Cap rate is the most useful single number for comparing short-term rental deals. Here's the formula, what it includes, what it doesn't, and what a good STR cap rate actually looks like.
Cap rate is one of those terms that gets used constantly in real estate investing and explained poorly almost every time. For short-term rentals specifically, cap rate is both more useful and more nuanced than in long-term rental analysis — because STR operating income is harder to project and varies considerably based on management approach, market dynamics, and occupancy assumptions.
This guide covers how to calculate cap rate for a short-term rental, what inputs matter, what a good number looks like by market type, and how to use cap rate alongside other metrics to evaluate a deal.
Cap Rate = Net Operating Income (NOI) / Current Market Value (or Purchase Price)
Net Operating Income is the property's annual revenue minus all operating expenses — before debt service. It does not include mortgage payments. Cap rate is intentionally a debt-free metric, which is what makes it useful for comparing deals across different financing structures.
For a short-term rental, calculating NOI requires accurate revenue and expense inputs:
NOI = Gross Revenue - All Operating Expenses (excluding debt service)
A 3-bedroom STR in a mountain market with a $525,000 purchase price:
That 4.1% is low for a mountain market. A deal like this works if the appreciation thesis is strong and the debt service is manageable — but it's not a cash-flow-first acquisition.
Cap rate benchmarks vary significantly by market type:
As a baseline: if an STR deal can't hit a 6% cap rate in a mid-tier market with professional management assumptions, the deal relies entirely on appreciation to justify the purchase. That's a legitimate investment thesis, but it should be stated explicitly rather than hidden in an optimistic revenue model.
Cap rate measures property-level performance independent of financing. Cash-on-cash return measures your actual return on the cash you put in — and that includes the leverage effect of your mortgage.
A property with a 5.5% cap rate financed at 7% interest produces negative leverage — your borrowing cost exceeds the property's unlevered return. The same property at 5.5% cap rate financed at 4.5% produces positive leverage. This is why cap rate and cash-on-cash return tell different stories and why you need both to evaluate an STR deal completely.
See our full guide to STR cash-on-cash return for the complete calculation.
Calculating cap rate manually requires pulling property tax data, estimating market ADR and occupancy, modeling all operating expense categories, and running the math. That takes 30–60 minutes per deal when done properly.
The VaultSTR Pro Forma calculates cap rate, cash-on-cash return, DSCR, IRR, and break-even occupancy automatically from a listing URL. Paste a Redfin or Realtor.com link and it pulls the property data, generates the financial model, and lets you adjust every assumption. ProForma Plus subscribers also get live market comp data to benchmark their ADR and occupancy inputs against what comparable listings actually earn.
For real estate agents presenting STR deals to investor clients, having a cap rate calculation ready before the showing — not after — is the difference between being an advisor and being an order-taker.
Cap rate is useful because it strips out financing and lets you compare deals on their operating fundamentals. For STRs, getting cap rate right requires accurate ADR, occupancy, and operating expense inputs — not guesses. The VaultSTR Pro Forma automates this from any listing URL, free for up to three deals.
Paste a listing URL and VaultSTR calculates cap rate, cash-on-cash return, DSCR, and IRR automatically — with live market comp data to benchmark your assumptions.
Free for up to 3 deals. No credit card required.
What is cap rate and how is it calculated for a short-term rental?
Cap rate (capitalization rate) equals a property's Net Operating Income (NOI) divided by its purchase price or current market value. NOI is gross revenue minus all operating expenses, excluding mortgage payments. For a short-term rental, gross revenue is projected ADR times projected occupancy times 365, minus platform fees. Operating expenses include management fees, cleaning, taxes, insurance, utilities, maintenance, and software subscriptions.
What is a good cap rate for a short-term rental?
A good STR cap rate depends on the market. Urban gateway markets typically produce 3–5% cap rates. Beach and vacation destination markets produce 5–8%. Tertiary and emerging STR markets can produce 8–12% or higher. As a general benchmark, a deal that can't hit 6% in a mid-tier market with professional management assumptions is primarily an appreciation play, not a cash flow investment.
Does cap rate include the mortgage payment?
No. Cap rate is calculated before debt service — it measures the property's operating return independent of how it's financed. This is what makes cap rate useful for comparing deals across different financing scenarios. To measure your actual return on invested cash (including the effect of leverage), use cash-on-cash return instead.
Why is STR cap rate different from long-term rental cap rate?
STR cap rates are both higher and harder to calculate than long-term rental cap rates. They're higher because operating expenses are greater (management fees, cleaning, higher maintenance) but also because gross revenue is significantly higher when occupancy is strong. They're harder to calculate because revenue is variable and dependent on market-calibrated ADR and occupancy benchmarks rather than a fixed lease rate.
How do I calculate cap rate for a short-term rental without a spreadsheet?
The VaultSTR Pro Forma calculates cap rate automatically from a Redfin or Realtor.com listing URL. Paste the link and it pulls property data, models five-year cash flows, and outputs cap rate, cash-on-cash return, DSCR, and IRR in under three minutes. It's free for up to three deals at app.vaultstr.com/proforma.
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