What's a good cap rate for a short-term rental?

Oikos Property Ventures · ~6 min read

Most investors want a one-number answer. The honest version: a "good" short-term rental cap rate usually lands somewhere around 8–10%+, but the number only means something once you've calculated it correctly and put it next to your financing.

How cap rate is actually calculated

Capitalization rate — cap rate — is simple:

Cap rate = annual net operating income (NOI) ÷ purchase price

NOI is your gross rental revenue minus all operating expenses — but it deliberately excludes your mortgage. That's the part people get wrong. Cap rate is meant to measure the property's return independent of how you finance it, so two buyers can compare the same property on equal footing.

For a short-term rental, your operating expenses are higher than a long-term rental and need to include: cleaning, supplies and consumables, utilities and internet, management or co-host fees, insurance, property taxes, and a maintenance/CapEx reserve. Leave the reserve out and your cap rate will look better than reality.

So what's a "good" number?

It depends heavily on the market. As a rough frame:

• Below ~5%: typically a pricey, high-appreciation market — you're betting on the property gaining value more than on cash flow.
• ~6–8%: a common, healthy range for a well-run STR in a solid market.
• ~8–10%+: strong cash-flow territory — attractive, but check that the revenue assumptions are realistic and not inflated.
• Suspiciously high (12%+): double-check the inputs. Either it's a genuinely underpriced gem, or the revenue is optimistic and the expenses are understated.

A high cap rate isn't automatically "better." It often signals higher risk — a softer market, more seasonality, or a property that needs work. A lower cap rate in a stable, high-demand market can be the safer long-term hold.

Cap rate vs. cash-on-cash return

Cap rate ignores your mortgage. Cash-on-cash return doesn't — it's your annual pre-tax cash flow divided by the actual cash you put in (down payment plus closing and startup costs). Because most STR buyers use leverage, cash-on-cash is often the number that tells you whether the deal works for you, while cap rate tells you about the property itself.

Use both. A property can have a respectable cap rate and still produce thin cash-on-cash returns once an expensive mortgage is layered on — or vice versa.

How to pressure-test a deal

• Use conservative revenue. Pull comparable nearby listings or an AirDNA estimate and shade it down, not up.
• Include every expense. Especially the maintenance reserve and a realistic management or co-host fee even if you plan to self-manage — your time has a cost.
• Look at a bad year. Re-run the numbers at lower occupancy. A deal that only works at 75% occupancy has no margin of safety.
• Compare to alternatives. A cap rate means more next to other deals in the same market than against a national average.

The bottom line

A good STR cap rate is one that's calculated honestly, holds up under conservative assumptions, and pencils out next to comparable properties in your market — usually in the high single digits. Pair it with cash-on-cash return so you're judging both the property and your financing.