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  • Simplify STR

What Airbnb Cap Rate Should Investors be Looking For?

Updated: Jul 23, 2022

The Airbnb cap rate, or capitalization rate, is one of the best indicators of profitability for any home. The cap rate represents the net income a property generates against the property purchase price. While the cap rate is oven associated with renting out a home as a standard long term rental, the same equation can apply to short term property rentals as well.

A cap rate of 5-10% is generally considered to be good

Airbnb cap rate rental property

The general industry recommendation from an investment perspective is to aim for a cap rate of around 5-10%. Any less than that and your likely to find a better investment elsewhere. However, it’s very possible to exceed the 10% cap rate - especially with short term rentals.

How do you calculate the Airbnb cap rate?

calculating airbnb cap rate

The cap rate is the annual net income of a property divided by the property value. An important detail here is that it uses ‘net income’ rather than revenue. This means you have to account for any operational expenses rather than simply the payments you receive.

For example: If a property generates $30,000 of annual net income, or $2,500 per month, and you purchased the home for $300,000, you’d divide $30,000 by $300,000 which is equal to 10%. So the cap rate in this example would be 10%. However, to understand your anticipated Airbnb cap rate it’s important to understand the expected operating expenses.

What are typical operating expenses for an Airbnb?

Airbnb cap rate operational expenses

Because of the nature of short term rentals, an Airbnb investment property generally has more operational expense than long term rentals. However, they also generate more revenue. So as long as you can keep your expenses down, an Airbnb investment often provides a larger return on your investment.

Below are some of the most common operating expenses when it comes to managing a short term rental property. Hopefully this can help you more accurately estimate the anticipated cap rate of a potential Airbnb investment:

  • Cleaning fees: the exact amount can vary from home to home as its often dependent on your location and the size of your home.

  • Lodging and property taxes: This is dependent on your city. Look up the property tax amounts for your location to help determine what it will cost. And for lodging taxes, many cities have partnered with Airbnb to charge that amount on your behalf. If this is the case in your location, you can ignore including it in your calculation as the guest would be remitting that directly to Airbnb

  • STR permitting fees: Some cities require you get your STR permitted before you can list it. This process often has an associated fee. Check with your local city hall to see what the annual costs are to operate an Airbnb from a regulatory standpoint

  • Insurance premium: Keep in mind: insurance policies which cover short term rentals are often much higher than a typical homeowner policy.

  • Maintenance costs: This is hard to anticipate, but inevitable that you’ll have some sort of maintenance expense with any home. If it’s a brand new home it may be minimal, but for older homes you need to try and anticipate maintenance costs. We generally recommend planning for annual maintenance costs of around 0.5 – 1% of the purchase price of the home.

  • Utilities: Unlike most long term rentals, the owner is responsible for paying the utilities for a short term rental. This would include electric, gas, water, internet, cable, and any other monthly utility expenses you may have.

  • STR Management Fees: Most STR management companies charge a fee of around 20-30% of the monthly revenue to manage a short term rental property. If you plan to manage the property yourself you can avoid this fee. With the right setup you can automate most of the operational aspects of managing an STR and keep that 20-30% in your pocket. For more about how we can help on this front check out our listing optimization and automation services.

Here at Simplify STR, we can help you with any aspect of your STR. If you already have a property listed we can help you optimize and automate your processes or we can align you with a quality turnover crew. If you are seeking an Airbnb investment property or a vacation home, we can help you navigate the local STR regulations and use data to find you the perfect home. And for cities or municipalities looking for assistance with automating compliance and regulation enforcement, we have an automated solution that can help clean up the area and protect the legally permitted and compliant properties.

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