnb Cap: 6.04%
- Airbnb Rental Income: $1,945
- Airbnb Cash on Cash Return: 6.04%
- Median Property Price: $275,000
Related: 10 Most Profitable Airbnb Locations for Cash on Cash Return
Things to Note About the 15 Best Cities for Airbnb Capitalization Rate
- The cap rates in these top locations do not all range in the ‘good cap rate’ range, but they are all good cap rates nonetheless. The highest capitalization rate is Dubuque, IA. Five cities have average cap rates from 7%-8%. The remaining cities have cap rates at 6% or above.
- The median property prices in the best cities for Airbnb cap rate are relatively inexpensive. Eleven of the fifteen cities have property prices that are below $350,000, which is about the national average. To make matters better, eight of those eleven cities have median property prices that are below $300,000.
- All of the 15 cities have high Airbnb rental income. All of these top locations have an Airbnb monthly rental income of at least $1,100, which is much more than the Airbnb average of about $924. Fourteen of the cities have an Airbnb rental income of over $1,400. Nine cities have a rental income of over $2,000.
All in All
The capitalization rate of a property is a must-have metric to understand real estate investment ROI. Investments in the cities on this list will pay themselves back rather greatly, to say the least.
To find out more about real estate concepts like cap rate, or to find investment properties all over the US, be sure to visit Mashvisor!